The mar­ket’s never wrong

Dart thrower’s par­adise for past three years

Finweek English Edition - - Focus on asset management -

DART THROW­ERS have had a whale of a time over the past three years on the fi­nan­cial mar­kets. Pas­sive in­vest­ment ve­hi­cles such as Sa­trix 40 clocked up re­turns of close to 40% in each of the past two years and the best per­form­ing fund of the year to Fe­bru­ary – Coro­na­tion Re­sources – logged a 58% re­turn. It was al­most im­pos­si­ble to lose money in a mar­ket where the un­der­ly­ing econ­omy was grow­ing at more than 5% (closer to 7% if im­ports and ex­ports are ex­cluded).

“The re­silience of this mar­ket has sur­prised ev­ery­one,” says David Shapiro, man­ager of the Sas­fin 2010 Fund, which in­vests in funds likely to ben­e­fit from in­fras­truc­tural spend­ing. “There were many peo­ple warn­ing a year ago that the mar­ket was look­ing over­heated, but if we have learned any­thing it’s that the mar­ket is never wrong.”

That re­silience was tested in May last year when an emerg­ing mar­ket scare top­pled the JSE Alsi 40 in­dex by 17%. The in­dex bot­tomed out in June and then raced up a fur­ther 47%. An­other speed wob­ble in Fe­bru­ary this year knocked the in­dex by 7%, but in­vestors saw that as just an­other op­por­tu­nity to buy in at a lower price. By end-March the in­dex had again bro­ken new highs.

Even at th­ese lofty lev­els an­a­lysts say the mar­ket is by no means over-priced, though you have to look harder for value. In­dus­trial firms are ex­pected to show earn­ings growth of 17% over the next year, slow­ing to around 9,5% there­after, says Paul Hansen, di­rec­tor of re­tail in­vest­ing at Stan­lib. “Over time earn­ings growth tends to track the nom­i­nal growth in gross do­mes­tic prod­uct, and we be­lieve the out­look for SA re­mains very pos­i­tive.”

Much of that op­ti­mism comes from the ex­pected R450bn in pub­lic sec­tor in­fra­struc­ture spend­ing and a pos­si­ble fur­ther R1 tril­lion from the private sec­tor.

Eskom re­cently an­nounced an al­most 50% in­crease in its planned spend­ing to R150bn to meet de­mand for power and to help pay for that it wants a sub­stan­tial hike in elec­tric­ity tar­iffs. Air­ports Com­pany of SA has an­nounced a near qua­dru­pling in its cap­i­tal spend­ing bud­get lead­ing up to 2010. That’s in ad­di­tion to projects al­ready un­der way, such as the Gau­train, as well as port, rail and road up­grades. Con­struc­tion firms’ or­der books are chock-a-block and ce­ment is be­ing im­ported to ease SA’s sup­ply bot­tle­necks.

The econ­omy is fir­ing on all cylin­ders and there are signs that the in­ter­est rate cy­cle is at or near a peak. Ev­ery­one has their eyes on 2010 and the for­tunes to be made along the way. The prob­lem is, much of that’s al­ready priced into as­set val­u­a­tions though there are some sec­tors and in­di­vid­ual stocks that have caught the eye of in­vestors.

Banks are trad­ing at price:earn­ings mul­ti­ples of be­tween 12 and 13, slightly be­low where they were a year ago. That isn’t out of line with the p:e ra­tios of Euro­pean banks, cur­rently en­joy­ing a pe­riod of un­prece­dented growth.

A re­port by Mercer Oliver Wy­man on the state of the world’s fi­nan­cial ser­vices in­dus­try notes that 21% of the growth of the world’s lead­ing banks comes from emerg­ing mar­kets and that will grow to 40% within five years. That’s good news for SA, which has a vast po­ten­tial mar­ket of un­banked cus­tomers yet to en­ter the main­stream. The black mid­dle class is grow­ing by an es­ti­mated 420 000/year, though the Na­tional Credit Act, soon to come into force, may rein in the lend­ing spree that’s fu­elled earn­ings growth over the past five years.

Many re­tail shares now look fully priced af­ter more than tre­bling over the past three years, though there are still op­por­tu­ni­ties in se­lected stocks. Louis Stassen, chief in­vest­ment of­fi­cer at Coro­na­tion As­set Man­age­ment, says Woolies, while not cheap, is gain­ing mar­ket share in its food di­vi­sion and that’s not fully priced into the share. An­other in­vestor favourite is Net­care, which broke the SA for­eign ac­qui­si­tion curse by mak­ing a suc­cess of its Bri­tish op­er­a­tion, Gen­eral Health­care Group.

