Telkom, Shoprite & Mr Price - Showing SA Economy Trajectory
The Telkom weekly chart showing a Hammer after effortlessly tearing down multiple support levels. You have to zoom back to 2010-11 to view the price at which Telkom was last at these levels. It sounds irrational that a share could show so much fear with a lot of volume to back that up.
What Went Wrong?
Telkom pattern isn't strange for JSE in recent times, the market has changed faster than we can change our minds about it. Technical Analysis has failed many traders quietly leaving a trail of disaster. I was digging to find out what could be wrong because this script played out with Shoprite JSESHP followed by Mr Price JSEMRP. One thing I could pick was that these shares featured mostly on foreign buyers lists & we must understand the nature of foreign portfolio investors.
South African markets like most Emerging Markets aren't dominated by local investors & foreign investors usually invest profits from own local markets into Emerging Markets. For example Apple Inc is up over 90% in USA. If an investor bought & sold Apple they made a good profit, if they decided to invest some of that profit into an emerging market they are investing a portion of their profit not capital. Now we must appreciate that a loss of profits is a small matter compared to a loss of capital. Now consider a trader/investor faced with loss on profit from profit? If I invest $1000 & makes $1900 then invest the $900 and make $1400, the $1400 isn't the capital base but profit from profit. Now if I invest $500 (1400-900) into an emerging market I have invested profit on profit. Psychologically how much would the blow be if I am to sell the $500 in emerging market? Not a big blow! This is money one can afford to lose 100% & still remain over 90% in the black.
So What Then to a local Investor/Trader
In emerging markets we must appreciate we are at the mercy of this profit from profit, architects of our own time bombs because we do not invest in our own markets beyond the insurance companies. This script of a tanking market I lived it in Zimbabwe, South Africa feels like a de javu & when the last foreign portfolio investor leaves then a stagnant market follows. If you think this is far-fetched consider that in South Africa less than 5% of the population has any form of saving. The best a trader/investor can do is recognize the market in which you operate in, be always on the lookout for companies dominated by foreign portfolio investors & be ready to pull a stop on adverse news because the sell-off will come in irrational fashion.
The more bad news sustains the more we are going to see this horror movie repeated. Magnus Heystek will continue to be proved a genius, Local fund managers will continue to bemoan that South Africa's quality is being overlooked but who cares if S & P 500 is giving amazing returns? South Africa is now a cheap market with a lot of potential for rebound, however that potential might just die as that, potential. It is up to the political authorities to inspire confidence for a return of those who can make the market tick in large volumes. The inconsistency & hesitancy on the part of those in power might prove overpowering of any goodwill. Eskom for one needs an urgency to look at the problem then go all out to to fix, it might mean diverting expenditure from elsewhere and give it a priority because this is one company capable of keeping the bad news coming via terrible trading updates. South Africa is the door to Africa, forget Rwanda, Ethiopia and other fanciful stories. An investor is likely to forage into Africa having learnt a thing or two in South Africa. If the lights go out in South Africa then it will take a Singaporean story to attract portfolio investors again.
Until then, happy fishing in the murky waters. You might catch an eel or a cat fish, just brave it and persevere. If it becomes all too much then take Magnus' advice to follow the money. But at current levels the S & P 500 is perched very high, some might jump out of the pan straight to the fire, this is the time for calm heads & calculated risk.
What Went Wrong?
Telkom pattern isn't strange for JSE in recent times, the market has changed faster than we can change our minds about it. Technical Analysis has failed many traders quietly leaving a trail of disaster. I was digging to find out what could be wrong because this script played out with Shoprite JSESHP followed by Mr Price JSEMRP. One thing I could pick was that these shares featured mostly on foreign buyers lists & we must understand the nature of foreign portfolio investors.
South African markets like most Emerging Markets aren't dominated by local investors & foreign investors usually invest profits from own local markets into Emerging Markets. For example Apple Inc is up over 90% in USA. If an investor bought & sold Apple they made a good profit, if they decided to invest some of that profit into an emerging market they are investing a portion of their profit not capital. Now we must appreciate that a loss of profits is a small matter compared to a loss of capital. Now consider a trader/investor faced with loss on profit from profit? If I invest $1000 & makes $1900 then invest the $900 and make $1400, the $1400 isn't the capital base but profit from profit. Now if I invest $500 (1400-900) into an emerging market I have invested profit on profit. Psychologically how much would the blow be if I am to sell the $500 in emerging market? Not a big blow! This is money one can afford to lose 100% & still remain over 90% in the black.
So What Then to a local Investor/Trader
In emerging markets we must appreciate we are at the mercy of this profit from profit, architects of our own time bombs because we do not invest in our own markets beyond the insurance companies. This script of a tanking market I lived it in Zimbabwe, South Africa feels like a de javu & when the last foreign portfolio investor leaves then a stagnant market follows. If you think this is far-fetched consider that in South Africa less than 5% of the population has any form of saving. The best a trader/investor can do is recognize the market in which you operate in, be always on the lookout for companies dominated by foreign portfolio investors & be ready to pull a stop on adverse news because the sell-off will come in irrational fashion.
The more bad news sustains the more we are going to see this horror movie repeated. Magnus Heystek will continue to be proved a genius, Local fund managers will continue to bemoan that South Africa's quality is being overlooked but who cares if S & P 500 is giving amazing returns? South Africa is now a cheap market with a lot of potential for rebound, however that potential might just die as that, potential. It is up to the political authorities to inspire confidence for a return of those who can make the market tick in large volumes. The inconsistency & hesitancy on the part of those in power might prove overpowering of any goodwill. Eskom for one needs an urgency to look at the problem then go all out to to fix, it might mean diverting expenditure from elsewhere and give it a priority because this is one company capable of keeping the bad news coming via terrible trading updates. South Africa is the door to Africa, forget Rwanda, Ethiopia and other fanciful stories. An investor is likely to forage into Africa having learnt a thing or two in South Africa. If the lights go out in South Africa then it will take a Singaporean story to attract portfolio investors again.
Until then, happy fishing in the murky waters. You might catch an eel or a cat fish, just brave it and persevere. If it becomes all too much then take Magnus' advice to follow the money. But at current levels the S & P 500 is perched very high, some might jump out of the pan straight to the fire, this is the time for calm heads & calculated risk.