Why the JSE is booming
What is the JSE smoking and can we have some?
There is no doubt that the South African economy is taking strain. Labour unrest, political uncertainty, the specter of decreased foreign capital inflows, a massive and persistent current account deficit, electricity supply constraints, subdued private sector fixed investment, poor export performance, declining consumer confidence…
The list of constraints to growth is seemingly endless, yet the Johannesburg Stock Exchange (JSE) is breaking record after record and is currently trading near all-time highs.
Why is there such a divergence between the real economy and our stock exchange? What is the JSE smoking and can we also have some?
According to Bureau for Economic Research senior economist Hugo Pienaar, it is due to two factors, the first being the US Federal Reserve's policy of quantitative easing (QE).
Pienaar explains that QE has flooded the world with money and, with interest rates at record lows, investors chased returns by pouring money into assets such as stocks. And it is this 'liquidity party' fuelling rising stock markets in many parts of the world.
Secondly, South Africa's 10 largest listed companies (representing 60 percent of the market capitalistion of the JSE) generate a large percentage of their earnings outside of South Africa.
"Earnings growth in these companies is strong and they remain largely shielded from the weak domestic growth story," said Pienaar.