JSE: We're clawing our way back

David Shapiro: I'm in the camp that believes that sometime during the year the JSE will test its all-time peak, recorded in May 2008.

This implies a gain in the overall index of at least 15% from its current level; nowhere near last year's recovery-inspired 27%, but still a return well above the inflation rate and considerably higher than the after-tax yield on the money markets.

It would be big-headed to claim I have suddenly acquired a sound grasp of the workings of the global economy, especially in these worrying and chaotic times. Nor do I think the vexing issues facing central bankers and other monetary authorities are easily solved.

I also admit that, when it comes to the stock market, I am by nature feverishly bullish. But that's not cause to dismiss the existence of a number of signs that reinforce my view that the positive trend in equity prices, which commenced last March, will stretch into 2010.

Firstly, after coping wearily with a two-year onslaught of hard luck stories that followed the collapse of the US sub-prime housing market, investors have developed a resistance to bad news, while responding with vigour to any gesture pointing to a turn in fortune.

You only have to look back to last week, when global stock markets edged forward to fresh 15-month summits, brushing aside downbeat stories like the poor employment numbers in the US, President Obama's proposed new levy on large banks, China's move to increase interest rates and Google's threat to depart the Chinese market. Dubai's near debt default and Greece's poor finances are stories long forgotten.

Secondly, interest rates are likely to remain low for longer.

Although few dispute that data is pointing to a rebound in international trade and business activity, at this stage not one commentator has had the temerity to forecast a full-bodied recovery in the global economy.

And if there is one lesson central bankers learnt from the Great Depression, it's not to tighten monetary and fiscal policy until there is overwhelming evidence that economic life can sustain itself without government support.

Loose monetary policies were intended to encourage businesses and consumers to borrow cheaply and increase their demand for goods and services to resuscitate output and promote employment. But the low cost of credit has also opened the way for speculators in financial markets to take on more risky wagers, particularly in commodities and emerging markets.

China's massive stimulus packages, launched in November 2008, probably did more to bail out the world economy than the combined effect of the measures introduced by all the other major industrial nations.

Though Chinese economic statistics are considered unreliable, one cannot spurn the surge in the country's import demand, the rise in resource prices or the climb in their industrial production.

Sure, the increase in lending, flood of capital investment and ascent of share and property values have triggered warnings of a possible asset bubble, but this could turn out to be wishful thinking on the part of the state's critics.

The Chinese recognise the need to rein in the record levels of credit; still, a large portion of the population purchase their residences for cash and, as a rule, mortgages seldom exceed 50% of a property's value.

Further, to allay fears, most of the fixed investment flowing into the country is earmarked for infrastructural development rather than expanding manufacturing capacity. And if one measures Chinese capital formation in terms of its population, in value it is well behind rich economies like America and Japan.

Throughout last year's startling recovery, there was little evidence of any major selling pressure - a clear indication that a vast universe of investors let a generous opportunity pass, choosing, instead, to remain anchored in the safety of cash, fearing the onset of a storm that never arrived. With pools of money sheltered in low-yielding money market instruments, the downside in share prices appears limited.

Yet my views come with a health warning. The JSE All Share Index is heavily weighted in value and earnings to companies that produce their revenue abroad. These include not only resource companies but an increasing proportion of industrial and financial corporations.

While I am confident that the income of these enterprises will steadily improve with the rebound in global trade, I remain guarded about the outlook for the local economy; but that is next week's story.

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