Who to watch in 2015

Low growth hurt­ing

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China’s growth is slow­ing down after decades of rapid ex­pan­sion. That’s bad news for com­mod­ity-pro­duc­ing coun­tries — and min­ing and en­ergy com­pa­nies that have been feed­ing its in­sa­tiable hunger for met­als like iron ore and cop­per — as well as oil. The slow­down is re­flected in com­mod­ity prices. Iron ore has fallen more than 40% this year and US bank­ing group Citi be­lieves it has fur­ther to go. Oil prices have fallen sharply to a four-year low be­low $80, with the US’s move to­wards en­ergy in­de­pen­dence adding pres­sure.

De­spite slow­ing growth, Chi­nese con­sumers are shop­ping up a storm. One of their pre­ferred meth­ods is on­line, as was ev­i­denced when re­cently listed Chi­nese e-com­merce gi­ant Alibaba sold goods worth more than $9bn on Novem­ber 11 dur­ing its an­nual Sin­gles’ Day Sale.

Un­sur­pris­ingly, China will be one of the main de­ter­mi­nants of which stocks will do well next year. So don’t ex­pect too much from your re­sources port­fo­lio in the year to come, but hold on to those Naspers shares. In­vestors may also have to look beyond SA’s bor­ders to find any­thing worth buy­ing. Fund man­agers are find­ing lit­tle value in South African eq­ui­ties.

In­de­pen­dent an­a­lyst Ian Cruick­shanks says he re­mains bear­ish on the prospects for the JSE next year be­cause weak growth is ex­pected and val­u­a­tions are al­ready high. With the Re­serve Bank fore­cast­ing 1.4% growth for 2014 — or less — he says growth next year is un­likely to be higher than 2%-2.5%. The In­ter­na­tional Mon­e­tary Fund has also re­vised down­wards its forecasts for global growth.

“The out­look for the mar­ket as a whole re­ally de­pends on the out­look for the econ­omy,” Cruick­shanks says. “Where we have al­ways looked for res­cue — our re­sources sec­tor — is not

likely to help much be­cause de­mand for com­modi­ties is limited and the cost of South African pro­duc­tion is rock­et­ing.”

Given in­creas­ingly un­re­li­able elec­tric­ity sup­ply, an un­sta­ble labour force and ques­tion­able se­cu­rity of as­sets, one large and in­flu­en­tial global fund man­ager says it is “un­likely to at­tempt to in­flu­ence any for­eign cap­i­tal in­flow” into SA. Th­ese fac­tors could make it in­creas­ingly dif­fi­cult for the coun­try to bal­ance its cur­rent ac­count.

“So, is this a mar­ket in which you should be a buyer?” says Cruick­shanks. “In the long run we are go­ing to get some sort of growth, al­beit at a low level, and there are some com­pa­nies that can take ad­van­tage of the sit­u­a­tion.”

There’s no dis­agree­ment from Claudius Ros­toll, a port­fo­lio man­ager at AG Cap­i­tal.

“Apart from do­mes­tic chal­lenges, ris­ing US rates could pose some of the big­gest chal­lenges to our mar­ket next year,” he says. “If our po­lit­i­cal lead­ers con­tinue to take a lethar­gic stance on for­eign di­rect in­vest­ment, we’re not mak­ing a case for at­trac­tive in­vest­ment. We will con­tinue to keep a keen eye on China’s growth as it grap­ples with the 7% level. This has a mas­sive di­rect im­pact on our re­sources sec­tor in par­tic­u­lar.”

From a macro per­spec­tive, Ros­toll says he would limit his do­mes­tic ex­po­sure to sec­tors not ex­posed to lower dis­cre­tionary spend. Com­pa­nies with sig­nif­i­cant off­shore ex­po­sure are prefer­able, he says.

“Of the high­est-rank­ing ge­ogra­phies, I quite like the po­ten­tial that the US and East­ern Europe of­fer, given the level of risk,” he says.

“The US mar­ket seems to be per­form­ing well through­out the ta­per­ing cy­cle and I would like to see a con­tin­u­a­tion of this per­for­mance with the train­ing wheels off for another year.”

Less cen­tral bank in­ter­ven­tion means vo­latil­ity should in­crease and nor­malise off the cur­rent his­tor­i­cally low lev­els, which presents a great op­por­tu­nity in it­self should the US econ­omy re­main ro­bust in the face of the new year’s chal­lenges, Ros­toll says.

