In­vest­ment In­dus­tri­als present risk, re­sources & banks op­por­tu­nity;

Finweek English Edition - - INSIDE - Tan­di­s­izwe Mahlut­shana

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.

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