By Rodney Nichols,2014-08-12 02:30
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    January/February 2003



    ; Should You Invest on the JSE in 2003?

    ; The Rand to Come Under Pressure in 2003 summary

    ; SA Equities Set to Perform in 2003 - summary

    Dr Gad Ariovich, editor and Investment Consultant Contributors: Desmond Esakov, Charl Marais

Should You Invest on the JSE in 2003?

    Owing to daily contact with portfolio managers and clients we often have the ability to get a sense of the investment sentiment on the JSE. It is our impression that many of the JSE equity market players are now „sitting on the fence‟ waiting for a signal on price direction. Following a tough 2002, when the JSE Overall Share Price index dropped by 11.2% and the current pending war with Iraq, uncertainty among equity players is high. This article reviews the current state of the JSE from a longer perspective by using several alternative analytical methods.


     JSE Average PE Ratios For Various Periods16.0








    7yrs5yrs3yrs1 yr current

    Figure 1 suggests that the current PE of 10.0 (30 Jan 03) for the JSE Overall index is quite low from a historical perspective, and according to this criterion, the market should be considered to be cheap.



    JSE Annual Average Dividend Yields For Various









    7yrs5yrs3yrs1 yr current

Figure 2 shows that the current dividend yield is high and therefore according to this

    criterion the market is also cheap.

Figure 3: The ratio between RSA long bond yield and JSE dividend yield

    Ratio between RSA Long Bond and JSE Dividend Yield9












    Another analytical method used to asses the state of the JSE market is the ratio between long-term government bond yields and dividend yields. This method, which is often used by investment strategists, suggests that the lower the ratio between the long-term bond yield and the dividend yield, the more undervalued the JSE

    According to figure 3, the JSE market is currently in a very cheap territory.

Figures 4 and 5: JSE value by the US Fed Model

    The Federal Reserve ModelJSE Overall Index: Consensus Forecast vs Actual








    The US Federal Reserve Bank suggests a macro model to estimate over/undervalued situations on equity markets. The Fed model suggests that a fair value forward PE ratio for a market should be a function of its long-term bond rate. More specifically, the fair value PE for the JSE should be defined as one over the RSA 10 year bond rate. Thus, if the current yield for the RSA 10 years bond rate is 10.4, the forward fair value PE for the JSE is 1/10.4 = 9.3. The consensus earnings growth rate for the JSE All Share index for next year is 13.8. Thus, if the current PE is 10, the consensus for the forward PE should be 8.7. This means that the JSE is 13% undervalued (8.7/10 -100)*100= -13

    Figure 4 shows the ratio between the current P/E and the reciprocal of the 10 year bond yield. According to figure 4 the JSE is in historically cheap territory.

    Figure 5 shows the consensus forecast for the JSE Overall Index against its actual value. According to figure 5 the JSE Overall Index is forecast to be at 10 902 for 2003 against the current value of 8932. This indicates that the JSE is undervalued.


Figure 6: Country PE ratios for the beginning of 2003.

Figure 7: Country dividend yields for the beginning of 2003.


    With the globalisation of world investment markets, it is worth comparing the PE ratios and dividend yields with other international markets. Figure 6 and 7 show both the PE ratio and the dividend yield of the JSE in comparison with many other equity markets.

     thth and 9 cheapest equity market According to both figures 6 and 7, the JSE is the 5

    respectively among the 43 investigated countries.

Figure 8: Over/undervalued situations on the JSE

    ALSI Over/Undervalued Situation










    Our proprietary model for revealing over/undervalued situations for the JSE Overall Share Price index also suggests that the SA equity market is now in cheap terrain, well below its fair value (the zero line reflects the fair value points).

    In summary, we have applied eight alternative methods to evaluate the current state of the JSE market. All our indicators suggest that the JSE market is in a cheap territory. We therefore consider the JSE equity market to be a strong buy. Consequently, we strongly recommend clients to continue investing on the JSE. We believe that over the next five years the JSE will continue to provide better after-tax return than fixed deposits rates in the banks. We also believe that a well-diversified portfolio on the JSE will continue to provide a return, which comfortably exceeds the local inflation rate and therefore increases the purchasing power of investor‟s wealth in South Africa.


