2010 Looking past the hype
Six experrts pick their stocks for the future
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.”
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