The JSE's ‘honeymoon' phase is taking shares higher, how long will it last?

by , 25 January 2018
The JSE's ‘honeymoon' phase is taking shares higher, how long will it last?
I can remember my honeymoon like yesterday.

We were crazy in love.

And for months afterward this euphoric phase continued.

I could make no mistake in her eyes, nor she in mine. Everything was perfect.

Then suddenly reality struck. Our first big fight after getting married.

And suddenly we realized being married is tough, and the good times go hand in hand with the tough ones…

So why am I telling you this?

Well, clearly the markets are in LOVE with Cyril Ramaphosa!

And just like star struck lovers, we're in the honeymoon phase.

In fact, since Ramaphosa was announced the new ANC president the JSE has soared around 20% in dollar terms!

So how high can the market go, and how long will this love affair last before reality sets in?

 
 
The JSE just had record capital inflows from foreign investors
 
According to Bloomberg, foreigners have never been this keen on South African stocks. Average daily flows into Johannesburg-traded shares are running at the highest rate since at least 1997, when Bloomberg started compiling the data.


In total 2017 saw R47 billion of foreign capital flow out of the JSE, and that’s after R123 billion streamed out in 2016.
 
But the trend is reversing.
 
In fact, since the first week of December, the JSE has seen around R27.5 billion in capital inflows from foreigners. That’s more than half of 2017’s outflows made up for in inflows within a month.
 
Clearly, the love affair is strong!
 
So where is all of this going?
 
A strong rand – and lower inflation
 
All of these capital inflows are clearly behind the sudden massive strengthening of the rand to its current level of R12, and a couple of cents…
 
Inflation will stay lower – this is great for manufacturers. Even though the oil price is up, the strengthening of the rand will mitigate that. Energy and electricity costs will remain under control. So will transport costs. And low inflation means interest rates will remain low, whilst consumers will recover and spend more.
 
That’s a good thing for consumer driven stocks, the housing sector, and car sales (which have been steadily rising in the past year in any case).
 
These capital inflows will also certainly send the JSE higher.
 
Now, whilst I don’t want to make calls on the broader JSE right now, I want to make a call on the Small Cap Index.
 
On 14 December 2017, the Small Cap Index sat on 56,940 points.
 
I believe it will hit 66,000 points by MAY 2018.
 
That’s a 16% move in 5 months.



What will be the end of this honeymoon phase?
 
I don’t expect the love affair with Ramaphosa to end soon.
 
He is a strong leader. And so far, at least it seems like under his leadership reforms will be introduced that could lead to a stronger SA economy.
 
But reality will set in.
 
Everything cannot be changed or fixed in the blink of an eye.
 
There’s hard work needed to fix the South African economy.
 
I believe the JSE will overheat; the small cap index could hit 70,000 points by year-end.
 
But by early 2019 or after the election there’ll be a correction of 10% or so, as investors realise the markets can’t run ahead of growth and reforms too much.
 
For now, enjoy the euphoria. Invest in undervalued and growing small cap stocks. And make money.
 
Here’s to unleashing real value
  
Francois Joubert
 

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