THE JSE bounced back this year whichever way you look at it. Not only were almost all indices solidly in the green, but listings rebounded and corporate action returned.
Against that background, what will next year bring?
The return to form for Africa’s largest pool of corporate capital is a story of success, but it also contains an implicit warning. The problem for the JSE is that the speed of its rebound has been so strong that it has lost touch with its context: an economy that has grown at a merely adequate pace. Economists spent most of the past year trimming back their expectations. Now the economy appears to have delivered a pedestrian 3% expansion in gross domestic product (GDP).
This modest rate of overall growth, especially when paired with extensive job losses, contrasts with the stock market indices — at the broadest level, the all share index ended the year about 16% higher.
For market watchers, perhaps the most positive indication for the coming year is that there was substantial movement among mid-cap and small-cap shares too. The mid-cap index ended the year about 28% up and the small caps were not far behind. Activity at the bottom end of the market suggests expectations that earnings will rebound across the board, and not just among the heavyweight companies that tend to have a high level of international exposure.
There were other positive signs too. After a net reduction in JSE-listed companies last year, there were 14 new listings this year. Furthermore, there were a handful of transfers from the fledgling AltX to the main board, suggesting the exchange is serving its purpose of providing companies with the capital they need to grow.
What is more, unlike last year, which was dominated by a single, very large listing in Vodacom , this year has seen a broad range of new entrants, including some well-established businesses. These included Life Healthcare and Clover, along with a tiny but hopeful resurgence of interest in listing among small companies.
Yet within this resurgence there are areas for concern.
Perhaps the most obvious is the fact that the JSE’s gold sector has increased in value over the year by only 10% despite an increase in the gold price of 22%. The basic materials sector didn’t do much better, and financials also lagged. The construction sector was a disappointment, especially after a successful World Cup, but unlike many other sectors it was coming off a high.
It was the surprise performance of industrial stocks, especially retailers, that provided the jet fuel for the overall improvement in the JSE. Retailers got an unexpected boost from the strong rand, which tends to improve the value of consumer goods, and the result was higher retail spending than expected.
This is something of a contrast to what has been happening abroad. In developed markets the focus was on the rebound of financial shares in particular, but the subdued overall economic environment put a cap on any irrational exuberance. The Dow Jones industrial average ended the year 10% up, much like the FTSE 100 index in London. Even in China, where GDP growth has exploded once again, both the Shanghai composite and the Hang Seng ended the year more or less where they started.
There is no knowing how the stock markets will respond in the new year, but investors can take heart from the fact that economic growth seems likely to accelerate and that commodity prices remain well supported. The key variables for the new year will be whether capital inflows continue to support the rand so strongly and whether local economic growth pans out as expected.
The main reason for caution is the that while most stock market indices are within sight of their historic highs, the local and global economies hold many risks.
