Investment Industrials present risk, resources & banks opportunity;
There have been many recommendations t hat local i nvestors should consider adding defensive stocks to their portfolios as a possible antidote to the weakening rand and the US Federal Reserve tapering off its quantitative easing programme.
One fund manager, however, is going the other direction. Andrew Vintcent, head of the Stanlib Unconstrained Equity Franchise and portfolio manager for the Stanlib Growth Fund, says that investors will do well to avoid the big industrial stocks, such as British American Tobacco and SABMiller. He says that these stocks have stretched valuations, and are also not well positioned for the current cycle. The JSE Industrials Index grew some 32.9% in 2013.
“The performance of the Industrial Index has been driven by a combination of strong earnings growth, and a price-toearnings (P/E) multiple that has risen to 21 times current earnings. Only three times in the last 50 years has the Industrial Index P/ E expanded to above 20 – we would caution investors against expecting much more in the way of a re-rating from current levels,” says Vintcent.
A fund manager survey by multimanager firm Investment Solutions show that 68% of the market views the industrials sector as least favourable for 2014 while 56% seem buoyant about the resources sector. According to the survey, 55% of managers see the JSE All Share Index ending the year within a range of 44 000-48 000 points while 30% felt it could outperform to the 48 000-52 000 range.
Says Glenn Silverman, chief investment officer at Investment Solutions: “We are not convinced that markets will necessarily even be higher at all. They could be f lat too, but that would require a far weaker rand, and ‘QE4’ scenarios to play out. That would likely benefit both the resources sector, and rand-hedge stocks, in general. Locally, our managers, too, have indicated a preference for resources for 2014. There is however a strong divergence within the sector as the majority of managers are steering clear of the gold miners in favour of the platinum and diversified miners.
“Within financials our mangers view the banks as still offering value. The valuations of the large caps that make up the bulk of the Industrials are generally very stretched. Momentum and their rand-hedge qualities could push these prices higher still, but this sector presents the highest risk in local equities in 2014. The retailers have pulled back recently so valuations are now more interesting, but they face a rather challenging environment where further interest rate hikes, a slowing economy, full margins and ratings, and high foreign ownership, would likely still pose challenges to them advancing.”
Top holdings in Vintcent’s portfolio i nclude Anglo American and Barclays Africa Group. He says the current valuation for the big banks, trading at P/ E multiples of between 9 and 10, due in part to the sell-off experienced last year, present competitive earnings opportun-ities while global resource stocks like Anglo American boasts Tier 1 global assets and its share price recovery has been encouraging. He adds that the mid-cap sector presents good opportunities for above-average returns, punting stocks such as Grindrod, Omnia and Brait as possible outperformers.