Windfall!

11 September 2021 By PDSNET

THE RAND

The current account surplus on the Balance of Payments in the second quarter came in at R343bn – considerably higher than the first quarter’s substantial surplus of R261bn. Obviously, this massive and on-going influx of cash is largely due to the worldwide boom in commodities which is benefiting South Africa despite the relatively unfriendly legal environment which mining companies must deal with in this country.

The country’s economy and its fiscal health are being rescued by the international recovery. That in turn is being driven by unprecedented monetary policy stimulation, especially in America where the central bank is conducting $120bn worth of asset purchases (quantitative easing or Q/E) every month.

One of the most noticeable effects of this has been the strengthening of the rand over the past 17 months. This strength is in line with our much-repeated view that the rand is basically under-valued against first world currencies. Consider the chart:

South African rand/US dollar: February 2020 - 10 September 2021. Chart by ShareFriend Pro

This chart shows how the rand has appreciated against the US dollar over the past 17 months. The recent bout of “risk-offsentiment combined with the civil unrest and the effects of the cabinet reshuffle resulted in a temporary weakening trend, but for the past three weeks it has been steadily gaining ground.

Our view is that the rand will continue to strengthen now, breaking below the previous cycle low at R13.43 to the US dollar which was reached on 4th June 2021. Most of this strength will be due to the cash flowing into this country as we sell our commodities on world markets at record prices.

The inflow of that cash is also having a significant impact on the government’s balance sheet, reducing our overwhelming debt levels. If it is sustained, it will also begin to have a noticeable effect on consumer spending. All of this is very good news for the economy and the share market.

 

THE OCTOBER EFFECT

Since the crashes of 1907, 1929 and 1987, October month has gained a reputation among investors for being a bad month for the stock markets of the world. This irrational fear is known as “the October effect” and it sometimes causes some investors to sell out of their positions. Now, as October approaches, we should certainly consider the possibility, even the probability, that markets will undergo a major correction.

If this happens it could take markets down by somewhere between 10% and 20%. Consider the chart:

S&P500 Index: February 2020 - 10 September 2021. Chart by ShareFriend Pro

You can see here that over the past 5 trading days, the S&P has fallen back about 1,7% from its all-time record closing high of 4536 made on 2nd September 2021. This move has taken it down to touch its 21-month rising trendline which has been unbroken since the downward spike caused by COVID-19 last year. A significant breakthrough of that trendline this week could be the start of a major correction.

In general, such corrections are a healthy part of a bull trend and since the S&P500 index has not had a significant correction since the impact of COVID-19 in March last year, it is now overdue. Downward trends on Wall Street are generally associated with a shift of investor sentiment towards “risk-off” – which means that money will move out of emerging economies like South Africa and into more secure first world assets, especially treasury bills, with a concomitant impact on the rand.

Our position is (and has been for some time) that the next major correction will be just that – a correction – and not the start of a new bear trend. For a variety of reasons, we believe that this bull market still has some distance to run and so we will regard the significant next downward move as a buying opportunity.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Gold and Harmony

In our last Confidential Report, published on 6th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high

CA Sales

In recent years, the JSE has not seen many high-quality, exciting companies listing on the exchange. One of those few is CA Sales Holdings (CAA), which offered both fund managers and private investors an excellent opportunity to make a significant capital gain last year.

CAA is a company which has grown

Two Elections and Two Wars

As the New Year begins, private investors should consider the most important factors which are likely to impact on the prices of shares and the profits of companies listed on the JSE. Some of these factors are local, like the general election which is expected to take place sometime in May, and some are international like the oil price, the