Timonrosso

JSE to head to new highs

Long
JSE:J200   TOP 40 INDEX
Reason #1: Our economy is about to wake up with the ease of the lockdown

On Monday, 1 June 2020, the national lockdown went to level 3.

This resulted in many firms and businesses resuing operation at almost, full capacity.

Already we’ve seen a boost in activity in food production, retail, communications as well as mining.

In fact, most underground mines like DRD are heading back to 100% production.

Millions of employees have gone back to work, there’s been an improved sentiment towards the economy and the JSE has rallied 3.28% with three up days in a row.

Jasper Lawler, Head of research at London Capital Group, said,

“Markets are pinning hopes on a quick economic rebound once lockdown and travel restrictions are lifted,”

Reason #2: The JSE is lagging the World index

The JSE as well as many other emerging markets, tend to follow the world markets…

When the World index moves up, we see the JSE follow. And when it drops (due to a financial crisis or a global Black Swan event) the JSE crashes with it.

This is because most South African equity market’s earnings , are derived from demand factors outside its borders.

Now let’s take a second to look at the World index ( MSCI ACWI Index) performance in relation to the JSE…
In the last six months, it’s clear that the JSE (orange line), has traded at a huge discount compared to other emerging markets measured by the world Index (Black line).

This tells us we should expect the JSE to move up in sync again.

And looking at the last two months with the sudden up spike, this means it’s already on its way.

Reason #3: Lowest interest rates since the 70s

On Thursday, the SARB cut the repo rate by yet another 50 basis points.

This came after a 100bps cut in March and another 100bps in April.

This brought the repo rate down from 4.25% to 3.75%.

These are levels we’ve not seen since the 1970s.

What this means for investors is they’ll receive less interest on their savings and low yielding assets…

As the return is much lower, investors will most likely take their money and deposit into better return on investment assets.

And now with many sectors looking very cheap, we can expect investors to start buying low price but high quality companies on the JSE.

And the charts share the same sentiment.
Since 1 March up until 1 June, we’ve seen the ALSI 40 (JSE All Share Top 40 Index ) move in a triangular pattern (shaded area).

This is called an Ascending Triangle which has two main characteristics.

#1: Triangle that makes higher highs

The price moves down until it hits a bottom. In this case, the price moved to a low price at 34,000.

It then moves up and forms a high price. Which in this case, the price moved to a high at 48,323.

#2: The price breaks out of the triangle

The market then moves to the top and breaks up and out of the triangle formation.

Now that the price has broken out of the Ascending Triangle , we can expect demand and buyers to rush in.

This will result in the ALSI moving to new highs.

To calculate this target, we’ll take the difference between the high and the low of the formation and add it to the high.

Target price = (High – Low) + High
= (48,323 – 34,000) + 48,323
= 62,646

This means, we can expect the JSE ALSI to rally another 30% from where it currently is, in the next few weeks.

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