South Africa's blue chip stock index is set to climb another 6 percent by the end of next year, a subdued performance compared with 2012, as flows of central bank cash eventually taper off, a Reuters poll showed on Thursday.
Major central banks have been the benefactor to global markets by pumping their respective economies with liquidity, money which has found its way into emerging markets. But there is a limit to how much more will likely be done.
The Johannesburg Top 40 index has rallied more than 20 percent from the start of the year and will hit a record high of 36,500 by year-end according to the survey of 10 traders and analysts. It closed at 34,415 on Wednesday.
“This market has been driven by liquidity flows and they are not going to keep increasing at the rate that they have been,” said Rudi van der Merwe of Standard Bank Stockbroking.
“The only thing that could drive the market up further is if they increase the rate at which they are pushing liquidity into the market, at an exponential basis, and I think they are going to run out of legs,” Van der Merve added.
Overnight the US Federal Reserve boosted the amount of money it will print outright each month to $85 billion but also pointed out its own limitations, especially with policy rates near zero.
Another risk is the weakness of the rand, which has been dragged down by a ballooning current account and the worst mining labour unrest since the end of Apartheid in 1994, which has killed more than 50 people.
Also, the current account gap held at 6.4 percent of gross domestic product in the third quarter. The shortfall of 202.5 billion rand ($23 billion) is the biggest on record in absolute terms, and is expected to exert pressure on the currency.
“It will be interesting to see how the rand is going to react to the growing current account deficit, because that has the potential to cause a fair amount of depreciation in the rand,” said Bernhard Grobler, head of stockbroking at Investec.
The index is expected to hit 35,000 points by the end of the first half of 2013, constrained by the risks to the global economy.
“The first half will be slow, restrained by US fiscal drag and European woes. Commodity prices are not expected to start a concerted upward move until the second half of 2013,” said Mike Haworth at Applied Capital Insights.
“The dual-listed component of the Top-40 will be the main driver of the index capital gain,” added Haworth.
Dually listed companies normally provide a hedge against rand weakness given that earnings are not denominated in rand. - Reuters