So just how much deeper could this bear drag the market? Well the answer is a mighty long way. The
declines suffered so far are really not yet at all severe when expressed in
terms of valuation measures such as the price to earnings (PE) ratio. This bear
has not yet destroyed even a half of the gains that the All Share index
achieved since the little hiccup and low point in the middle of April, a mere
two months ago. That index has so far scored a maximum decline of just 6.4%
from its peak above 42 200 on the last day of May. Self respecting bears can do
far more damage than that. At the low of the 2008/9 market correction,
investors were paying an average of just R9.00 for R1.00 worth of historic
earnings (that is the PE ratio was 9). Currently the cost of the same amount of
earnings is about R16.00 (PE ratio now 16).
So if the market were to return to that lower PE ratio, prices would
need to fall at least 40% from current levels. And that’s not the end of the
gloomy news. Thanks mainly to the unfolding calamities and tragedies in the
mining businesses listed on the JSE, average earnings of the overall market
have been falling steeply. If this were to continue, average prices would also
need to fall just to maintain the present PE ratio.
Even when using an index such as the Financial & Industrial, which
excludes the mostly dismal mining and resource shares, the picture is equally
concerning. While growth in the average earnings of these sectors has slowed a
little, it is still satisfactorily positive but the index itself has outpaced
that growth in the past few years. Therefore, to return to the PE ratios
experienced in 2008/9, current prices in that index would need to pull back
more than 50%. And then only a particularly bearish analyst will also point out
that economic conditions are such that even the financial and industrial
sectors might also soon begin to report negative earnings growth.
And that’s what has happened at Telkom where earnings apparently are
down almost 75% despite holding a near monopoly on fixed line infrastructure
and a stranglehold on almost all internet traffic for which they charge
exorbitantly. The attitudes of the politicians who allegedly are in charge of
our communications these days are an echo of a previous government who also
felt no good would come of letting South Africans enjoy what the rest of the
world had. On that occasion we were denied television. Now we are denied cheap
and plentiful bandwidth.
Remember that fearsome price collapses like that suggested by these
calculations do not take place overnight. Indeed they can take months and years
to unwind and before they end many investors will have grown bored and gone to
find something else to do. That is of course when we must all remember to buy.
There’s a nice little side-battle taking shape at the edge of the
big one about the tolls on the lovely new roads around Joburg. The company that
was responsible for installing the fancy kit that will scan the passing traffic
and calculate the tolls due is based in Austria. It has been explaining to
their shareholders there how things work in Africa.
Despite having installed and tested the gear more than a year ago no actual
money has yet been collected and everyone must wait for the dancing and singing
to stop. Reportedly the company hopes that their share of the income will be some
50 million euros per year. Sanral, the local operator, however, would appear to
have other ideas. They are telling everyone that no money from the tolls will
leave the country. This could be fun, as long as you are not Austrian.
The roads around the bowling club are being cordoned off in
preparation for a car show starring some alleged celebrities from the BBC. Huge
excitement is promised and large crowds are expected. Hopefully, however, the
Metro Police will stick to their promise and go on strike over this weekend.
Without the clueless cops messing up the traffic it might still be possible to
get there for a beer. Hopefully the rugby deprived folk of Nelspruit will turn
out in better numbers than we managed at Kings Park
last weekend for the back to back tests. It must be pretty dispiriting for two
national sides both playing an away game to appear in a near empty stadium.
Remember that Monday is a holiday. It’s when we celebrate being
young again.
James Greener
14th June 2013
