Many of South Africa’s biggest firms end their financial year in December and analysts expect to see strong earnings growth as financial results are released in the weeks ahead.
Craig Pheiffer, the general manager of investments at Absa Asset Management Private Clients, said investors had become concerned that the JSE was expensive – a perception that “will make significant gains (in prices) unlikely”.
But he pointed out that investors would have a “better picture of value” once results were out. “Now analysts are working with earnings estimates. In a few weeks their calculations will be based on actuals.”
Mining firms have kicked off the reporting season well this week with Anglo Platinum reporting a threefold jump in profits, while Harmony more than doubled earnings.
Paul Stewart, the managing director of Plexus Asset Management, said Plexus calculated the average price:earnings (p:e) ratio of the JSE was 17.2. The ratio, sometimes referred to as a multiple, is the share price divided by earnings and it shows what investors are willing to pay per rand of earnings. When the ratio is too high the share appears overvalued.
Stewart said that at the current level JSE shares were 20 percent overvalued.
The all share index hit a high of 33 233 points in May 2008 and a low of 17 814 points in November that year. It closed at 32 677.56 points yesterday.
After an adjustment for cyclical factors, Plexus calculations show the p:e ratio peaked at 30 in October of the previous year, followed by a trough of 15.5 in September 2008.
A different perspective comes from Maarten Ackerman, a Citadel investment strategist based in London. He said that over the past 40 years the JSE p:e ratio had averaged about 12 and anything above 15 made shares very expensive. In contrast, shares in developed economies were at levels in line with the historic average and “slightly below fair value”.
He agreed that good earnings would support the local market but said he preferred offshore. “I would go for 60 percent offshore and 40 percent local.”
John Biccard, a portfolio manager at Investec Value Fund, said by the end of March, p:e ratios of local stocks were likely to be “quite a bit lower” than their current levels.
Best positioned were resource stocks as commodity prices ran up strongly in the second half of last year. Biccard said both Anglo American and BHP Billiton, which make up about a quarter of the all share index, should show strong earnings growth.
The JSE resource 20 index has soared from 56 044 points at the end of last month to close yesterday at 60 106 points.
Worst off are banks, which have seen slow earnings growth as credit growth remained muted.
Lebogang Molebatsi, a banking analyst at Stanlib, said rising costs had hit all banks and bad debts had been “a massive issue”. But Standard Bank has had to meet the additional costs of retrenchment and a trading statement from the group last year predicted earnings could fall as much as 12 percent.
Pheiffer said the JSE had treated investors well over the past two years – in 2009 the all share index achieved a total return of 32 percent followed by 19 percent last year “for a compound annual market return of 25 percent”. - Business Report