Big money in big shares

At home and over­seas

Finweek English Edition - - Moneyclinic -

UN­USUAL TIMES PRO­VIDE un­usual op­por­tu­ni­ties in eq­uity mar­kets. Share prices have re­cov­ered some­what in emerg­ing and de­vel­oped mar­kets since ear­lier this year but could still have some way to go. Where should in­vestors be looking? At the “good busi­nesses” on the JSE, says Corona­tion Fund Man­agers. Corona­tion is also op­ti­mistic about prospects for shares in de­vel­oped mar­kets, be­liev­ing those could out­per­form the SA mar­ket for the next few years. But it has also iden­ti­fied mis­priced shares on the JSE it’s buy­ing.

“Fi­nan­cial mar­ket dis­lo­ca­tions present at­trac­tive en­try points into good busi­nesses as liq­uid shares, gen­er­ally good busi­nesses, are sold down more than illiq­uid ones. Those pe­ri­ods, we be­lieve, are very healthy for fi­nan­cial mar­kets, as they sep­a­rate the good from the bad,” says Neville Ch­ester, se­nior port­fo­lio man­ager at Corona­tion.

It de­fines good busi­nesses as those with de­fen­sive earn­ings streams, strong cash gen­er­a­tion, high earn­ings vis­i­bil­ity, wider mar­gins and strong bal­ance sheets. Its ex­am­ple of a com­pany with all those qual­i­ties is MTN, even more now the Bharti deal has been called off. “As a share­holder we fun­da­men­tally didn’t like the deal. We be­lieved the price of­fered was too low and that MTN was just a far bet­ter busi­ness than Bharti, with ex­cel­lent growth prospects and ge­o­graphic di­ver­si­fi­ca­tion. Now the deal has fallen away we’re comfortable our orig­i­nal in­vest­ment case still holds true,” Ch­ester says.

Other shares Corona­tion is heav­ily in­vested in are global stocks listed on the JSE, in­clud­ing MTN, Naspers ( owner of SABMiller, Bri­tish Amer­i­can To­bacco, Lib­erty In­ter­na­tional and Richemont.

Barnard Ja­cobs Mel­let Pri­vate Client Ser­vices ( BJMPCS) sees eq­uity op­por­tu­ni­ties over­seas, say­ing South African in­vestors can re­verse the process of “op­por­tunis­tic for­ays” by in­vestors from the de­vel­oped world into emerg­ing mar­kets, in­clud­ing SA, by ex­ploit­ing “bar­gain base­ment prices” in Bri­tain, the United States and Europe.

Louis Bekker, head of multi-man­ager funds at BJMPCS, says for over a year the big, long-term value op­por­tu­ni­ties from a low base have been in the de­vel­oped world. He fears that turn of events is so sur­pris­ing that South African in­vestors might let the op­por­tu­nity slip.

Bekker be­lieves strong GDP growth prospects in key emerg­ing mar­kets are al­ready re­flected in share prices. So in­stead he’s looking at em­bat­tled Bri­tain and the US mar­kets. “In­clud­ing one of the most shunned sec­tors of the past 18 months – bank­ing. Com­par­isons with bank­ing coun­ters from emerg­ing Asia are an eye­opener. The shares of one large Asian bank were trad­ing at four times the in­sti­tu­tion’s net as­set value. If you look at one ma­jor Bri­tish bank its shares were at 3,5 times NAV in the boom years of 2005/2006 – only to plunge to a lit­tle over NAV by year-end 2008. Those shares are still way be­low the long-term av­er­age of about twice NAV.”

A sec­tor Corona­tion is wary of is SA’s construction in­dus­try, say­ing many com­pa­nies here exhibit the op­po­site char­ac­ter­is­tics of a good com­pany: namely, cycli­cal earn­ings, earn­ings that can’t be fore­cast with cer­tainty, low mar­gins and poor cash flow.

Ch­ester says construction com­pa­nies ini­tially faced an ex­cep­tion­ally pos­i­tive macro en­vi­ron­ment over the short term, partly due to in­fra­struc­ture spending for 2010 and his­toric un­der­in­vest­ment in SA’s in­fra­struc­ture. “To­day, the macro en­vi­ron­ment has de­te­ri­o­rated. Cap­i­tal projects have ei­ther been can­celled or sus­pended and, in ad­di­tion, fund­ing has be­come much more dif­fi­cult.”

Ch­ester says while the earn­ings base of construction com­pa­nies was high it was largely due to com­pa­nies ben­e­fit­ing from a pe­riod of ab­nor­mal spend. “How­ever, the construction sec­tor re­mains highly cycli­cal and as the amount of work dries up, mar­gins will come un­der pres­sure, ul­ti­mately im­pact­ing the prof­itabil­ity of those busi­nesses.”

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.