DESPITE mounting evidence that the slowdown in the global and local economies will continue for a while, South Africa’s stock market is enjoying its best year in three years.

The JSE all-share index has recently set new record highs almost weekly on both foreign and local investor interest.

Falling mining output following debilitating strike action from August to October has worsened an already depressed macroeconomic picture.

Most of Europe — one of the country’s main trading partners — is still in the throes of a recession caused by austerity measures imposed by governments.

The US economy is struggling to deal with high unemployment levels that may worsen if the country’s politicians do not avoid a looming fiscal cliff.

The 164-member all-share index reached yet another record high on Tuesday, closing 0.4% higher at 38,535.97 points.

The index has gained more than 20% for the year to date — the most since 2009 when stocks were recovering from a major sell-off the previous year triggered by the collapse of US investment bank Lehman Brothers.

"Although people keep talking negative, they are acting positive on markets," Sasfin Securities director David Shapiro says.

Foreigners have bought and sold stock to the value of more than R972m so far this year, compared with more than R874m last year, according to JSE data. Bonds have attracted much more foreign interest, with more than R93bn bought this year, compared with more than R49bn last year.

If investors believed that the US fiscal cliff, Italy’s political imbroglio and Spain’s debt concerns were impediments to investing on the JSE, markets would have come under pressure a long time ago, Mr Shapiro says. "In my view, it appears that people believe that things are in repair and are starting to feel better."

Stocks now trading near or at record highs on the all share cut across the spectrum and are not sector-specific.

Among the companies trading near records are fast-moving consumer goods company Tiger Brands, Brian Joffe-led logistics conglomerate Bidvest, and fertiliser and explosives company Omnia.

The biggest downside risk to local stocks is when analysts start downgrading their earnings expectations, says Gryphon Asset Management chief investment officer Abri du Plessis.

"My feeling is that in January, some analysts will be downgrading profit expectations for this market," he says.

This is possible if analysts expect the economy to come under more pressure from slow growth in Europe.

"It’s concerning that while there are bad economic figures coming out, the JSE keeps making new highs," he says.

In search of emerging market exposure as their economies struggle under an austerity-induced slowdown, foreign investors have been key drivers of South Africa’s equity and bond markets. Interest in South African bonds has helped offset some of the recent downward pressure on the rand caused by the mining strikes.

South Africa’s entry into the Citi world government bond index in October and the weak state of the global economy have boosted bond sales.

Another risk to local markets is if the US economy starts showing signs of a sustainable recovery next year, Mr Shapiro says. "That is a big risk factor … if the US starts to pull its own weight and looks good, it’s a big fear that money may move back there."

Economic data out of the US have been more encouraging over the past few weeks. On Tuesday, the Institute for Supply Management said US manufacturers were more optimistic about sales and spending next year than service providers, signalling that factories would support the country’s economic expansion after they had slumped in recent months.

Job openings in the US climbed to a four-month high in October, indicating that the labour market is on the mend.

The JSE has outperformed the stock markets of the US and Europe substantially over the past decade on the combination of high commodity prices and the emerging market growth story.

In the past decade, the S&P 500 index — a capitalisation-weighted index of 500 US stocks — has gained close to 57%. The FTSE 100, an index of 100 of the most capitalised stocks on the London Stock Exchange, has gained just under 50%.

The JSE all-share index has gained more than four times in value over the same time.

With Bloomberg