One sec­tor at­tract­ing huge in­ter­est is plat­inum. An­glo Plat­inum is up nearly five­fold since De­cem­ber 2004, a per­for­mance beaten only by Aquar­ius Plat­inum, up 7,7 over the same pe­riod. The seem­ingly ab­surd val­u­a­tions ap­plied to plat­inum stocks re­flect the un­der­ly­ing health of the world ve­hi­cle mar­ket and de­mand for au­to­cat­a­lysts from en­vi­ron­men­tally sen­si­tive ve­hi­cle mak­ers world­wide. Mas­sive in­vest­ment is tak­ing place across the Bushveld com­plex to meet fu­ture de­mand for plat­inum and in that light An­glo Plat­inum’s p:e ra­tio of 25 isn’t out of line with his­tor­i­cal av­er­ages.

For all the good news there are some storm clouds gath­er­ing. The mas­sive in­crease in in­fra­struc­ture spend­ing could put strain on SA’s bal­ance of pay­ments due to the high level of im­ports re­quired to com­plete those projects. That in turn could hurt the rand ex­change rate. The SA Re­serve Bank is also tetchy over the rate of credit ex­pan­sion, de­spite the two-per­cent­age point in­crease in in­ter­est rates over the past nine months, with a fur­ther hike pos­si­bly on the cards at the next meet­ing of the Bank’s Mone­tary Pol­icy Com­mit­tee.

Saliegh Salaam, head of eq­ui­ties at Fu­ture­growth As­set Man­age­ment, says that af­ter four years of spec­tac­u­lar growth in which in­vestors have be­come ac­cus­tomed to com­pound an­nual growth of 38%/year they

have be­come less dis­crim­i­nat­ing in their stock se­lec­tions.

Says Salaam: “The so-called qual­ity pre­mium has dis­ap­peared. For ex­am­ple, trans­port com­pany Im­pe­rial, which has one of the best earn­ings track records on the JSE over 20 years, is trad­ing at a sim­i­lar mul­ti­ple to Su­per Group, which has had a more che­quered earn­ings his­tory. We be­lieve that qual­ity will re­assert it­self over time and that the con­ver­gence in rat­ings seen over the past few years may break down to re­flect rel­a­tive dif­fer­ences in qual­ity.”

Salaam says at some point the JSE is likely to re­vert to its long-term av­er­age of 14%/year and now more than ever “care­ful stock se­lec­tion is paramount”.

An­other cause for con­cern is the val­u­a­tion of the JSE rel­a­tive to global stock mar­kets, which has nar­rowed sub­stan­tially in re­cent years.

Volatil­ity is on the in­crease, there are doubts con­cern­ing SA’s abil­ity to fund its cur­rent ac­count deficit and in­fla­tion­ary pres­sures are build­ing.

Shapiro agrees there are po­ten­tial speed wob­bles ahead, big­gest of which is the dan­ger that in­fras­truc­tural spend­ing will un­der­shoot the planned tar­gets due to a se­ri­ous lack of ca­pac­ity and skills. That may force Gov­ern­ment to open SA’s borders to skilled im­mi­grants.

The bears have now been urg­ing cau­tion for two years but no­body seems to be lis­ten­ing. They had the ears of in­vestors in the af­ter­math of the 2002 crash, when prices dropped nearly 40%, but their gloomy pre­dic­tions scared many in­vestors away from a mar­ket that’s re­turned 243% since April 2003.

The prodi­gious and on­go­ing flow of cash into money mar­ket funds sug­gests many in­vestors are ei­ther un­cer­tain about the fu­ture di­rec­tion of the mar­ket or they’re bank­ing prof­its af­ter the re­cent healthy run. In­sti­tu­tional fund man­agers were quick to spot the turn in the mar­ket in 2003, but in­di­vid­ual in­vestors – judg­ing by the pusil­lan­i­mous flow of funds into SA eq­uity funds un­til 2005 – were late in spot­ting the eq­ui­ties boom.

Now that ev­ery­one seems to be jump­ing on board the eq­uity train it may in­deed be time to ex­er­cise cau­tion. The econ­omy may be in bet­ter shape than it’s been for two decades but Salaam dis­misses the ar­gu­ment that “this time it’s dif­fer­ent”.

“Those words – ‘this time its dif­fer­ent’ – while pos­si­bly true, hap­pen to be the most dan­ger­ous words in in­vest­ing,” Shapiro says. He takes a more up-beat view, ar­gu­ing that the mul­ti­plier ef­fect of mas­sive in­fras­truc­tural spend­ing hasn’t been priced into the mar­ket.

In other words, each R1 spent on Gau­train and Spoor­net re­sults in R3 or R4 ad­di­tional spend­ing as the eco­nomic ben­e­fits trickle down to sup­pli­ers, work­ers and their fam­i­lies.

The alacrity with which the mar­kets re­bounded from the sell-offs in Fe­bru­ary and May 2006 sug­gest in­vestors are less prone to flee at each cry of wolf.

Any de­cline in prices is seen as an op­por­tu­nity to re-en­ter the mar­ket at lower prices. There’s a fear that in­vestors may fail to recog­nise real dan­ger when it ar­rives, but for the mo­ment the dan­ger signs are dis­tant to reg­is­ter.

The re­silience of this mar­ket has sur­prised ev­ery­one. David Shapiro

The so-called qual­ity pre­mium has disap-

peared. Saliegh Salaam

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.