SENSIBLY OPTIMISTIC
PLANTING THE SEEDS FOR A MARKET RALLY
A catalyst is needed to unlock the value. By Liam Graham, Portfolio Manager / Trader- NVest Securities.
2016 was a tough year for the South African financial markets: the Top 40 finished the year down-5 %, while the ALSI barely stayed above zero, thanks solely to the resource sector which saw a bounce off significantly depressed levels.
There is definitely more to be optimistic about going into 2017: South African market valuations are at 5 year lows with the forward PE of the ALSI at 12.3x.
Historical one year forward PE- emerging and developed markets * good returns for shareholders; a catalyst is needed to unlock the value. The catalyst need not be a major event that changes the path of growth overnight, in fact they rarely are- more likely a myriad of small margin changes that together create enough sustained inertia to slowly turn the economic cycle.
IN SEARCH OF MARGINAL SHIFTS
GDP growth bottomed in 2016 and general consensus expects GDP growth to more than double in 2017( although remaining at depressed rates), driven by recovering Agricultural & Commodity sectors.
SA GDP forecasts
Source: Avior Capital Markets, Bloomberg * PEs for economy plotted in local currency terms
Earnings growth across the ALSI should show significant acceleration on the back of a depressed 2016.
SA Equity Market- Earnings growth
The improving Agricultural and Resources sector should aid job stability and a stable Rand will aid investment decisions. However, I believe the biggest driver of marginal benefits in the near term will come from a receding inflation rate.
FOOD INFLATION HEADWIND TURNS TO TAILWIND
A big constraint on consumer spending in 2016 was inflation, which spent the year above 6.0 %, driven mainly by drought induced food inflation. Consumers found themselves with very little disposable income left after purchasing their staples.
SA Inflation Rate SA Food Inflation
Source: Avior Capital Markets, Bloomberg
This sets a good foundation for the market to provide healthy returns, however, reasonable valuations are not sufficient in itself to produce
Source: tradingeconomics. com
14 sensible finance Mar17