Clear and sunny skies ahead

There are many rea­sons to be optimistic about the new year and the big win­ners to look out for in 2017 will be re­tail­ers, banks and food grow­ers.

Finweek English Edition - - THE OPTIMIST’S GUIDE: STOCK PICKS - Ed­i­to­rial@fin­week.co.za *The writer owns shares in Ton­gaat Hulett, Wool­worths, CSEW40 and Capitec and will, if he can, ap­ply for Premier Fish­ing.

af­ter the hor­ror of 2016, the new year dawns bright and sunny for South Africans. The rat­ing agen­cies did not down­grade us to junk and we’re start­ing to see some glim­mer of hope for GDP growth. De­spite our politi­cians, the lo­cal econ­omy is im­prov­ing, the rand is strength­en­ing and inflation is back be­low 6% and mov­ing lower. While we’re still on a neg­a­tive watch with the rat­ing agen­cies, the chances of a down­grade to junk have re­duced markedly, es­pe­cially with GDP tick­ing higher. And yes, the politi­cians are still med­dling and mak­ing noises, but our key in­sti­tu­tions re­main strong, even if the paras­tatals are weak­ened.

Make no mis­take: the coun­try still faces sig­nif­i­cant chal­lenges. But the worst of 2016 is be­hind us and things are look­ing up and, af­ter three years of the Top40 go­ing nowhere, the lo­cal in­dex has cor­rected in time rather than price. Cor­rect­ing in price would mean a sell-off but in­stead, by go­ing side­ways for the last three years, while earn­ings have in­creased (even if mod­estly), we have a much cheaper in­dex. The Top40 looks set to crack through 50 000, en route to 55 000 or maybe even 60 000.

The rain has also re­turned and this will see food inflation com­ing down, while a stronger rand against the dol­lar means less im­ported inflation, lower petrol prices and over­all a real dent to inflation. This much-im­proved inflation out­look cou­pled with some GDP growth means the Re­serve Bank could well start cut­ting in­ter­est rates in the sec­ond half of the year.

The big­gest im­pact of all this good news is a con­sumer that will start to see the pres­sure of the last few years lift­ing, re­sult­ing in less bad debts and more spend­ing.

The big win­ners will be re­tail­ers and my pick here is Wool­worths*, which on a for­ward price-to-earn­ings ra­tio (P/E) of just over 13 times is the cheap­est it has been since the end of the 2008/09 fi­nan­cial cri­sis. Aus­tralia will con­tinue to be a chal­lenge for an­other year or two but they should be able to get their gar­ment of­fer­ing right (hav­ing blamed a warm win­ter for 2016’s col­lapse) and food sales will pick up as con­sumers feel and act richer.

Banks had a great 2016 and with a down­grade likely averted and bad debts start­ing to im­prove, they should have an­other good year as they are still at rea­son­able price lev­els and a div­i­dend yield of over 5% for the bank in­dex is cer­tainly at­trac­tive. How­ever, longer term it is go­ing to be tough for banks with in­creased reg­u­la­tion and com­pe­ti­tion. Capitec* re­mains my pick in the bank­ing space. It is rolling out new prod­ucts and have the low­est cost-to-in­come ra­tio of any of the banks, com­ing in at around 35% com­pared to the big banks’ 55%. With con­sumer pres­sure lift­ing, it should be able to lend more and re­duce its bad debts, but the stock is not cheap, with a for­ward P/E of above 20 times.

An­other in­vest­ment space for 2017 is food grow­ers and pro­duc­ers as the rains have van­quished the drought. Per­son­ally, I am not a fan of the food pro­duc­ers but they will benefit from lower in­put costs and im­proved con­sumer spend­ing. My strategy for prof­it­ing from the rain is the grow­ers such as Ton­gaat* and Quan­tum. The lat­est Ton­gaat re­sults showed su­gar prof­its on the up, while starch was flat and prop­erty un­ex­pect­edly came in weak. Prop­erty will be lumpy due to long lead times for the sales, but a de­pressed re­port­ing pe­riod for prop­erty will be fol­lowed by at least a re­turn to nor­mal and per­haps a jump higher, so next year should see great Ton­gaat re­sults.

The beaten bunch, es­pe­cially the UK-listed stocks, will con­tinue to have tougher times with Brexit, but ex­cel­lent man­age­ment teams will still be able to make prof­its. How­ever, a stronger rand will hurt those prof­its, so while there is space for them there will likely be bet­ter returns.

At the end of the day a sunny and buoy­ant SA will mean we could just buy a gen­eral equity ex­change-traded fund such as CSEW40* and reap the re­wards with­out lift­ing a fin­ger.

My last call for a sunny year would be Premier Fish­ing, which is list­ing soon and has great po­ten­tial.

The big­gest im­pact of all this good news is a con­sumer that will start to see the pres­sure of the last few years lift­ing, re­sult­ing in less bad debts and more spend­ing.

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