Despite predictions of doom and gloom from several of the world’s leading economic commentators, the equity market recovery remains firmly on track, albeit showing signs of exhaustion. The South Africa equity market, up 0.25% in September, was the worst performing of the emerging market universe for the month, with Russia’s gains of 15% coming through the strongest. The All Share Index is now up 18.6% over the year to date and has returned a healthy 19.5% per annum for the past five years.

It should come as no surprise that the SA equity market is starting to slow. Both the local stock market and its emerging market counterparts have run hard this year (with emerging markets up a further 9% in US Dollar terms for September alone.)

Many emerging markets experienced only a brief recession, and some avoided recession altogether. Despite the message broadcast by Western media, this has largely been a developed world crisis and not a global crisis. Several emerging markets, particularly in Asia, are growing strongly and the much predicted shift from the low yielding West into the higher growing rest has indeed been evidenced by the stock market returns from those regions. 

But while emerging markets as a whole can afford to keep on running a little longer, South African equities cannot continue at the same speed. Given that Europe is an important trade partner. South Africa will take longer than most emerging markets to recover from the financial crisis, and the recovery will be slower. The economy will contract by close to 2% this year, while growth next year is forecast to be slow. 

In addition, the JSE is trading above its long-term PE average and has to an extent run ahead of future earnings. Therefore, a short-term pull back or at best a bumpy sideways trajectory is to be expected. Factor in the much vaunted ‘new normal’, where slow growth, higher unemployment, increased saving, deleveraging, more sober remuneration and more prudent spending will all affect earnings, markets that run ahead of earnings in this environment are indeed at risk, as earnings will take some time to catch up. 

So in summary, the developed world essentially had a heart attack, and is going to have to walk for a couple of years before it can run again. Expect further volatility in the fourth quarter and expect possible short-term weakness, but nothing near the extreme levels experienced this time last year. There is still a wall of money waiting to enter the market and these funds should provide a floor to any potential stock market weakness.