Per­haps you shouldn’t bet on com­modi­ties and tele­coms

Sa­sol may not be able to cap­i­talise on a rising oil price while a pos­si­ble hike in US in­ter­est rates will hurt gold. MTN’s trou­bles are also not over yet.

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

nveis­tors

should ex­pect more mar­ket volatil­ity in the year ahead as un­cer­tainty re­mains about US pres­i­dent-elect Don­ald Trump’s pol­icy moves, and the im­pli­ca­tions for global mar­kets.

Other mar­ket-mov­ing events will be the up­com­ing elec­tions in France and Ger­many, the UK’s exit from the EU, as well as devel­op­ments in Italy fol­low­ing the De­cem­ber ref­er­en­dum on con­sti­tu­tional re­form, which is seen as a set­back for the EU.

In the near term, global eco­nomic growth is likely to im­prove, driven by fis­cal stim­u­lus as po­lit­i­cal lead­ers world­wide are ex­pected to start mov­ing away from aus­ter­ity mea­sures. How­ever, in the longer term, the prospect of in­creased pro­tec­tion­ist trade mea­sures could mean slower growth and higher inflation.

In ad­di­tion to these risks, there are com­pany-spe­cific risks that hold down­side po­ten­tial to the fol­low­ing stocks (for the po­ten­tial up­side, please see page 11 in the op­ti­mist’s guide to 2017):

MTN Group

MTN has had a tough few years in its key mar­kets of Nige­ria, Iran and South Africa. In Nige­ria, the group set­tled a fine from reg­u­la­tors for its fail­ure to dereg­is­ter SIM cards, a fine that led to the de­par­ture of for­mer CEO Si­fiso Dabengwa and other se­nior ex­ec­u­tives. How­ever, its trou­bles are not yet over, as it faces an in­ves­ti­ga­tion into al­le­ga­tions that it il­le­gally repa­tri­ated R190bn from Nige­ria, a claim it de­nies.

De­spite a shake-up at top man­age­ment level, it also re­mains to be seen whether it can fix its South African business, where it has lost mar­ket share to ri­vals in re­cent years. Its net­work also re­quires sub­stan­tial in­vest­ment to im­prove qual­ity.

Mean­while it has fi­nally been able to start repa­tri­at­ing the $1bn it had stuck in Iran due to in­ter­na­tional sanc­tions. Bloomberg re­ported that the full amount is likely to be repa­tri­ated by the end of the first quar­ter of 2017. How­ever, po­lit­i­cal risk re­main a factor in Iran, with Trump threat­en­ing to can­cel the Iran deal, which led to some sanc­tions re­lief.

Tech­ni­cally, down­side through 10 475c/ share could see MTN lose more of its share price value to­wards 5 300c/share.

Sa­sol

Brent crude prices have ral­lied since the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries (Opec) agreed to its first pro­duc­tion cut in eight years on 30 Novem­ber. This was fol­lowed by a de­ci­sion by non-Opec pro­duc­ers to also cut pro­duc­tion. The In­ter­na­tional En­ergy Agency (IEA) said on 13 De­cem­ber that oil de­mand should out­strip sup­ply in the next six months if the agreed-upon cuts are im­ple­mented, which should fur­ther sup­port the oil price.

A ral­ly­ing oil price – it was trad­ing above $55 a bar­rel at the time of writ­ing on 13 De­cem­ber, a long way from the sub-$30 lev­els seen early in 2016 – should be good news for Sa­sol. How­ever, the petro­chem­i­cal gi­ant has hedged about 16.8m bar­rels at $47.06 a bar­rel for the March and June quar­ters of 2017, thereby lim­it­ing the po­ten­tial up­side from the oil price rally.

The mar­ket also re­mains scep­ti­cal about Sa­sol’s ex­pan­sion plans in the US, where it is build­ing an $11bn chem­i­cal plant, which is al­ready sig­nif­i­cantly over budget and be­hind schedule.

Piv­otal sup­port is at 35 400c/share, and if breached, the price could fall to its down­side tar­get at 20 800c/share. In this case go ag­gres­sively short be­low 35 400c/share.

Mer­afe Re­sources

Ferrochrome pro­ducer Mer­afe Re­sources has had a strong per­for­mance in 2016, with its share price gain­ing 178% since the start of the year to trade at 142c/share at the time of writ­ing. Mer­afe would pro­long the con­sol­i­da­tion phase of a huge bot­tomin­gup pat­tern, if it were to en­counter ma­jor re­sis­tance at 150c/share. A short within the side­ways trend would be trig­gered at any level be­low 140c/share. Down­side through 115c/ share to­wards 100c/share could then fol­low.

Sibanye Gold

A rise in in­ter­est rates in the US to counter rising inflation, driven by Trump’s pro­posed spend­ing plans, would hurt gold. This would have a neg­a­tive ef­fect on gold prices, and there­fore gold mining shares.

In ad­di­tion, Sibanye is bet­ting the farm on Still­wa­ter Mining, a US plat­inum and pal­la­dium miner, which it plans to ac­quire for $2.2bn (R30bn at the time of writ­ing, com­pared with Sibanye’s mar­ket cap­i­tal­i­sa­tion of R22.3bn). The deal will be fi­nanced with a dol­lar-de­nom­i­nated loan as well as a new rights is­sue, Sibanye said, send­ing its share price down nearly 20% on 9 De­cem­ber, when the deal was an­nounced.

If Sibanye fails to trade above 3 000c/ share, go short as it could ex­tend cur­rent down­side to­wards 1 600c/share.

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