After reaching record highs throughout 2012, the JSE is expected to deliver more of the same in the current year – with the big issues continuing to revolve around the bubble aspects that emerged last year.
According to Mark Wilkes Mark Wilkes: senior sales trader at GT247.com, both international and domestic equities will continue to rise throughout 2013, more so than many commentators currently believe and despite concerns that equity markets are currently overvalued.
“JSE equities should continue onwards with the perfect storm – and this is often best accessed via the indices through the use of derivatives and ETF’s. Specific-timed stock selection within these indices can make things even better.”
Although often bemoaned – the composition of the South African basket makes for a compelling investment case as it comprises a number of attractive international diversified counters, diversified commodity plays, a monopoly in platinum, robust banks, participation in the pan-African retail scenario, national infrastructural and developmentally planned spending.”
He says that compared with European Indices, domestic political and labour issues will remain hugely problematic, as will the South African credit bubble, which will mature and burst with negative ramifications. “This is not a nice consequence but unfortunately it is inevitable. Unsecured debt has been jumped into aggressively, principally because of the margin between banks’ cost of funds and the rates charged. The extension of unsecured credit has been into lending against consumer assets and profiles which have become over leveraged.
“In essence unsecured lending has usurped property quite unfairly as a credit option – and has thereby forced capital into retailers’ balance sheets.”
Wilkes notes that with regards to JSE Indices, the mix of the ALSI 40 portfolio remains compelling as a long only play.
“Although it has a significant resource component, the index also retains decent exposure to retailers – with the two offsetting each other in terms of trend over the past year. We would expect this relationship to continue, albeit with the directions reversed.
“JSE Resource shares will splinter out SA assets and offshore into separate listings/entities. Since the end of apartheid large SA companies have successfully expanded offshore into global entities, afforded the opportunity to optimally domicile.
“It is ironic that we now come full circle to the stage where some of the assets/asset classes that originally created the capital for this expansion are now being ring fenced off to protect the interests of the broader portfolios. These splits are negative outcomes for SA Inc. but may in fact be the only way that miners can obtain protection.”
On the retail side, Wilkes warns of the attack on the implied forward multiple. “Retailers, much like Caesar, may find themselves built up and then destroyed for what they might become. Should sales growth – not the multiples implied by share price growth, and margins – become challenged, then the migration into retailers could reverse dramatically.”
“All of this is taking place against the backdrop of a ZAR hedge orientation. Addressing the key performing sectors and the specific counters is more problematic. Given the context of a yield chase where market capitalisation and liquidity are factors, value investors may struggle to see market uptake where they perceive value,” says Wilkes.
According to Wilkes, general commodity prices are likely to have a high probability of volatility this year.
“The simple problem combines apparent Chinese and promising developed market economic growth with increasing demand and rising non-bubble prices. The high levels of speculative capital in these markets should entrench volatility as shorter term view takers jump in and out of investments base on speculation, distorted demand and supply price movements.
“Furthermore, because certain commodities are rationalising on the supply side, it should be a year of positioning in quality producers or well positioned portfolios rather than speculative and marginal counters,” he advises.
Wilkes also predicts that emerging market bond yields should continue to remain firm as the growth of market /fund investment into emerging market debt continues to break all records. He explains that bond participation has increased.
In order for, emergent debt to maintain the same weighting as it did pre-developed market issuance, he says the ultimate take up of emergent debt has to increase and continue doing so.
“In addition, most emerging markets have growth better growth potential, in almost any scenario for the foreseeable future, than developed markets. The issue is not so much the yield- which remains superior, but also the security of yield and the need for credit diversification and weighting.
“This will change when capital flows back, but most likely outside of 2013. Thus, steer clear of developed debt and short US long dated debt on good strength,” he says.
In terms of volatility, Wilkes advises that lower volatility will be the new norm for 2013.
“One of the implicit objectives of central bankers is to reduce volatility in Asset prices. As well as protecting against the downside this also involves controlling runaway bubbles. However- in the short term volatility is oversold.”