Rand to come under pressure in 2003 (a summary of presentation)

    The South African rand will come under pressure in 2003, as foreign banks unwind the long rand positions built up since September 2002, Gad Ariovich, the economist at Anglorand Securities said at an investment seminar on Tuesday (28 Jan 03).

     These long rand positions where built up to exploit the large interest rate differential between South Africa and the other major countries. In 2002 South Africa increased its interest rates four times with the last hike in September.Most economists expect South Africa to cut interest rates this year and Ariovich warned that the unwinding of the long rand positions as the interest rate differential reduces would be put pressure on the rand.

     “One of the things that one must bear in mind when looking at currencies is that capital flows overwhelm trade flows. So the rand strength did not make sense when both September and November saw reported trade deficits, yet if one accepts that market speculation is that foreign banks long rand position is in excess of $1 billion, then the rand strength does make sense,” Ariovich said.

The rand has gained more than 25% since it formed a “double-top” at 10.95 rand per

    dollar on August 21 and 22 2002 to Tuesday‟s level of 8.70 rand per dollar. South

    Africa‟s foreign exchange market has a daily turnover in excess of $6bn, while by comparison the export volume is equivalent to less than $100 million per day. “The South African Reserve Bank (SARB) is well aware of these long positions and this is probably the reason why the governor has tried to stop speculation that interest rates will be cut shortly. The last thing the SARB needs right now is a weaker rand, as it has an inflation target to reach,” Ariovich said. Ariovich also said that the focus should also be on the trade-weighted rand, as the US dollar was likely to continue to be weak given the large US current account deficit.“Just because the rand is stable against the US dollar does not always mean that the rand is strong. Just look what the trade weighted rand has done in January when the US dollar was under pressure,”

Compiled Helmo Preuss, I-NET Bridge

SA equities set to perform in 2003 (a summary of presentation)

    The South African equity market is set to perform in 2003 as safe haven flows to gold can send the price “sky high”, Gad Ariovich, the economist at Anglorand Securities said at an investment seminar on Tuesday.

     “One of the things that one must bear in mind is that the gold market is a tiny investment market in global terms. This means that if a small number of investors decide that they will move a small proportion into a historical safe haven, then this could send the price sky high,” Ariovich said.


     The gold price has gained more than 25% since it traded below $300 an ounce in August 2002 to current prices around $373. “Iraq is not the only reason why investors are flocking into gold. In addition to war jitters, we have an erosion of trust in the US dollar, as well as worries about the Japanese banking system and what that might do other financial systems,” Ariovich said. The US Office of the Comptroller of the Currency (OCC) Derivatives Report showed that total US commercial bank derivative positions increased by $3.1 trillion in the third quarter 2002 to $53.2 trillion. If a mere 2% - the historical norm - of these deals go sour and a creditor is unable to pay on demand, then the resultant $1 trillion loss would wipe out the capital of most US banks. This risk is not negligible given that eight of America‟s 12 largest corporate bankruptcies have taken

    place since the beginning of December 2001.

     In August 1998, US Federal Reserve chairman Alan Greenspan cajoled US commercial banks into supporting the highly leveraged hedge fund, Long Term Capital Management (LTCM), so that its derivative exposure could be unwound in an orderly manner. Greenspan said at the end of 2002 when commenting on asset bubbles that: “History indicates that bubbles tend to deflate, not gradually and linearly, but suddenly, unpredictably, and often violently.”“Apart from the higher gold price, South African equities should also gain from the attractive valuations, which are low, both in the historical South African context and by comparison with most other equity markets,

    Ariovich said. “The government has got its house in order on the policy front with regard to fiscal and monetary policy and South Africa is about to reap the benefits of the past few years of discipline,” Ariovich said.

     Compiled Helmo Preuss, I-NET Bridge

Senior Staff

    David Lewis, CEO; David Palmer, Director, Head Dealer; Adriaan Kamper, Financial Director; Yulindi Taljaard, Compliance Director and Settlements Manager.

The Investment Committee

    Harold Bernstein, Chairman; Dr Gad Ariovich, Investment Manager; Dr Richard Bonnichsen; Charl Marais Desmond Esakov.

Anglorand Securities; rd Tel: 011 - 484 7440 Fax: 011 484 6647; 3 Floor, Werksman Chambers, 22 Girton Road, Parktown, 2193.


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