A Black October is unlikely this year
October 19, 2009
By Ethel Hazelhurst
Disappointing US corporate reports took the steam out of global stock markets on Friday, ahead of this week's 80th anniversary of the 1929 Wall Street crash.
However, commentators say the setback will be temporary and global stock markets are likely to build on recent gains.
The JSE all share index lost 0.7 percent to end at 25 997.65 on Friday. However, it was up more than 2 percent in the week and about 6 percent since its recent low on October 2 - despite fears that share prices have outrun economic fundamentals.
October has been seen as a dangerous month for stock markets ever since Wall Street started its long fall on October 24, 1929, which led to the Great Depression. Markets also suffered big losses on October 19, 1987 and on October 27, 1997.
But Wayne McCurrie, a portfolio manager at RMB Asset Management, said: "When markets have fallen by more than 40 percent, they don't repeat the fall again for a while."
The Dow Jones industrial average fell 53 percent between October last year and March 9, when it hit 6 547. And the JSE last year lost 46 percent between May and November 20, when it bottomed at 17 814.
McCurrie predicted the recent run-up would continue for some time because "a lot of cash is sitting on the sidelines". A potential inflow from investors now in cash and earning low returns was likely to cap any fall in share prices and should drive them up further.
"Markets love cheap money," McCurrie said, but warned the rising price trend was driven by artificially low global interest rates and predicted stock market weakness when the rate cycle reversed.
Nick Kunze, the head of private client dealing at stockbroker BJM, said the JSE recovery was driven by "foreign money buying emerging markets".
Citi, the research arm of Citibank, said last week: "Emerging markets are expected to outperform in the upswing, growing at an estimated 5.7 percent next year, compared with 1.9 percent in industrialised countries."
And a Bank of America-Merrill Lynch survey of fund managers for this month showed investors' risk appetite had reached its highest point in more than three years "amid continued optimism about the prospects for a global economic recovery and rising corporate profits".
However, according to Kunze, local portfolio managers remain underweight in shares despite the lower returns from cash. He said the run-up was being called "the most despised rally ever".
"Share prices are already high and the market is looking a little stretched. And the strong rand hasn't helped."
The rand traded at about R7.35 to the dollar on Friday, having strengthened from R7.48 on Monday. The currency's appreciation translates into lower earnings for exporters.
Kunze was also concerned about the effect that problems with electricity generation had on production. The inability of Eskom to meet the needs of mines and industry has reduced output. But Kunze said US investors seemed to be ignoring local factors.
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