2010 Look­ing past the hype

Six ex­per­rts pick their stocks for the fu­ture

Finweek English Edition - - Front page - BRUCE WHIT­FIELD

ASK SIX PRIVATE CLIENT fund man­age­ment com­pa­nies, in­clud­ing a cou­ple of small bou­tique money man­agers, to iden­tify five shares to buy and hold for five years and what do you get? The an­swer: 22 dif­fer­ent stock picks – with one over­whelm­ing favourite.

Four out of six private client port­fo­lio man­agers chose BHP Bil­li­ton as their pre­ferred buy and hold stock for five years. Five other com­pa­nies got two nom­i­na­tions each from our panel: Re­unert, Stan­dard Bank, Sa­sol, MTN and Wool­worths.

Fin­week asked six private client port­fo­lio man­agers to re­veal their pre­ferred five shares for the next five years. With so much of the mar­ket hype and fo­cus cen­tred around 2010, the short-term noise con­cern­ing Gov­ern­ment’s in­fra­struc­ture spend, for­eign di­rect in­vest­ment and short-term volatil­ity, in­vestors with a longer-term hori­zon will be pleased to know that pro­fes­sional in­vestors see value in the South African mar­ket be­yond the Soc­cer World Cup.

But 2010 is pro­vid­ing a fo­cal point for SA. Not only will we be host­ing the Soc­cer World Cup, but a new Gov­ern­ment will also be in place and many of to­day’s cor­po­rate lead­ers will have rid­den into the sun­set hav­ing cashed in on the big­gest stock mar­ket boom in his­tory.

All things be­ing equal, the six – BoE Private Clients (BoE), Stan­dard Fi­nan­cial Mar­kets (SFM), San­lam Private In­vest­ments (SPI), BJM Private Clients (BJM), Ves­tact and Cen­taur As­set Man­age­ment – shared their port­fo­lio choices on a buy and hold ba­sis up to 2012.

SPI is one of SA’s larger private client port­fo­lio man­agers. It has 83 staff and has R44bn in­vested on be­half of 13 100 clients. Private client stock­broking head Martin Sch­mu­lian says de­spite the fact that the mar­ket is trad­ing at record lev­els, long-term in­vestors should hold MTN, Stan­dard Bank, Tiger Brands, Rem­gro and BHP Bil­li­ton in their port­fo­lios. He doesn’t ad­vo­cate buy­ing at any price but says in­vestors need to look for pe­ri­ods where pull­backs make shares more af­ford­able and pick up hold­ings in se­lected com­pa­nies.

Says Sch­mu­lian: “While th­ese com­pa­nies aren’t cheap on an ab­so­lute ba­sis we do be­lieve that they pro­vide value on a rel­a­tive ba­sis, given com­pa­ra­ble price:earn­ings ra­tios and higher ex­pected earn­ings growth rel­a­tive to the mar­ket over the next five years.

“You should keep in mind that, nor­mally, if a com­pany earns 20% on cap­i­tal the stock price will rise by al­most 20% over the long term, even if you pay a slightly higher price for the stock. But if a com­pany earns 10% on cap­i­tal the stock price will rise by about 10% over the long term, even if you pay a very cheap price for the counter.”

How­ever, volatil­ity would ap­pear to be the or­der of the day. But it will pro­vide long-term in­vestors with op­por­tu­ni­ties to buy stocks at lower lev­els than where they’re cur­rently trad­ing – close to record ter­ri­tory. Volatil­ity scares off many novice in­vestors, who are un­will­ing to stom­ach the gut-wrench­ing re­al­ity of los­ing 10% of the value of their port­fo­lio in as many days. But volatil­ity is pre­cisely what drives op­por­tu­ni­ties for long-term in­vestors. Just ask leg­endary in­vestor War­ren Buf­fett, who ar­gues that volatil­ity of­ten of­fers new buy­ing op­por­tu­ni­ties for buy-and-hold in­vestors.

Head of in­vest­ments at top end ad­vi­sory firm BoE Private Clients, Jo­hann van Zyl, says broader macroe­co­nomic fac­tors need to be taken into con­sid­er­a­tion when mak­ing long-term in­vest­ment de­ci­sions. He’s ex­pect­ing US eco­nomic growth to slow sig­nif­i­cantly but not stag­nate. He be­lieves com­mod­ity pro­duc­ing na­tions are likely to con­tinue see­ing strong growth but re­mains con­cerned about the health of the Ja­panese econ­omy.

Be­sides re­sources, BoE re­mains bullish on prospects for banks, re­tail­ers and fixed in­vest­ment sup­pli­ers. It lists Bid­vest, Re­unert, Stan­dard Bank, An­glo Plat­inum and BHP Bil­li­ton as its five favourite shares over five years.

Says Van Zyl: “We’ve re­cently ex­pe­ri­enced some tur­bu­lence in the fi­nan­cial mar­kets, caused by a num­ber of fac­tors. First it was China spook­ing the mar­ket with state­ments re­gard­ing clamp­ing down on mar­ket spec­u­la­tors in their mar­ket. Ja­pan then in­creased in­ter­est rates, which sent carry traders head­ing for the hills. We also saw a melt­down of sub-prime lenders in the US. De­spite those oc­cur­rences the mar­kets have bounced back, though there’s still some ner­vous­ness.”

Van Zyl ex­pects the de­mand for re­sources to re­main strong, based on the like­li­hood that the Chi­nese econ­omy will con­tinue to sur­prise on the up­side. As a re­sult of that, a slow­down in the US will have a less pro­found im­pact on global growth. A softer US dol­lar and sus­tained higher com­mod­ity prices are pos­i­tive for SA.

