And the little one said: “Roll over”

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By Shaun le Roux

And the little one said: “Roll over, roll over”. So they all rolled over and the one fell out.

According to the kiddies’ song there were originally ten in the bed. The little one keeps telling them to roll over. Of course they listen and fall out one by one until only the little one is left. The little one then says: “Good night, sleep tight” and that’s the end of the tale.

The JSE bull market is just the same – well sort of. At the start of 2007 all the stock market’s cylinders were firing. The consumer was spending merrily; interest rates were low; commodity prices were buoyant and foreign investors were happy buyers of South African bonds and stocks. Those happy days seem a long time ago.

One by one, the participants in the longest and most profitable bull run since the 1960s have rolled out of bed and hit the floor hard.

The domestic credit retailers were the first to fall off the bed. Most of them topped out in April 2007 just before the implementation of the new National Credit Act (NCA), which proved to be the final nail in the coffin for their share prices.

Many of the other domestic economy stocks, including the likes of Bidvest and Barloworld, topped out around July 2007. In June 2007 the MPC re-commenced hiking rates, after being on hold for the prior six months. Around that time the woes in the US sub-prime market also started weighing on global equity markets and reigning in risk appetite.

Most global stock markets peaked in October 2007 as the credit crisis intensified. The highs on the JSE Financial and Industrial (FINDI) and Banking indices were in the same month. It is worth pointing out that it was only the courting of Standard Bank by the Chinese that prevented an earlier slide in the banking stocks. In addition, though the FINDI topped out in October last year, some of the heavyweight constituents – MTN and Richemont, were at all time highs only three months ago, though they were assisted by a weaker rand and heavy M&A activity in the case of MTN.

The extraordinary resilience and outperformance of other global stock markets by the JSE up until May of this year have been down to the Resource shares. With commodity prices rampant in 2008, driven by a weak dollar and resilient demand, materials and energy stocks have been about the only strong performers on the international equity markets. With the top seven stocks (Anglo, BHP Billiton, Sasol, Richemont, MTN, SABMiller and Impala) comprising in excess of 50% of the All Share Index, for much of 2008 we have witnessed a rising headline index while the broader domestic market and overseas markets sell off aggressively. And with Anglo and BHP alone accounting for almost 30% of the index they began increasingly to look like Atlas with the world on their shoulders.


Sasol, BHP and MTN rolled over in May of this year and for the following six weeks the responsibility for keeping the JSE upright fell on the broad shoulders of Anglo American. With a share price that was boosted by take-over rumours “The Little One” Anglo finished June just shy of R550. On yesterday’s close of R411.50 it is down no less than 25% in the present month alone.

In this case The Little One also decided to roll over.

Good night.

Source: Shaun le Roux, Alphen Asset Management, July 17, 2008.


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