“But I’m not mort­gag­ing my house just yet to go all-in on eq­ui­ties,” he says.

There’s only one JSE-listed share on 36One As­set Man­age­ment an­a­lyst Jean Pierre Ver­ster’s watch list for 2015: Naspers, owner of a 34% stake in Chi­nese In­ter­net gi­ant Ten­cent.

While third-quar­ter re­sults from Ten­cent ear­lier this month may have dis­ap­pointed in­vestors at face value, Ver­ster says this was due to a tem­po­rary slow­down in rev­enue growth at its mo­bile gaming unit.

“Our out­look for Naspers and Ten­cent is still in­tact,” says Ver­ster. “The premise of Naspers for us is not just about Ten­cent, although that is the most cru­cial el­e­ment as the Ten­cent stake is worth roughly the same as Naspers’s en­tire mar­ket cap­i­tal­i­sa­tion.”

The mar­ket is ef­fec­tively ig­nor­ing all other parts of Naspers, in­clud­ing Mul­ti­Choice, which in­cludes DStv in SA and the satel­lite op­er­a­tions across the con­ti­nent. This area of the business gen­er­ates cash strongly, yet the mar­ket is ef­fec­tively valu­ing it at zero, says Ver­ster.

“We are also very bullish on Naspers’s e-clas­si­fieds and e-re­tail sub-di­vi­sions,” Ver­ster says. “CEO Bob van Dijk comes with a back­ground in e-com­merce so we think there will be an in­creased fo­cus on this.”

A deal this month with Sin­ga­pore Press Hold­ings and Norway’s Schib­sted and Te­lenor, which will cre­ate joint ven­tures for their on­line clas­si­fieds busi­nesses in Brazil, In­done­sia, Thai­land and Bangladesh, will de­crease Naspers’s R&D spend and ac­cel­er­ate prof­its in th­ese mar­kets. It’s a sig­nif­i­cantly pos­i­tive move for­ward, Ver­ster says. In Brazil, Naspers has been spend­ing more than R1bn a year on R&D and this will now be cur­tailed, he says.

Though Naspers is the sole SA-listed share on Ver­ster’s list, Cruick­shanks and Ros­toll have iden­ti­fied a num­ber of lo­cal shares they would invest in — at the right price.

“Most of the stocks I’m look­ing at are rel­a­tively ex­pen­sive, which is why I don’t ad­vise rush­ing into any op­por­tu­nity un­til the po­ten­tial up­side suits the risk of the in­vestor at that en­try price,” says Ros­toll. “Stein­hoff is prob­a­bly the only stock I’d buy at cur­rent lev­els. The stock is vir­tu­ally a Euro­pean house­hold goods re­tailer, with con­ti­nen­tal Europe alone ac­count­ing for more than 60% of its rev­enue.”

Ac­cord­ing to Ros­toll, Stein­hoff con­tin­ues to make in­roads in mar­ket share with its value of­fer­ing in­ter­na­tion­ally and will prob­a­bly con­tinue to do so as it in­creases its East­ern Euro­pean foot­print with the Quat­tro Mo­bili brand.

“Once the much-awaited Frankfurt list­ing is fi­nalised, we ex­pect a re-rat­ing in the val­u­a­tion to match its Euro­pean peers as a kicker,” he says.

Ar­eas that Cruick­shanks has iden­ti­fied for in­vest­ment in 2015 in­clude food, phar­ma­ceu­ti­cals and the low end of the re­tail mar­ket. Any signs of cor­po­rate ac­tiv­ity could also present a buy­ing op­por­tu­nity, he says.

In the food sec­tor, he says Ton­gaat Hulett is one of the few com­pa­nies that have suc­cess­fully part­nered with lo­cal pro­duc­ers to im­prove pro­duc­tiv­ity to the ex­tent that they are in­creas­ing em­ploy­ment and pro­duc­ing a higher-grade prod­uct.

Zeder is also on Cruick­shanks’ radar. It is ex­pen­sive, trad­ing on 18 times re­ported earn­ings, but he says food pro­duc­tion is an ab­so­lute es­sen­tial. Zeder also has op­er­a­tions in south­ern Africa out­side SA, where growth prospects and mar­gins may be higher.

