File image: IOL
File image: IOL

OPINION: Is the correctionin sharemarkets over?

By Chris Harmse Time of article published Jun 3, 2019

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JOHANNESBURG - After equity prices on the JSE decreased substantially since the beginning of May, with the all share index losing 8.54percent up to May 28 and in line with the big correction of 8.4percent in the MSCI index, most analysts felt that the US/China trade war was mostly to blame.

One, however, also has to keep in mind the old saying on Wall Street, namely the “sell in May and go away” effect. This phenomenon occurs from time to time, especially if US share prices had quite a run during the first four months of the year, based on better than expected company earnings.

This year, more than 70percent of the S&P 500 companies in the US declared earnings that were better than expected.

In these circumstances investors tempt to take profits, sell-off their equities and wait till the end of the summer holidays. Therefore, in this sense a healthy correction in US equities was to be expected, given the record levels at the end of April.

These two factors, namely the Trump onslaught on China and since Friday also on Mexico, and profit taking had a huge negative effect on bourses like the JSE and other emerging market stock.

The S&P 500 index on Friday also was set for a drop to a 12-week low and the Dow Jones industrial index moved towards a sixth weekly loss, the longest slump since 2011. So it seems that the correction on Wall Street is far from over.

However, given the initial negative sentiment on the geopolitical situation in South Africa after the drama last week around President Cyril Ramaphosa’s new Cabinet, it seems that after the announcement and certainty over the Minister of Finance Tito Mboweni and Minister Pravin Gordon, risk appetite for South African shares started to return.

The Alsi increased rapidly last Wednesday and Thursday. The index ended Friday on 55650 points, or 2.5percent, higher than the close of 54271 a week ago.

Listed property had recovered by 4.4percent last week from a loss of 6.2percent since the beginning of May. It seems that an overreaction on South African equities had turned for the better. Financials also had recovered sharply by more than 5percent.

The rand exchange rate also seemed to have shaken off the negative sentiment that prevailed over the last three weeks in light of the US President Donald Trump saga and Ramaphosa’s Cabinet uncertainty.

On Friday afternoon the rand started to appreciate strongly against most currencies. Against the dollar the rand had lost much ground from R14.21/$ on May 15 to R14.73/$ last Tuesday. The currency then started to turn around and had traded late on Friday afternoon again on R14.58/$.

The same tendency seems to follow against both the euro and the pound. Once again one seems to anticipate that the negative movements for now had turned around.

This week, investors will look out for the release of South Africa’s gross domestic product (GDP) economic growth rate for the first quarter, the release of the SA Reserve Bank’s quarterly bulletin, new motor vehicle sales, level of foreign reserves and Standard Bank’s Purchasers Managers Index (PMI). Globally attention will shift to the latest GDP economic growth rate announcements for the EU, Australia and Korea.

Given the US/China trade war, the release of the US trade figures later this week is of importance.

The US will also publish its latest job data, especially the unemployment rate and hourly wages.

Most developed economies will also announce their latest trade data and various PMI’s.

Chris Harmse is the chief economist at Rebalance Fund Managers.


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