Buy shares on credit

Even though as­set man­agers don’t like it

Finweek English Edition - - Money Matters - VIC DE KLERK vicd@fin­

I WAS BAD last week. Very bad. Ac­cord­ing to many in­vestors, buy­ing shares on credit is the big­gest sin and it would be enough to make any as­set man­ager – or wealth man­ager, as they’re now called – go weak at the knees, es­pe­cially since I did it with re­tire­ment funds.

Why buy shares now? In a detailed re­search doc­u­ment a few weeks ago, JPMor­gan’s SA sub­sidiary gave prospec­tive in­vestors the go-ahead to buy value shares now. About four months ago, they weren’t in­ter­ested in value shares. Those are shares, such as our banks and re­tail­ers, trad­ing at ex­cep­tion­ally at­trac­tive earn­ings mul­ti­ples of less than 10, or even less than 8.

The trig­ger that JPMor­gan was wait­ing for was the inflation rate, which will soon reach its peak of around 13% and will then fall sig­nif­i­cantly to less than 6% by year-end 2010 if the SA Re­serve Bank’s pre­dic­tions are cor­rect. That could hap­pen. And that’s why JPMor­gan is now quite happy for our bet­ter class of shares out­side the re­sources sec­tor to be bought again.

Mer­rill Lynch, an­other recog­nised name and opin­ion-for­mer in SA, last week is­sued its Fund Man­agers Sur­vey. Ac­cord­ing to its re­search the rec­om­men­da­tion of by far the ma­jor­ity of SA’s as­set man­agers is that you should now get rid of cash as quickly as pos­si­ble and buy value shares, which even a few weeks ago were to­tally out of favour. Ac­cord­ing to Mer­rill Lynch, 88% of SA’s as­set man­agers pre­dict inflation will fall over the next 12 months and that in­ter­est rates could start fall­ing by sec­ond quar­ter 2009.

Mer­rill Lynch says over the past quar­ter the num­ber of cash bulls among fund man­agers fell from 44% to just 6%. But it also warns there are now no re­sources bulls left. That means not one of the fund man­agers they spoke to is ex­cited about the re­sources sec­tor. That would mean shares such as Im­pala Platinum, Sa­sol and ArcelorMit­tal shouldn’t be bought: in fact, they don’t be­long in a port­fo­lio. Of course, that neg­a­tiv­ity comes on the back of the oil price hav­ing fallen sub­stan­tially over the past month.

How­ever, there are re­sources bulls left else­where in the world and in SA, es­pe­cially now that the re­sources in­dex has al­ready fallen by 25%. Some of the shares, such as Im­pala, are now more than 30% cheaper than they were two months ago and the share is now again cheap enough to in­clude in a high-risk port­fo­lio.

Three of the big banks and In­vestec are pre­pared to sell shares on credit. The so-called in­stal­ment shares listed on the JSE are noth­ing else than a method of buy­ing shares on credit. On or­di­nary in­stal­ment shares the de­posit or first in­stal­ment is usu­ally 50% of the value of the share, plus in­ter­est for the fol­low­ing six, nine or 12 months.

On the so-called

en­hanced div­i­dend se­cu­ri­ties (hot EDS) the de­posit is only 25%. Those are of course more risky than or­di­nary in­stal­ment shares, which are in turn more risky than or­di­nary shares.

I like In­vestec’s in­stal­ment shares. They’re rel­a­tively cheaper than those of­fered by Absa, Ned­bank and Stan­dard Bank be­cause they con­tain the so-called “knock out” clause. That sim­ply means if the or­di­nary share’s price falls be­low a cer­tain level, In­vestec will can­cel the hot EDS. The in­vestor will re­ceive the in­trin­sic value of the share af­ter can­cel­la­tion but the in­ter­est paid in ad­vance is lost. In­vestec’s hot EDS are there­fore even more risky than the or­di­nary shares avail­able on credit of­fered by the other banks.

My list was com­piled on the strength of the cur­rent share price, which must be sig­nif­i­cantly lower than the high­est level at which the share traded over the past year.

Keep away from any­thing that’s cur­rently near its peak. It’s like a sec­ond-hand car that’s still in good con­di­tion but the first owner has al­ready faced the pain of a fall in its price. The two that in­vestors should look at are the so-called knock­out prices. Re­mem­ber that if the price of the or­di­nary share falls to be­low that level, In­vestec will can­cel the hot EDS.

Look at FirstRand. The knock­out price is 1360c. That’s only 17% less than the share is now trad­ing at, and just days ago FirstRand was trad­ing at 1300c. That’s more risky than the hot EDS on Stan­dard Bank, for which the knock­out price is 6524c – 27% less than its cur­rent share price. Even in the dark­est days ear­lier this year, Stan­dard’s share price never fell to be­low 7000c.

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