“Look­ing at the re­tail sec­tor, I think some of the ra­tios are way too high, es­pe­cially among the credit re­tail­ers,” he says. “We are al­ready see­ing in­creas­ing con­sumer debt and an in­creas­ing in­abil­ity to ser­vice that debt.”

That’s why Cruick­shanks prefers cash re­tail­ers, such as Mr Price. The af­ford­able cloth­ing and house­hold goods group has es­tab­lished it­self firmly at the lower end of the value mar­ket and is pick­ing up business from cus­tomers who can no longer af­ford the more ex­pen­sive credit re­tail­ers, he says.

Another low-end re­tailer Cruick­shanks likes is Pep­kor, which in­vestors can ac­cess through in­vest­ment hold­ing company Brait.

“Pep­kor makes up 70% of Brait’s as­sets at the mo­ment and that’s where Christo Wiese has parked a lot of cash,” he says. “It’s one I would look at and buy if its price came down a lit­tle. Wiese is a nat­u­ral deal maker and has a great record.”

De­fen­sive health­care com­pa­nies ap­pear on both Cruick­shanks’ and Ros­toll’s lists.

Cruick­shanks would be a buyer of Aspen, but only if its price:earn­ings ra­tio fell back from a lofty 39 times re­ported earn­ings. “It’s a great company and is be­com­ing a strong for­eign ex­change earner,” he says. “It is also strong in the area of cheaper generic medicines and from an African per­spec­tive I think that’s a very im­por­tant thing to have.”

Medi­clinic also stands out. The company has recog­nised the global move away from state-pro­vided med­i­cal care, build­ing a strong pres­ence in Switzer­land and the United Arab Emi­rates, where it doesn’t face a lot of com­pe­ti­tion. With well over half of its rev­enue com­ing from out­side SA, it also pro­vides a hedge against a weak­en­ing rand.

“Both com­pa­nies have top-notch man­age­ment with phe­nom­e­nal track records,” Ros­toll says. “Th­ese two in par­tic­u­lar are on my buy­ing list on a mar­ket pull­back. It won’t be that easy, though, be­cause the re­luc­tance in the share price to drop ear­lier in Oc­to­ber il­lus­trated the ex­tent to which in­vestors are fall­ing over their feet to gain en­try into the hos­pi­tal and phar­ma­ceu­ti­cal space.”

A sur­prise en­trant in Cruick­shanks’ list of stocks to watch next year is pa­per and pack­ag­ing group Mondi.

“Mondi is im­por­tant be­cause more and more goods are be­ing sold pack­aged rather than loose th­ese days and I think it is well sit­u­ated for that — it has shown a ter­rific abil­ity to stay in the fore­front of mar­ket­ing and pack­ag­ing,” he says. “And of course there’s the for­eign cur­rency earn­ings. I think it’s some­thing you have to look out for.”

Banks are go­ing to have an in­creas­ingly dif­fi­cult time as they bat­tle with cash-strapped con­sumers in a ris­ing in­ter­est rate en­vi­ron­ment, while fac­ing tighter rules and reg­u­la­tion do­mes­ti­cally and in­ter­na­tion­ally.

“Business and con­sumer con­fi­dence are also low, but PSG, which owns a chunk of Capitec, may be worth con­sid­er­ing,” Cruick­shanks says. “Chair­man Jan­nie Mou­ton is buy­ing stock in his own company and that’s a good sign — he’s not called ‘Slim Jan­nie’ for noth­ing.”

PSG has con­sis­tently picked win­ners. It has re­cently listed fi­nan­cial ser­vices group PSG Kon­sult and ed­u­ca­tion group Curro, and Cruick­shanks be­lieves there could be more to come.

“You are pay­ing a fairly hefty price, but if you want some fi­nan­cial sec­tor ex­po­sure, then PSG might be the way to go,” he says.

While Ros­toll sees chal­lenges for SA shares next year due to weak growth, ris­ing in­ter­est rates and weak de­mand for our com­modi­ties, he says if rand weak­ness abates Im­pe­rial could be a stock worth watch­ing.

