Market returns – It is not all what it seems

Philipp Wörz of Alphen Asset Management comments on how local markets have performed in the uncertain and volatile conditions since the start of the year, and looks at some of the constituents responsible for this performance.

At the start of the year, not many market watchers would have called the Euro/Dollar exchange rate at 1.35, the rand approaching 10 and 11 to the Euro and Sterling respectively, and important parts of Europe running into serious financial trouble. Unfortunately though, this volatile environment we currently face is likely to prevail for quite a while longer.

As is well known by now, 2009 turned out to be a great year for stock market investors, both locally and around the globe. The local bourse, after its good run into the close of 2009 did, however, not see a continuation of this trend into 2010. After the first two months of the year, the All-Share Index (ALSI) is already 3.1% in the red.

Not all is bad though. Upon further analysis of the market return so far in 2010, it is clear that the negative headline performance of 3.1% has mainly been driven by sectors that carry a large weighting in the index.

As can be seen in Table 1 below, the ten worst performing equity sectors account for 50% of the index and consequently contributed -3.75% of the index return, year-to-date. In fact five sectors: Gold,  Beverages, Platinum, Oil and General Mining, make up 47% of the ALSI and accounted for -3.53% of returns.

On the other hand, 2010’s ten best performing sectors delivered an average positive return of 7%, but due to their small weighting in the index of 20%, they only contributed 1.17% to the index’s performance. It is evident from Table 2 below that all of the top performing sectors, with the exception of Software & Computer Services, that mostly consist of global IT firms Didata and Datatec – are domestically focused. The market’s stronger-for-longer currency stance and a concomitant expectation for further interest rate cuts could be cited as the main factors that managed these positive results.

In Table 3 below it is clear that both the best and worst performing shares represent companies from similar sectors, such as Retail, Commodity and ICT. It is also interesting to note that Kumba Iron Ore has been the top performing stock in the large and mid cap indices this year, while another global cyclical share Grindrod shares this honour on the downside.

It is difficult to predict what the next year or two holds in store for investors and we will therefore not attempt to do so today. As mentioned in previous Alphen Angles though, at the current market price/earnings ratio of 18 and a dividend yield of 2.12% we do not view the market as offering compelling value. We consider careful bottom up stock picking a preferred strategy in 2010 and beyond.