According to Mark Wilkes Mark Wilkes: senior sales trader at GT247.com, both international and domestic equities will continue to rise throughout 2013, more so than many commentators currently believe and despite concerns that equity markets are currently overvalued.
“JSE equities should continue onwards with the perfect storm – and this is often best accessed via the indices through the use of derivatives and ETF’s. Specific-timed stock selection within these indices can make things even better.”
Although often bemoaned – the composition of the South African basket makes for a compelling investment case as it comprises a number of attractive international diversified counters, diversified commodity plays, a monopoly in platinum, robust banks, participation in the pan-African retail scenario, national infrastructural and developmentally planned spending.”
He says that compared with European Indices, domestic political and labour issues will remain hugely problematic, as will the South African credit bubble, which will mature and burst with negative ramifications. “This is not a nice consequence but unfortunately it is inevitable. Unsecured debt has been jumped into aggressively, principally because of the margin between banks’ cost of funds and the rates charged. The extension of unsecured credit has been into lending against consumer assets and profiles which have become over leveraged.
“In essence unsecured lending has usurped property quite unfairly as a credit option – and has thereby forced capital into retailers’ balance sheets.”
Wilkes notes that with regards to JSE Indices, the mix of the ALSI 40 portfolio remains compelling as a long only play.
“Although it has a significant resource component, the index also retains decent exposure to retailers – with the two offsetting each other in terms of trend over the past year. We would expect this relationship to continue, albeit with the directions reversed.
“JSE Resource shares will splinter out SA assets and offshore into separate listings/entities. Since the end of apartheid large SA companies have successfully expanded offshore into global entities, afforded the opportunity to optimally domicile.
“It is ironic that we now come full circle to the stage where some of the assets/asset classes that originally created the capital for this expansion are now being ring fenced off to protect the interests of the broader portfolios. These splits are negative outcomes for SA Inc. but may in fact be the only way that miners can obtain protection.”
On the retail side, Wilkes warns of the attack on the implied forward multiple. “Retailers, much like Caesar, may find themselves built up and then destroyed for what they might become. Should sales growth – not the multiples implied by share price growth, and margins – become challenged, then the migration into retailers could reverse dramatically.”
“All of this is taking place against the backdrop of a ZAR hedge orientation. Addressing the key performing sectors and the specific counters is more problematic. Given the context of a yield chase where market capitalisation and liquidity are factors, value investors may struggle to see market uptake where they perceive value,” says Wilkes.
According to Wilkes, general commodity prices are likely to have a high probability of volatility this year.
“The simple problem combines apparent Chinese and promising developed market economic growth with increasing demand and rising non-bubble prices. The high levels of speculative capital in these markets should entrench volatility as shorter term view takers jump in and out of investments base on speculation, distorted demand and supply price movements.
“Furthermore, because certain commodities are rationalising on the supply side, it should be a year of positioning in quality producers or well positioned portfolios rather than speculative and marginal counters,” he advises.
Wilkes also predicts that emerging market bond yields should continue to remain firm as the growth of market /fund investment into emerging market debt continues to break all records. He explains that bond participation has increased.
In order for, emergent debt to maintain the same weighting as it did pre-developed market issuance, he says the ultimate take up of emergent debt has to increase and continue doing so.
“In addition, most emerging markets have growth better growth potential, in almost any scenario for the foreseeable future, than developed markets. The issue is not so much the yield- which remains superior, but also the security of yield and the need for credit diversification and weighting.
“This will change when capital flows back, but most likely outside of 2013. Thus, steer clear of developed debt and short US long dated debt on good strength,” he says.
In terms of volatility, Wilkes advises that lower volatility will be the new norm for 2013.
“One of the implicit objectives of central bankers is to reduce volatility in Asset prices. As well as protecting against the downside this also involves controlling runaway bubbles. However- in the short term volatility is oversold.”
