How to in­vest in per­ilous times The re­cently re­leased GDP fig­ure was far lower than ex­pected, and with fears of a pos­si­ble down­grade at the end of the year, we take a look at how to po­si­tion your port­fo­lio in the cur­rent low-growth en­vi­ron­ment.

Finweek English Edition - - MARKETPLACE - Editorial@fin­week.co.za * The writer owns shares in Metro­file.

theGDP num­ber for the first quar­ter of 2016 re­leased by Stats SA last week was a shocker. The quar­ter-on-quar­ter num­ber was neg­a­tive 1.2% while year-onyear was neg­a­tive 0.2%. The year-on-year fig­ure is what we should pay at­ten­tion to – if we get an­other neg­a­tive num­ber for the sec­ond quar­ter, we will of­fi­cially be in a re­ces­sion.

The big­gest hit to the GDP num­ber was min­ing. That is no sur­prise com­ing in the week that the PwC’s Mine re­port was pub­lished, show­ing that the 40 largest min­ing com­pa­nies in the world had had their worst year ever.

The ques­tion I want to an­swer this week is how you should in­vest in low or neg­a­tive GDP growth con­di­tions, re­gard­less of whether we hit a re­ces­sion or not. The is­sue of a re­ces­sion is a great head­line grab­ber, but even if we man­age a pos­i­tive GDP num­ber for the sec­ond quar­ter, the truth is that South Africa is not grow­ing nearly enough and that’s hurt­ing cer­tain sec­tors of the econ­omy.

The point is your in­vest­ment port­fo­lio should al­ready pretty much be po­si­tioned for low to neg­a­tive GDP growth. Sure, the num­ber re­leased last week was a shocker but even the most op­ti­mistic ex­pec­ta­tions were barely touch­ing 1% growth. In­vest­ing is about the long term and we need to make sure our port­fo­lios are po­si­tioned to ride out the bumps along the way.

Now sure, re­ces­sions and low GDP growth are not go­ing to be with us for­ever, but we’ve al­ready been here for a few years and al­most cer­tainly have a few more years to go. This is the theme I have been talk­ing about when sug­gest­ing that we should be very selec­tive when in­vest­ing in SA Inc. stocks.

Scru­ti­n­is­ing SA Inc.

come from be­yond our bor­ders. Delv­ing into the dif­fer­ent sec­tors, fi­nan­cials con­tinue to con­cern me. Our lo­cal banks are very cheap by pretty much any val­u­a­tion methodology.

But re­ces­sion puts more pres­sure on them as con­sumers get squeezed fur­ther. More loans start turn­ing bad, cor­po­rates are not ex­pand­ing or bor­row­ing and their in­comes gets hit as bad debts move higher. Small-cap stocks are go­ing to be one of the hard­est hit spa­ces. A small com­pany likely only has one or two rev­enue streams and if they are fo­cused on the lo­cal mar­ket it will be very tough. Af­ter the 2008 cri­sis, it was un­sur­pris­ingly the small caps that suf­fered the most – the ma­jor­ity of busi­ness res­cue plans had to be im­ple­mented in this space. The ex­cep­tions are com­pa­nies with a lot of off­shore earn­ings or busi­nesses with solid moats. Metro­file* is one of those with a strong moat – cor­po­rates have to con­tinue stor­ing files and while they may have fewer files to store due to weak­en­ing prof­its, many are still stor­ing older doc­u­ments from pre­vi­ous years.

With re­gard to the large stocks, it is im­por­tant to fo­cus on com­pa­nies with strong off­shore earn­ings and we have a lot of those.

Con­sumer stocks should be suf­fer­ing but we’re see­ing them do­ing bet­ter than ex­pected. That’s more about ex­cel­lent man­age­ment rather than a ro­bust con­sumer, so make sure you own the best of the best.

The real is­sue here is that your port­fo­lio should al­ready be po­si­tioned for the low growth lo­cally and if (or when) SA gets down­graded, you’ll be ready for that. You do not want to be 100% non-SA Inc. be­cause our econ­omy will start pick­ing up again one day, but you do want to be po­si­tioned for the cur­rent lengthy pe­riod of lo­cal eco­nomic weak­ness.

The real is­sue here is that your port­fo­lio should al­ready be po­si­tioned for the low growth lo­cally and if (or when) SA gets down­graded, you’ll be ready for that.

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