Is it the tail wagging the dog, or is it just a fast growing puppy?
On Monday, Tuesday and Wednesday, the All-share index on the Johannesburg Securities Exchange closed trade, each day on a historically new record. This unprecedented performance eventually saw the ALSI topping 37,300 on Wednesday reaching an all-time high of 37,339. On Thursday it pulled back by about seven tenths of a percent, ending trade at 37,051.
But it was the widely quoted benchmark index, the JSE Top 40, that drew more attention. This index that tracks the 40 biggest South African companies by market capitalisation went above 33,000 index points on Wednesday for the first time since it was launched 17 years ago. Intra-day trade saw an all-time high of 33,122. However, the share performance of the individual companies making up the index, was more mixed than the All-share index. While many companies surprised with their solid gains, especially among the retailers, other sectors disappointed most notably the miners and the construction companies.
It is perhaps a bit early to draw too many dogmatic conclusions from this week’s new records on Africa’s largest stock exchange. The Rand on Wednesday traded in a well-defined band between R8-55 and R8-65 to the US dollar. It was a somewhat stronger Rand compared to the previous two weeks when the bucket’s bottom fell out and the Rand swiftly depreciated from around R8-24 to R8-91 at its weakest. Still, it fortunately never breached the psychologically important R10-00 level, and it seems as if limited bond trades and portfolio investments bolstered the currency for the early part of this week.
When the international financial meltdown happened in August 2008, the All-share index stood at a then all-time high of just above 33,000 index points and it was only in August this year, that it set a new post-crisis high of 34,000.
Much has changed since August 2008 but much has also remained the same, so the question that inadvertently pops into my mind, whether we are in dangerous territory again, is not an invalid question. In essence, the analyst’s conundrum can be captured by: Can this performance be trusted or is it the result of loose monetary policy in the United States?
This week’s impressive index records, were set on indices tracking equities. In other words, it has nothing to do with movements in the bond market, and certainly not in the government bond market.
As of the beginning of October, eleven South African government bonds are listed in the Citigroup World Government Bond Index. It is premature to quantify the impact of this important inclusion in an index that guides the mandates of many international fund managers. Yet, the examples of Mexico, Malaysia and Poland, which I quoted in a commentary at the end of September, indicate it is not unreasonable to expect yields on SA government bonds to come down by as much as 200 basis points over the first six months. Since it took a full semester for the benefit of inclusion to materialise in the three quoted countries, it makes me suspect that there is no correlation between stock index performances of this week, and the anticipated investment inflows in the bond market.
Furthermore, the appreciation in the currency clearly indicates that foreign portfolio inflows are what stoked the indices. In short, it was foreign investments that pushed equities to their record levels and not domestic money.
Since I am convinced it is too early to see a meaningful downshift in the bond market, and in the absence of comparable data, indices tracking equities, are the only indication that a massive capital inflow has occurred on the JSE over the past three days.
Earlier in the week I read a report where Emerging Markets are punted as the new investment target for large international fund managers. I know these fund managers do not move their investments around willy nilly, but I also know they control such vast sums, that it is relatively easy for a handful of them to effect significant moves in our local markets.
In 2008, this proved to be a major headache for other, bigger emerging markets, most notably Brazil, who announced various measures to curb volatile portfolio inflows and outflows. Even the Swiss punted capital controls to counter currency volatility. Eventually it has become somewhat of a non-issue, but for the southern African region, it seems suddenly, investment volatility may turn out to be more disruptive than positive. By the end of the year, we should have a clearer indication from both the equity and the bond markets.