Big money in big shares
At home and overseas
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.”