Good time to stock up on SA Inc?

Saturday Star - - P E R S O N A L F I N A N C E -


THIS might be a good time to in­vest in South African listed com­pa­nies whose pri­mary busi­ness is here in South Africa, known in fi­nan­cial cir­cles as SA Inc, as well as in some of our more global com­pa­nies that are cur­rently un­der­val­ued.

The best in­vest­ment re­turns are born in times of fear and un­cer­tainty, says Mikhail Mo­tala, as­sis­tant fund man­ager at PSG As­set Man­age­ment, and there is a pre­vail­ing neg­a­tive nar­ra­tive on South Africa.

Busi­ness con­fi­dence is close to 40-year lows and re­cent fi­nan­cial re­sults com­men­tary from Jse-listed com­pa­nies re­veals just how tough the eco­nomic en­vi­ron­ment is. SA Inc busi­nesses are ex­pe­ri­enc­ing some of their most test­ing times. The FTSE/ JSE Mid Cap In­dex, which serves as a good proxy for SA Inc com­pa­nies, is trad­ing at lows last seen in 2002.

“Val­u­a­tions closely fol­low busi­ness con­fi­dence, as both are prox­ies for in­vestor sen­ti­ment,” Mo­tala says. “De­pressed val­u­a­tions sig­nal that the mar­ket has very low ex­pec­ta­tions for fu­ture earn­ings growth. “It is there­fore not de­spite but be­cause of the tough eco­nomic en­vi­ron­ment that lo­cal mid-cap shares present at­trac­tive op­por­tu­ni­ties. Many of the fears about South Africa’s eco­nomic woes ap­pear to be priced into th­ese shares. “So even if eco­nomic head­winds per­sist for longer than ex­pected, share­hold­ers can still ex­pect to make de­cent re­turns. “If, how­ever, a ‘nor­mal’ cy­cle un­folds and some of the head­winds abate, the re­sul­tant earn­ings re­cov­ery could be dra­matic.

“In this sce­nario, share­holder re­turns could be highly at­trac­tive.”

While it’s dif­fi­cult to pre­dict if or how an eco­nomic re­cov­ery may take shape, and mar­ket par­tic­i­pants should by no means un­der­es­ti­mate the chal­lenges the lo­cal econ­omy faces, Mo­tala be­lieves there are a few en­cour­ag­ing fac­tors to con­sider. In some South African in­dus­tries, such as in­fra­struc­ture and en­ergy, there is pent-up de­mand from the so-called “lost decade” – the eco­nomic stag­na­tion ex­pe­ri­enced over the past 10 years.

Growth fol­lows in­vest­ment. In­vest­ment into emerg­ing mar­kets gen­er­ally is at cycli­cal lows. Within emerg­ing mar­kets, South Africa has taken a big­ger knock than many of our peers. Gen­er­ally, South African cor­po­rate bal­ance sheets are strong.

Key lo­cal in­sti­tu­tions such as the Na­tional Trea­sury and the SA Re­serve Bank have been thor­oughly tested over the past 12 months and have proved their met­tle. De­spite a re­ces­sion and an in­quiry into state cap­ture, there has been a peace­ful and demo­cratic change in the lead­er­ship of the rul­ing party.

Even some larger, more global South African com­pa­nies are start­ing to look at­trac­tive. Nkareng Mpobane, chief in­vest­ment of­fi­cer of long-only fund man­age­ment at Ash­bur­ton In­vest­ments, says that even though lack­lus­tre South African earn­ings growth has been the main drag on eq­uity re­turns over re­cent years, bar­gains are emerg­ing in great stocks that have been “thrown out with the bath­wa­ter”. “We’ve had con­sis­tent down­ward re­vi­sions to earn­ings ex­pec­ta­tions, which ex­plains the mar­ket’s rel­a­tively flat long-run per­for­mance.

“This poor per­for­mance has re­sulted in higher div­i­dend yields, but lower earn­ings growth is likely to hold back any real improve­ment in price-earn­ings mul­ti­ples on a for­ward ba­sis. As it stands, price-earn­ings mul­ti­ples re­main at their long-term his­tor­i­cal av­er­ages.”

For South African in­vestors, how­ever, val­u­a­tions in some shares look very at­trac­tive, with some of the JSE’S lead­ing names trad­ing sub­stan­tially below long-term val­u­a­tions. “For pa­tient in­vestors, great stocks can be had at very at­trac­tive prices,” Mpobane says. Some of th­ese com­pa­nies are Vo­da­com, Aspen, Sho­prite and Mr Price.

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