Put some money into com­modi­ties and tele­coms

Sa­sol may rise on the back of the oil price while com­modi­ties play­ers could see an up­ward trend in the com­ing year. MTN is also on the path to re­cov­ery.

Finweek English Edition - - THE OPTIMIST’S GUIDE: STOCK PICKS - Ed­i­to­rial@fin­week.co.za

the­most mem­o­rable as­pects of 2016 was the global wave of pop­ulist po­lit­i­cal out­comes, in­clud­ing Brexit, Don­ald Trump’s vic­tory in the US elec­tion, and the out­come of De­cem­ber’s Ital­ian ref­er­en­dum.

Slower growth in China, fall­ing oil prices, the spec­u­la­tion on when the US Fed­eral Re­serve will con­tinue its rate-hik­ing cy­cle, geopo­lit­i­cal in­sta­bil­ity and the threat of bank­rupt­cies in junk bonds are other fac­tors sim­i­lar to those cred­ited for caus­ing the extreme volatil­ity that we saw from Au­gust 2015.

The dis­ci­plined in­vestor who was will­ing to en­dure the volatil­ity was re­warded. But the one who at­tempted to divine pre­cisely when the times of volatil­ity will be­gin and end, suf­fered harshly. Whether mo­ti­vated by fear or pride, most in­vestors have strug­gled to main­tain sub­stan­tial gains this year from the steep swings up and down.

Global po­lit­i­cal un­cer­tainty re­mains a key worry, and fur­ther ques­tions re­main re­gard­ing Trump’s in­ten­tions with US trade and eco­nomic pol­icy, which could af­fect gov­ern­ment debt lev­els, in­ter­est rates, com­mod­ity prices and eco­nomic growth rates, par­tic­u­larly in emerg­ing mar­kets.

But in an ideal world, the Fed will go ahead and in­crease in­ter­est rates grad­u­ally in an at­tempt to pre­vent any crashes from hap­pen­ing. It will only in­crease key rates to a level that does not have any neg­a­tive im­pact on fi­nan­cial mar­kets. A strong re­cov­ery in the US econ­omy would be boosted by an im­proved job mar­ket, higher wages, and grow­ing spend­ing power. The Euro­pean Cen­tral Bank (ECB) will stick to its driv­ing style in 2017 with steering ma­noeu­vres con­sist­ing of bond pur­chases and neg­a­tive de­posit rates.

Tak­ing an up­beat view of 2017, my stock picks are based on shares that have been out of favour this year, and seem ready to be re­gain­ing up­side. (For the po­ten­tial down­side on these stocks, please see the ar­ti­cle on page 11 of the flip side of this mag­a­zine.)

MTN Group

MTN has been un­der sig­nif­i­cant pres­sure since the tele­coms group was slapped with a $5.2bn fine in Nige­ria in October 2015, af­ter it failed to com­ply with reg­u­la­tions to scrap un­reg­is­tered SIM cards. MTN plunged from highs at 26 300c/share to a cur­rent low at 10 400c/share. The fine, which has since been dras­ti­cally re­duced, has led to a shake-up and re­struc­tur­ing of MTN’s up­per ech­e­lons, with new CEO Rob Shuter, a top Voda­fone ex­ec­u­tive, set to join in March 2017.

Cur­rently re­tain­ing sup­port at 10 400c/ share, up­side through 12 200c/ share would trig­ger a neu­tral buy, with po­ten­tial gains to 15 650c/share. An ag­gres­sive long is rec­om­mended above that level as im­pe­tus will most likely con­tinue to 21 500c/share.

Sa­sol

Brent crude plum­meted be­low the $30-bar­rier early in 2016, but a deal among Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (Opec) mem­bers in Novem­ber to cut out­put helped rally prices. At the time of writ­ing on 13 De­cem­ber, Brent crude was trad­ing above $55 a bar­rel, its high­est lev­els in nearly 18 months.

Sa­sol, whose for­tunes are closely cor­re­lated to the oil price and the rand/ dol­lar ex­change rate, has been range­bound be­tween 50 000c/share and 35 400c/share since Jan­uary 2015. A re­cov­ery above 41 915c/share will most likely trig­ger fur­ther gains to­wards 47 300c/share at first and then 50 000c/share. Go ag­gres­sively long above that level as a 100% re­trace­ment to 65 300c/share could then en­sue.

Mer­afe Re­sources

Af­ter reach­ing lows last tested in 2009, Mer­afe seems set to re­deem it­self. A move above 150c/share should see the share price ap­pre­ci­ate to 200c/share, be­fore test­ing a 2007 prior high of 245c/share. Mer­afe gen­er­ates in­come pri­mar­ily from the Glen­core-Mer­afe Chrome Ven­ture. With the com­pany ex­pect­ing global stain­less steel pro­duc­tion to grow by 2.6% in 2016 and by 3.1% in 2017, there will be a higher de­mand for ferrochrome.

Mark Bev­eridge, who is re­spon­si­ble for mar­ket in­tel­li­gence group CRU’s ferrochrome mar­ket out­look, says a com­bi­na­tion of stim­u­lus-linked de­mand for ferrochrome in China and a rel­a­tive ab­sence of chrome in­ven­tory led to a scram­ble for South African ore. It seems the re­cov­ery in chrome prices co­in­cides with what the re­search group be­lieves to be sig­nif­i­cant moves to con­sol­i­date the South African in­dus­try.

Sibanye Gold

A Trump vic­tory is seen by many as positive for gold in the long term be­cause of the prospects of a higher budget deficit to fi­nance all his pro­posed in­fras­truc­ture spend­ing plans and tax cuts. Un­der this sce­nario, gold would then be a safe haven, es­pe­cially if mar­kets re­main volatile amid wide­spread un­cer­tainty over Trump’s in­ter­na­tional poli­cies. Above 3 000c/ share Sibanye Gold will end its short­term bear­ish streak, and a 100% re­cov­ery to­wards 8 000c/share should fol­low.

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