The South African equity market has performed relatively well this year in the midst of the sub-prime turmoil in world markets and the general global economic slowdown, and has breached its all-time high, thanks mainly to resources stocks.

On Wednesday, the all share index pushed up to an all time high of 31 834.971 points, cracking through its record high hit in October last year of 31 728.180, as it was mainly driven by resources counters. The JSE's resources index hit a new record on Wednesday of 72 406.219 points.

"The rand has weakened and we have very strong commodity prices, so it’s a double whammy for the JSE. That is helping boost resources shares and is driving our market to all time highs," said Garth Mackenzie, a trader at BOE Private Clients.

Resources counters and commodity prices have kept the JSE afloat, as it is a resource-driven market, David Shapiro, a market expert from Sasfin, agreed.

"Of the market, Anglo American makes up roughly 14 percent, BHP Billiton 13 percent, Anglo Platinum 6.5 percent and Sasol 5.6 percent," noted Shapiro.

He said that these shares made up 39 percent of the JSE and all are among the top 20 shares in the JSE, adding that the top 20 shares make up approximately 80 percent of the market.

"Massive influence on the JSE"

"Ten shares in the top 20 are resources-based with a very heavy weighting. When these shares move, they have a massive influence on the JSE," he added.

Shapiro explained demand for commodities has increased because of countries such as China, India, Brazil and Russia expanding their infrastructure, and this directly impacts the demand for commodity counters in countries such as Australia and South Africa, as investors believe that more demand generates higher earnings.

"According to [Anglo American chief executive] Cynthia Caroll's recent speech, demand for commodities has increased, but supply is going to struggle to keep up with the demand," he said. This means that as supply decreases and demand increases, prices tend to go up.

As a result, investors are buying more commodity-based counters like Anglo American, BHP Billiton, Anglo Platinum and Sasol, thus boosting the JSE.

Chief economist from Econometrix Dr Azar Jammine said: "The fact that the JSE has outperformed Wall Street reflects confidence in SA."

Shapiro said that since January, the local bourse had gained 9 percent because commodities were in favour, but the UK's FTSE 100 and the US's S&P 500 had both declined by approximately nine percent for the year.

"But the JSE hasn't had anywhere near the kind of market that the US and the UK had because of the credit crisis and sub-prime concerns," Shapiro said. It has very little exposure to sub-prime except through some dual- listed counters such as Investec (INL, INP).

"I think that sub-prime has had an indirect effect on our banking sector. It affects sentiment in the market and we are not immune to that,” added Mackenzie.

Shapiro agreed, adding that the global concerns have also had an indirect influence on the local economy, hurting demand for products such as fruit, wine and cars, which South Africa exports.

Lower consumer spending and higher inflation remain concerns not only in South Africa, but in other economies too. Higher food and oil prices globally have pushed up inflation, causing a global economic slowdown and hurting financial and industrial shares worldwide, including those on the JSE.

Weaker rand driving buying interest

He added that it was not only the high demand for commodities and supply shortages that were boosting resource-based economies, but it was also the weaker dollar as well as the weaker rand that were driving the buying interest in commodity stocks.

"The rand has fallen about 16 percent against the dollar this year and about 25 percent against the euro. The dollar is also a factor because all commodities are priced in dollars, and as soon as the dollar falls, investors want more commodities as they are more affordable," he said.

The higher demand also pushes the price of the commodities up.

"The dollar has weakened because of all the recession fears and the problems in the US, but if it were to recover, we could find a lot of unwinding in the market as well, which means that commodity prices would drop," he said.

For the moment, the rand continues to remain fairly weak against the dollar, and the dollar weak against the euro.

However, Shapiro warned that if one looks at the different indices on the JSE, the resources index is up about 29 percent for the year, but industrials are down 2.5 percent and the financial index is down about 10.5 percent.

"It is only a handful of mining shares that have propped this market up," Shapiro said.

"The market is much skewed because of resources. If we strip resources out of the JSE, we would be nowhere near our all time highs," said Mackenzie.

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