Johannesburg - Things aren’t looking too rosy for South Africa, but no one seems to have told the stock market.
Having booked a string of record highs this year - including three times this week alone - Johannesburg's stock market appears to defy the violent labor unrest that has threatened growth and sparked ratings downgrades of Africa's top economy.
Much of the rise over the last 12 months has been because of foreign investors. Fueled by global stimulus, foreigners have piled into South African retailers and other sectors seen as having solid expansion prospects.
“Foreign investors like to invest where they can see growth,” said Piet Viljoen, executive chairperson of RE:CM, a Cape Town-based asset manager.
“Emerging markets offer them growth and South Africa is one of the emerging markets that has done best over the past 10 years.”
But growth expectations may be overblown.
Almost 100 000 workers, mostly in mining, have gone on strike for higher wages since August, hampering output and potentially leading the government to increase social spending, a further squeeze on a strained budget.
Both Moody's and Standard & Poor's have cut their ratings on South Africa and the deputy central bank governor has said growth forecasts could be revised because of the strikes.
“The fundamentals in South Africa are under quite a bit of pressure, growth rates are being revised lower. You could find that company earnings don't hold up anywhere near as well as they have been,” said Kevin Lings, chief economist at asset manager Stanlib.
“What you do sense is that you're on borrowed time.”
The most impressive run has been by retailers, particularly those that target lower-income customers, as investors bet the government will continue to pay benefits to the poor.
Mr Price, which sells budget household goods and clothes, has surged 62 percent this year. Grocer Shoprite is up 30 percent.
While recent data shows that foreigners are now net sellers of South African equities, retailers continue to advance.
“Foreigners and even potentially locals are buying those retail stocks still, despite the extended valuations, on the basis of the government social grant programme,” said Mohammed Nalla, head of strategic research at Nedbank Capital in Johannesburg.
“That's something that's very hard to roll back, given the social mood, and that underpins a lot of that consumer spend.”
Retailers have also had a bigger impact on the market as their index weighting has been increased, Nalla said.
BofA Merrill Lynch this month cut its rating on the sector to neutral from overweight, saying the “long-loved SA consumer theme” no longer had room to outperform in the near future.
The benchmark Top-40 index this week closed above 33,000 for the first time in its 17-year history. It is up about 16 percent this year, making it the 11th best performer of 30 emerging market stock indexes tracked by Reuters.
In dollar terms the index is up just nine percent, reflecting the recent heavy selling of the rand currency and putting the Top-40 at 23rd place out of the 30 markets.
The index is trading at around 14 times its earnings, according to Thomson Reuters data, roughly in line with its average over the past three years and well below some of its emerging markets rivals.
Even at current lofty levels, the Top-40 index may still have room to advance, as global central bank stimulus translates into inflated equity prices.
“With interest rates being so low globally, the price of risk in the short term is so low. I think that is what reserve banks globally want to achieve, they want to push investors into a risk-taking environment,” said RE:CM's Viljoen.
“To the extent that share prices are going up, they are succeeding. Unfortunately nothing much is happening in the real economy.” - Reuters