JSE in uncharted territory, but with a twist

2016-07-26 16:54

In a Sharenet VIEWS article published by PowerStocks Research as part of their 12-part “Signs of the Bear Market” seminar series, they used the Advance-Decline Line (AD-Line) of the JSE to point out that market breadth peaked in Dec 2013, the same time that the SA Business Cycle peaked and entered recession. The AD-Line has been declining determinedly ever since and the hypothesis was that the JSE was being propped up by a handful of large caps at nose-bleed P/E’s, and that without these large caps, the JSE had probably peaked long ago and was potentially already in a bear market.

A group of Sharenet Equity Analysts set about putting this hypothesis to the test, with some very surprising results.

One of the first surprises was just how much the "Big-5" NASPERS, SABMILLER, RICHEMONT, BILLITON and BATS was skewing the Price/Earnings (P/E) ratio of the JSE, with the remarkable findings below:

It confirms the current rich valuation of the JSE TOP40 at P/E 22  is isolated to the Big 5 and that the Top40 excluding the Big 5 only has a PE of 15.85. So there is value to be found on the TOP40 but its not with the large caps. And given the Big-5's 48% domination of the weighting of the TOP40, heading for safety into the popular SATRIX-40's may not be such a good idea after all.

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