Economic update: September 2013 Paul Hansen, director retail investing, STANLIB A recovery in the resource sector is powering the JSE The JSE recently broke new highs and many investors may be wondering what is behind this rally and whether the JSE is now entering expensive territory. Driven by resources When looking at the JSE performance it is important to understand that this is being driven largely by a very over-due recovery in the resource sector. The resource sector was once the most dominant sector on the JSE, but at 28% of the JSE All Share Index, it still carries a lot of weight, so when it rallies, so does our market. The focus, therefore, should be on whether this rally in resources is sustainable. Potential long-term recovery The resource sector has been in a downward trend since its peak in 2008. There have been several indications that the trend would be reversed but any recovery has tended to be short-lived. This time, dare we say, it could be different. During August the Index surged by over 20% and fund managers are starting to take a renewed interest in the sector. If funds start increasing their weighting to resource stocks this could provide momentum to share prices. Still a long way to go In August BHP Billiton came close it its post-crash high in rand terms and Anglo American rose 25%. Despite this rally the JSE Resources Index remains well below the values of 2007 and is not looking expensive. Despite rising by over 40% in August, Anglo Platinum is still well off its all-time high and was until recently trading 80% below its peak. Historically, when a good company with future prospects has fallen 80% from its peak, it usually indicates a good buying opportunity. For example if one looks historically at indices like Nasdaq, the Japanese Nikkei and the US Dow Jones, all of which have experienced falls of 80% from their highs at some point in their history, those falls indicated an excellent buying opportunity. Depends on the dollar On a cautionary note, it is important to remember that much of this recovery is due to a weaker dollar which saw the prices of gold, platinum, palladium and iron ore move up sharply. The US dollar is playing a significant role in the current run in resources prices as a weak dollar is translating into higher resource prices, a strong turn around in the dollar could soften some of these prices. Stick to investment rules While it is interesting to understand the driving forces behind the market returns, when it comes to long-term investing trying to second guess the market, and currencies in particular, usually ends in tears. Waiting to see if the market corrects or jumping in because the market is rallying is not an investment strategy. A diversified portfolio invested in quality shares and diversified to meet your investment needs should deliver returns over time.
Posted on: Tue, 17 Sep 2013 12:01:29 +0000