Analysts still expect 27% growth in JSE for the next 12 months.

Spring has finally arrived, and we’re getting closer to that time of the year when most people’s minds are leaning towards sun, sea and sand. The less pleasant side of a sea vacation, however, is rip currents. Anyone who has had the unfortunate experience of crossing paths with one of these monsters will know that it has to be one of the most terrifying and frustrating experiences known to man. Your every instinct will prompt you to swim back to shore, only to find yourself being drawn back into sea even further. The key to your survival when caught in these currents, strangely enough, lies in the fact that you need to either conserve energy and float on your back with the current, or swim sideways parallel with the shoreline until you can feel the current weakening, giving you the opportunity to swim to shore safely.

These currents provide the perfect example to explain the current situation in our local stock market, especially over these past few months. In the same way that your instincts will prompt you to swim against a rip current to shore, human instinct will always prompt us to try and determine either the peak or the bottom of any market, and more specifically, individual shares. In reality, however, this is exactly where many investors earn themselves a few extra self-inflicted grey hairs.

History offer some poignant examples. After the FTSE/JSE All Share Index (JSE) declined by more than 29% for the 12 months ending 30 April 2003, the “swim against the current” mentality clearly showed when the JSE managed to grow by nearly 43% in the following 12 months (up to 30 April 2004). It feels like only yesterday when the press was filled with news on how the market “rallied too much” and how cash has suddenly “become king.” What happened after that, was that the JSE managed to grow by a further 25% in the 12 months that followed and three years later (30 April 2007), delivered almost 200% growth in total.

That said, the last thing I want to do is to suggest that our current local market environment is anywhere close to what it was in 2004. But I do want to point out how careful investors should be to swim against the market rip current. As at the end of August 2020, JSE levels of 55 476 didn’t only mean that we were in a full-blown recession in addition to the COVID-19 pandemic, but the JSE also found itself in a space where it hasn’t been able to outperform local money market since 2013. The fact is that since the market declined by more than 33% since the beginning of 2020 until 19 March 2020, no one thought that six months later, we would be trading at levels higher than those seen at the end of 2019 again. Is this the peak then? What are the experts saying?

Before I answer this question, I would like to explain an investment term called the bottom-up approach. When investors follow a bottom-up approach, they focus on the analysis of individual shares and not so much on the market as a whole. When looking at analysts’ consensus forecasts on individual shares, for example, we will be able to get an indication of how positive or negative their outlook is on each individual share. When placing their findings relative to something like the FTSE/JSE All Share Index, we can get an idea of the expected growth for the market.

After following a bottom-up approach on each individual listed share on the stock exchange and calculating the one-year expected future price on each of these shares, it was quite interesting to see that analysts remain moderately optimistic about local shares, despite the fact that the index’s earnings suffered quite a bit over the past two months. In fact, for the first time in years, analysts have adjusted more companies’ earnings forecasts upwards than downwards in the past 30 days. At current price levels, they still expect 27% growth in the index over the next 12 months.

Graph 1: FTSE/JSE All Share Index with 12-month expected growth consensus forecasts (source: PSG Wealth Old Oak & Thomson Reuters)

It is important to remember that although they may be experts in their fields, these analysts still cannot provide any guarantees in terms of future growth, profits or pricing.

Remain calm when approaching the noise and “currents” surrounding shares at the moment. It remains a higher risk investment than other asset classes such as money market and bonds, but those who are able to demonstrate patience over the long-term can definitely reap the rewards.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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