25 Jun Economic overview: May 2014
The FTSE/JSE All Share Index (ALSI) return was strongly driven by a recovery in Naspers (+17.6%), supported by British American Tobacco, MTN, Sanlam and a recovery by the food producers. Both developed and emerging markets performed well, driven by improved global risk appetite. The domestic property market is being constrained by low consumer spending and interest rate expectations. Perpetual preference shares added a placid 40 basis points after a spectacular recovery over the past 3 months.
The ALSI valuation seemed expensive on a top down basis. Earnings growth averaged at around 11% over the past six months. Consensus is expecting 11.8% growth over the next 12 months. The historical 12 month ALSI PE is currently on 19.4 times earnings, a one year forward PE is at 14.6.
Substantial additional iron ore supply, and high levels of inventory, forced the iron ore price down to 2009 levels. Inventory levels are at an all-time high due to finance schemes and subdued construction activity in China. Chinese steel prices have also been low over the past year. In contrast to the Chinese markets, US hot rolled steel prices have been trending up due to support by construction.
Real GDP expectations (using IMF forecasts) are set out below: