Currently the price to earnings is high, on average around 20. We have Gross Domestic Product (GDP) averaging at 1.5%, a weak currency, high inflation figures and high current account deficit. Where to from here? The South African stock market is very expensive, so will the market retract and if so, when and should we remain invested in the JSE?
Market commentators say that Africa is the market to be invested in, in twenty years’ time. But is it the time to be invested in Africa now? If you require your money soon or wish to preserve your capital, it would be best to decrease your local equity exposure. The markets could retract and you could lose 30 – 40% of your market exposure. After the last market crash in 2009, the markets recovered relatively quickly. But since 2009 GDP has been on average 1.9% per annum, so even though the equity market has performed well, the economy on the whole has not. The South African economy has remained suppressed, the current account deficit has grown, unemployment has risen, and more recently, inflation has started to climb. As a result of climbing inflation, the South African Reserve Bank has increased the repo rate, and we can expect further increases in due course. Unfortunately South Africans are more indebted than ever and as a result of climbing inflation and higher interest rates many are not able to service their debt.
I guess that is why we have a low savings rate and individuals are more worried about keeping their jobs rather than long-term investment opportunities.
Most commentators argue against being highly invested in the stock market as indicators are there that the market will fall. If your investment term is long term, i.e. longer than ten years, then you could remain in the stock market. Historically the market fully recovers within seven years, so should the market fall, it should fully recover within seven years, given the past performance.
It will be interesting to see for how much longer it will remain at these high levels, and if it should drop, by how much? If you are concerned about your equity exposure or asset allocation, please contact me soonest.
The South African stock market
