JSE share gains buck bears' pessimistic outlook

ONE of my favourite market anecdotes is a soccer story I fear I may be repeating. It's a condition that comes with ageing but still, the tale bears no less relevance to the point I wish to illustrate.

Many years ago I read legendary footballer Billy Bremner's memoirs. Bremner, a Scot, captained Leeds United in the 1960s and 1970s at a time when the Yorkshire team was one of the dominant forces in the top division of the English league.

In his book, Bremner recounted an invitational game against a much-fancied Italian team he refrained from naming. The match was organised to celebrate a milestone in the Italian club's history, and against all odds Bremner's team beat the hosts by one goal to nil.

At the post-match banquet, the president of the defeated team went to great lengths to explain why his championship side had been subdued. In reply Bremner spelt out exactly why the Italians had lost: "Mr President, we put the ball in the back of the net and you did not."

This year the JSE All-Share Index climbed an astonishing 18% in an environment that was hardly conducive to risk-taking. The bears are crying foul, chiding those who believe the trend is sustainable. The global economy is sluggish, they warn, weighed down by unmanageable government debt, decelerating industrial production and easing consumer spending.

The slowdown is spilling over from the developed economies into emerging regions, reducing their export sales and, in turn, trimming their demand for bulk commodities. In Europe, leaders continue to find ways to dodge a crisis that remains a major threat to a global recovery while in the US policy-makers are locked in a bitter dispute over passing necessary tax legislation and introducing steep budget cuts. The bears claim world markets have moved higher on a sea of liquidity created by out-of-control central bankers, needed to prop up insolvent banks and keep interest rates at record low levels. Inevitably, when this cheap source of funds is withdrawn, severe economic hardship will follow.

In financial markets one can't be too careful, yet an analysis of the drivers behind the impressive gains on world markets reveal a different story. Share prices generally surged on the back of solid earnings performances. Corporate balance sheets remain ungeared, dividend yields attractive and future prospects encouraging.

On the JSE, brewer SAB Miller is up 40% since January 1, eight times more than the yield on the local money markets. British American Tobacco lagged SAB Miller, advancing 23%, but the rise was still well above the increase in the All Share Index and significantly above returns on the fixed interest markets. The gains in these securities had nothing to do with Ben Bernanke's loose monetary policy, but rather were the outcome of rising householder demand in emerging regions like Africa, South America and Asia Pacific.

The changing shift in purchasing patterns not only includes basic products like foodstuffs, beverages and tobacco but covers luxury goods, pharmaceuticals and technology as well. Luxury goods manufacturer Richemont rose a staggering 68% this year, supported by record sales of high-priced luxury watches, particularly by the aspirant Chinese. Pharmaceutical company Aspen's decision to expand its business internationally has rewarded shareholders handsomely - the share price moving up 62% over the past 11 months.

Another theme that contributed to the JSE's run to all-time heights was foreign investors' appetite for domestic retailers spreading their operations into Africa.

Although local analysts turned cautious about the heady multiples at which these shares were trading, the flows from abroad persisted, pushing the revitalised Woolworths Group up an incredible 82%. Mr Price was not too far behind (+66%), followed by Shoprite (+41%). Massmart was held back by management spend on repositioning the group's business model, while shareholders in beleaguered Pick n Pay paid the price for ineffectual leadership - the share down 12%.

There were a number of other sectors that matched the moves in retailers and our heavily capitalised dual-listed giants including Food Manufacturers (AVI +48%), Packaging (Mondi +62%), Healthcare (Life Healthcare +56%) and Logistics (Imperial +50%). But there were also areas of the market where the bears called it right.

China's decision to cool its economy by increasing interest rates and shifting focus from investment to domestic consumption took its toll on commodity prices, especially bulks like coal and iron ore.

This, coupled with runaway increases in local mining costs and the upshot of illegal strike action on production, upset the resource markets. Platinum and gold counters were hardest hit - Harmony down 30%, Angloplats 27% and Anglogold 22%. Cost overruns in Brazil, tensions in Chile and trouble on the Platinum Belt hastened the departure of Anglo American CEO Cynthia Carroll. Still South Africa's most widely held share, Anglos, was off 16% this year, compared with an 18% rise in rival BHP Billiton.

Finally, despite government's commitment to spend R850-billion on infrastructural development, building and construction companies revealed little proof that the money was being allocated. Profits plunged, taking share prices down with them. Basil Read led the decliners, slipping 34% with Murray & Roberts giving back 17% and Aveng 16%.

Each year we attempt to forecast where the market will trade a year from now. The bears remain impenitent, convinced structural imbalances in the global economy will ultimately send share prices tumbling. I prefer to study financial statements for guidance.

At this juncture SAB Miller still appears to be selling a lot of beer, the eastern Europeans are still smoking like chimneys and the Chinese still accumulating expensive watches. Shoprite continues to cut up its opposition and Mr Price is still attracting discerning shoppers. On this evidence alone there seems no reason to lose your place in the stock market.