JSE’s long-term opportunities

Patrick Cairns Moneyweb

Heading into 2018, local investors would have been feeling far more optimistic than they had for some time. As such, first quarter (Q1) JSE returns were rather disappointing. Every major sector was negative over the first three months.

27Four Investment Managers’ Claire Rentzke says Q1 didn’t align with improving sentiment in SA. “We also saw an increase in volatility driven by heightened geopolitical tensions around the world. But if you look through the noise, we are still seeing attractive investment opportunities.”

One of the biggest impacts of SA’s improvements has been a stronger rand. This shows improved market sentiment towards the country, but it’s largely negative for local investors.

“As so much of the Top 40 is rand-hedged, a strong rand weighs on local equity returns,” explains 27Four’s Nadir Thokan. “It also weighs on returns from a balanced portfolio that is using its full 25% offshore allocation.”

However, ‘SA Inc’ stocks – those most exposed to the local economy – have started to look very interesting. Some have already rerated aggressively since December. Banks and local retailers, in particular, have made some rapid gains.

“Consumer confidence has already started to increase,” says Thokan. “Retail sales have also drastically improved well in excess of the historic trend, from very depressed levels. The market is therefore starting to price in better conditions for retailers, and better conditions for ‘SA Inc.’ stocks.”

In some parts of the market, this rally has been very aggressive. Massmart, for instance, was up as much as 50% from December, although it has come back a little.

However, the wider mid-cap index has remained relatively flat over this period. It’s here that Thokan believes the real, longerterm opportunities now lie.

“We think there is a lot of value in the mid-cap part of the market. Stocks like Clover, Rhodes Food Group, Italtile, Hudaco, and Altron are really good stories. We think that over the long term this is a basket of stocks that can unlock a lot of opportunities from an improving SA economy.”

While a stable policy environment doesn’t translate into improved earnings immediately, it encourages these kinds of companies to invest with more confidence into their local businesses.

“Subsequent to this investment we start to see improvements in earnings,” says Thokan. “Then we will see the market reaction and share prices trending higher.”