“Th­ese fac­tors should be good for SA’s trade bal­ance and ul­ti­mately for GDP growth. The lo­cal econ­omy is ex­pected to show strong growth over the next few years, with a shift from be­ing con­sumer-driven to in­vest­ment-led,” Van Zyl says.

In stark con­trast to Van Zyl, SFM chief in­vest­ment of­fi­cer Rudi van der Merwe is con­sid­er­ably more bear­ish con­cern­ing the US econ­omy, which he says is only just be­gin­ning to show the first signs of cracks in the hous­ing mar­ket. He ar­gues there will be an in­evitable knock-on ef­fect if the woes of the sub-prime mar­ket spread to the rest of the US hous­ing mar­ket, which will af­fect credit qual­ity and lend­ing on prod­ucts from mort­gages to credit cards.

“There’s a mas­sive di­chotomy in the out­look for the do­mes­tic mar­ket,” says Van der Merwe. “In iso­la­tion, the do­mes­tic pic­ture looks at­trac­tive. But if you scratch be­low the sur­face the risks to the global macroe­co­nomic sys­tem in my opin­ion clouds the do­mes­tic out­look.”

His worry is that a worse than ex­pected slow­down in the US will have a neg­a­tive im­pact on emerg­ing mar­kets as risk pre­mi­ums nor­malise and com­mod­ity prices come un­der pres­sure. That will put the rand un­der pres­sure and, by im­pli­ca­tion, will hit in­ter­est rates and over-in­debted con­sumers.

With that level of un­cer­tainty, Van der Merwe says in­vestors should have a bias to­wards com­pa­nies with an el­e­ment of a cur­rency hedge and that have re­li­able cash gen­er­a­tion. His top five picks: En­vi­roServ, Absa, KWV, Sa­sol and Hu­daco.

BJM Private Clients chief in­vest­ment of­fi­cer Mark Ap­ple­ton has cho­sen a well di­ver­si­fied port­fo­lio of shares cov­er­ing the main sec­tors of the broad South African econ­omy, iden­ti­fy­ing the di­ver­si­fied fi­nan­cial house FirstRand as a pre­ferred play over SA’s other ma­jor, more fo­cused re­tail banks Absa and pop­u­lar Stan­dard Bank.

De­spite hit­ting – and in some cases, out­per­form­ing – its turn­around tar­gets, in­vestors are still shy­ing away from Ned­bank, strong in the cor­po­rate mar­ket but with a moun­tain to climb on the re­tail front. BJM’s di­ver­si­fied port­fo­lio is made up of: BHP Bil­li­ton, FirstRand, Re­unert, Wool­worths and Im­pala Plat­inum.

Bou­tique man­ager Cen­taur As­set Man­age­ment is six years old, em­ploys four in­vest­ment pro­fes­sion­als and has around R1bn in­vested on be­half of about 150 clients. Cen­taur MD Roger Wil­liams says in­vestors need to be wary. “In five years’ time cur­rent cycli­cal growth ar­eas could well turn to duds and I’m cir­cum­spect about the long-term re­turn po­ten­tial of com­modi­ties and fixed in­vest­ment stocks,” ar­gu­ing that in­vestors need to as­sess val­u­a­tions and con­sider long-term sec­u­lar growth sec­tors.

Rather than choose tra­di­tional port­fo­lio stal­warts such as Rem­gro and Stan­dard Bank, Wil­liams has cho­sen five shares he says are “slightly off the radar”: Wool­worths, Mve­laphanda Group, Ad­vtech, Sappi and John­nic Com­mu­ni­ca­tions.

An­other bou­tique player in the private cli- ent arena is Ves­tact. With just four em­ploy­ees, the busi­ness has R1,5bn un­der man­age­ment and out­sources all of its back of­fice work ex­clud­ing as­set se­lec­tion and client in­ter­ac­tion.

“I’m bullish on global and SA mar­kets,” says Ves­tact MD Paul Theron. “In my view, hu­mankind is en­ter­ing a pe­riod of un­prece­dented pros­per­ity as a re­sult of the eco­nomic emer­gence of the de­vel­op­ing world, es­pe­cially China and In­dia. World fi­nan­cial mar­kets are more liq­uid and flexible than ever be­fore and in­vest­ment and sov­er­eign risks are ad­e­quately un­der­stood and priced.”

Theron says the en­vi­ron­ment will en­able well-man­aged pub­lic com­pa­nies to pros­per and grow their busi­nesses quickly, with in­vestors in­clined to buy stocks on higher av­er­age for­ward val­u­a­tions. His picks are: BHP Bil­li­ton, MTN, Sa­sol, Mass­mart and WG Wearne. Ves­tact is the only house to choose an AltX stock.

“The ac­tions of the few re­main­ing rogue states – such as Iran, Venezuela, Zim­babwe and North Korea – could pose a threat to that rosy sce­nario, but th­ese coun­tries will prob­a­bly marginalise them­selves eco­nom­i­cally, lead­ing to change and re­newal in the longer term,” says an op­ti­mistic Theron. “The re­cent mar­ket volatil­ity pre­sented in­vestors with at­trac­tive buy­ing op­por­tu­ni­ties.”

THE GREAT UN­KNOWN High flyer or crash & burn?

FTSE/JSE ALL SHARE IN­DEX

Source: I-Net Bridge

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