Market review January 2013
In my closing review at the end of 2012, I mentioned that we have to start asking what will be the source of growth this year. The reason for this is that beyond all expectations, most stock exchanges performed quite well last year. Now questions need to be asked about valuation and the relative appeal of stocks compared to other asset classes.
The past few years profit growth has mainly been the result of cost savings and not growth in turnover as such. However, costs were cut drastically and we should now judge whether there is adequate macroeconomic growth for an increase in turnover.
On the downside, it is evident that several of the issues that plagued us last year, are still around. Europe is still in a recession, the Americans have a debt ceiling and have to deal with the so-called fiscal cliff. It creates uncertainty among consumers and the business sector.
In many parts of the world consumer confidence is still down and extremely low interest rates are necessary to stimulate the various economies. The social pressure in the Middle East is still in existence and resulted in a higher than normal oil price.
On the local front Angloplat’s restructuring announcement set the cat among the pigeons with government and unions accusing the company of being irresponsible. This and other governance issues put pressure on the rand.
However, on the growth side we see:
- An increase in manufacturing activities in the USA.
- According to the Case-Shiller index houses prices are rising, which will ultimately lead to the recovery of consumer confidence.
- The Chinese economy shows signs of recovery and a growth rate of 7.5% is expected for 2013.
- The fiscal cliff in the USA has been avoided for now, but could become an issue in the future.
- Interest rates are still low and could remain low for the rest of the year. Companies use these low interest rates to borrow money from the bond market. Companies have also saved up a lot of cash and it will have to be spent some time to finance development, buy back their shares or pay out extra dividends.
- Oil prices could go down with America becoming less dependent on imported oil and the discovery of gas fields in several parts of the world.
- The election of Cyril Ramaphosa has led to greater confidence in the country, especially in respect of the protection of the constitution and the implementation of business-friendly economic policy.
The result is:
- grave concerns about the sustainability of any recovery; and
- that stock prices are generally expected to go down after the sharp increases the previous year.
Despite the increase the past year, stock prices are still priced correctly and definitely relatively inexpensive compared to other asset classes.
In my opinion the positive statements above should be adequate to ensure that stock prices, both locally and internationally, are higher at the end of this year compared to 2012. It is also clear that the market will still faces many challenges.