Picking shares that could benefit in a recovery

If investors are brave enough to dabble on the JSE in these tremulous times, where are the best spots to place a bet on the local stock market recovering?

Neil Brown, co-head of Electus, says the JSE indices (all share and shareholder weighted) are the most undervalued they have been in more than five years, with a more than 20% upside based on “bottom-up” aggregation of all the company valuations undertaken by Electus.

He adds that the resources board is the only sector with a positive return (+11% since the beginning of 2018), and is now a fairly priced sector compared to all other major sectors that have fallen by more than 14%.

“Our funds will favour high-quality defensive rand hedges given the recent rand weakness. We will also hold selective local cyclicals as a number of these shares have been sold down substantially in the past few months and will benefit from any recovery in SA Inc.”

Brown says because interest ratesensitive stocks — specifically banks and property — have also pulled back significantly, “we think it is also time to add some exposure in these sectors”.

Lentus Asset Management chief investment officer Nic Norman-smith says perspective is important. “We have in recent years seen some crazy valuations on property and retail stocks as well as any companies with an aggressive offshore strategy. Now there is a lot of bad news out in the market. But we have been through worse periods. Markets are cyclical … they recover every time.”

Norman-smith believes the gloomy mood on the JSE makes equity valuations look a lot more exciting. Of course, one can’t brush off the significant risk of further downside, and investors need to remain globally diversified. But there are more shares where it appears that the risk is already priced in.”

He concedes that trying to time the recovery on the JSE is a mug’s game.

“It can get worse. But if investors buy the cheap out-of-favour stocks and hold these positions, the upside could be pretty exciting if the local economy steadily recovers.”

Norman-smith says the popular retail sector is likely to get worse before it gets better.

“In this instance, it might be wise for investors to keep some powder dry.”

Cannon Asset Managers CEO Adrian Saville says if investors do their homework they will discover that some good businesses are still doing well in a weak economy. “Recalibrate the numbers and try imagining what the business could produce in earnings in better times.

“Look for companies that don’t have strained balance sheets, or are polluted by complicated accounting. Make sure there are cash-based earnings and not accounting earnings.”

RECM & Calibre CEO Piet Viljoen is wary of buying globally inclined SA stocks — even at lower prices. “Investors need global diversification. But do it yourself — don’t let listed corporations diversify for you. Any company that goes overseas, sell it. That’s not such a generalisation. There are not many that have made a success of [offshore expansion].”

Though there is currently an abundance of “deep value” and (dis)stressed opportunities on the JSE, Viljoen warns that investors dabbling in such counters must construct an uncorrelated portfolio. “Don’t put your eggs in one basket by backing a single sector.”