“If you take the view that the rand will be sta­ble, the oil price will re­main de­pressed and there is no or lit­tle risk of con­ta­gion as a re­sult of higher US rates, Im­pe­rial is the ugly duck­ling I would back to morph into that beau­ti­ful swan,” he says. “Oil is our big­gest im­port and if this dreamy sce­nario of sta­ble or stronger rand and lower oil price ma­te­ri­alises, Im­pe­rial will see the ef­fect di­rectly on its mar­gins, cou­pled with health­ier do­mes­tic de­mand.”

Apart from Naspers, Ver­ster finds lit­tle value in South African eq­ui­ties. With the rand vul­ner­a­ble to fur­ther weak­ness against the dol­lar and other cur­ren­cies of de­vel­oped mar­kets, 36One prefers ex­po­sure to com­pa­nies that gen­er­ate for­eign cur­rency earn­ings with ex­po­sure to fast-grow­ing mar­kets.

So, while Richemont has long been a favourite of many in­vestors, Ver­ster would rather invest in a business like Michael Kors, a US-based af­ford­able lux­ury goods group. The re­tailer is po­si­tioned in a seg­ment of the mar­ket that is re­silient thanks to ris­ing af­flu­ence in the mar­kets it tar­gets. It re­cently re­ported strong like-for-like sales at its US stores and is ex­pand­ing in­ter­na­tion­ally.

“It stacks up bet­ter on a val­u­a­tion ba­sis,” he says. “They are not strictly com­pa­ra­ble as Richemont is high-end lux­ury, while Michael Kors is af­ford­able lux­ury, but it is grow­ing faster, has higher re­turns and is trad­ing at a lower mul­ti­ple than Richemont.”

Alibaba is another global stock Ver­ster is watch­ing go­ing into the new year.

He says the record Sin­gles’ Day sales il­lus­trate the buy­ing

power of the Chi­nese con­sumer.

“Alibaba has a dom­i­nant po­si­tion in the business-to­busi­ness and the business-to­con­sumer mar­ket in China,” Ver­ster says. “In­creas­ingly we are see­ing in­ter­na­tional re­tail­ers that want to en­ter the Chi­nese mar­ket re­al­is­ing they need a strong In­ter­net strat­egy as well as a bricks-and-mor­tar pres­ence. Rather than build­ing their own e-com­merce sites they would rather part­ner with Alibaba and of­fer their prod­ucts through its con­sumer site, Tmall.com.”

In­fant nu­tri­tion group Mead John­son is another on Ver­ster’s list for 2014. Fol­low­ing the scan­dals when baby milk for­mula pro­duced in China was found to con­tain melamine, Chi­nese par­ents pre­fer in­ter­na­tional milk for­mula brands.

“Mead John­son is one of the lead­ing in­ter­na­tional play­ers in milk for­mula so it can com­mand a pre­mium in China,” he says. “With the one-child pol­icy be­ing done away with, we ex­pect China’s pop­u­la­tion growth to pick up slightly, which means more chil­dren who will need for­mula. We are look­ing at pric­ing and vol­ume growth for Mead.”

Also on Ver­ster’s global list is The Price­line Group, which owns travel and ho­tel-book­ing web­site Book­ing.com, a ser­vice with a dom­i­nant po­si­tion in Europe and the US and ex­pand­ing in Asia through ac­qui­si­tions and part­ner­ships.

“It has a com­pet­i­tive ad­van­tage in the mar­ket be­cause as its gets big­ger, adding more ho­tels and des­ti­na­tions to the site, other ho­tels feel they have to join as Book­ing.com be­comes the go-to site for trav­ellers,” he says. “This vir­tu­ous cy­cle has en­trenched the company in the high-growth mar­ket of on­line travel.”

Putting to­gether a port­fo­lio of South African stocks does come with a caveat in what may be a hos­tile in­vest­ment cli­mate in 2015, how­ever. Cruick­shanks sug­gests buy­ing a cou­ple of put op­tions on the mar­ket in case there is a sig­nif­i­cant pull back.

“I think it is pru­dent at the mo­ment to have a lit­tle bit of in­surance in case the mar­ket takes a knock,” he says.



Ian Cruick­shanks… It is pru­dent to have a lit­tle bit of in­surance in case the mar­ket takes a knock.

Jean-Pierre Ver­ster… Apart from Naspers, there’s lit­tle value in South African eq­ui­ties.


Claudius Ros­toll… Ris­ing US rates could pose some of the big­gest chal­lenges to our mar­ket next year.

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