Post-poll cer­tainty could spell a bright year for SA Inc, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Contents -

Elec­tions hold key in 2019: cer­tainty could spell a bright year

“Con­sumer-fac­ing, in­dus­trial and bank­ing stocks should ben­e­fit most from an im­prov­ing econ­omy

Next year will be a wa­ter­shed mo­ment for the coun­try as South Africans head to the polls. The out­come will de­ter­mine the tra­jec­tory of the econ­omy and shape the type of re­turns in­vestors can ex­pect.

Galileo Cap­i­tal’s War­ren In­gram says the first half of the year will be char­ac­terised by mar­ket in­sta­bil­ity due to var­i­ous po­lit­i­cal risk fac­tors. “The elec­tions will in­flu­ence the lo­cal mar­ket and in­vestor sen­ti­ment, while Brexit and the US-China trade war will shape in­ter­na­tional mar­ket trends.”

Iain Anderson, head of in­vest­ments at Syg­nia As­set Man­age­ment, adds that while there is no clear cat­a­lyst for the dis­si­pa­tion of the many head­winds fac­ing SA — higher in­ter­est rates in the US, slow­ing do­mes­tic eco­nomic ac­tiv­ity and a de­te­ri­o­rat­ing fis­cal sit­u­a­tion — most of the risks are cycli­cal. “And cy­cles al­ways turn. As such, de­spite the weak eco­nomic en­vi­ron­ment, do­mes­tic eq­ui­ties could turn in the sec­ond half of 2019, or ear­lier, if in­vestors are pre­pared to look through the volatil­ity.”

Should the ANC se­cure a clear ma­jor­ity, In­gram be­lieves that sig­nif­i­cant op­por­tu­ni­ties will emerge. “In­vestors are look­ing for cer­tainty and most hot-but­ton pol­icy is­sues will only be re­solved af­ter the elec­tions. By se­cur­ing a 60% ma­jor­ity, the ANC will have suf­fi­cient sup­port to im­ple­ment its pro­posed poli­cies such as land re­form and state-owned en­ter­prise res­o­lu­tions, which, if done in a ra­tio­nal man­ner, will ben­e­fit the broader econ­omy."

How­ever, an un­ex­pected re­sult or a weak man­date for the party could erode in­vestor con­fi­dence and may cause the rand to weaken. Hy­wel Ge­orge, di­rec­tor of in­vest­ments at Old Mu­tual In­vest­ment Group, says: “If this hap­pens, ex­pect re­turns from the lo­cal eq­uity mar­ket to shift. If this sce­nario plays out, in­vestors should be in rand hedge-sec­tor stocks that of­fer ex­po­sure to busi­nesses with non-rand-based prof­its.”

While a tighter mar­gin of vic­tory will erode the ANC's power base, In­gram says the po­ten­tial im­pact of a neg­a­tive out­come is priced into mar­kets. “There is, how­ever, sig­nif­i­cant po­ten­tial for re­turns off the back of a pos­i­tive out­come.”

This doesn’t mean we won’t be af­fected by in­ter­na­tional shocks, warns In­gram, who says a more con­ser­va­tive ap­proach to in­ter­na­tional ex­po­sure is war­ranted based on pre­vail­ing mar­ket con­di­tions.

“In­ter­na­tional eq­uity mar­kets are ex­pen­sive and re­al­ity is kick­ing in in terms of val­u­a­tions. Ques­tions are be­ing raised about the po­ten­tial scope for fur­ther im­prove­ment in US mar­kets, which places risk to the down side. The po­ten­tial is also there for an eco­nomic shock which will re­sult in a big mar­ket drop, so in­vestors should be cau­tious.”

De­spite some lin­ger­ing po­lit­i­cal and eco­nomic risks, Galileo Cap­i­tal has a neu­tral view on Euro­pean-based eq­ui­ties as the con­ti­nent is out of in­ten­sive care. “We ex­pect the Euro­pean Cen­tral Bank to start rais­ing in­ter­est rates, which is … a good sign of eco­nomic health. How­ever, the un­cer­tainty around Brexit should make in­vestors wary of UK-based in­vest­ments and po­si­tions on the pound,” says In­gram.

Based on these fac­tors, he sug­gests a over­weighted fo­cus on emerg­ing-mar­ket eq­ui­ties with a mul­ti­year hori­zon. “Emerg­ing mar­kets had a hard 2018, but if the global econ­omy weath­ers the threats in the first half of 2019, there will be good op­por­tu­ni­ties for a strong re­cov­ery. This will de­liver strong yields from both cur­ren­cies and shares.”

Lo­cally, SA’s top five rand hedge stocks are look­ing ex­pen­sive and there­fore don’t of­fer com­men­su­rate re­ward for the as­so­ci­ated risks. “The rest of the lo­cal eq­ui­ties mar­ket is at worst fair value, if not cheap, es­pe­cially mid-sized caps and those that gen­er­ate rev­enues do­mes­ti­cally,” says In­gram. He sug­gests a bas­ket of less risky big bank and broader fi­nan­cial mar­ket stocks, which should per­form well and of­fer fair re­turns on the back of pol­icy cer­tainty from gov­ern­ment.

Ge­orge is also op­ti­mistic about SA’s fu­ture and be­lieves that clients will re­alise good re­turns from lo­cal mar­kets. “As such, do­mes­tic eq­ui­ties should form a core part of port­fo­lios in 2019. Con­sumer-fac­ing, in­dus­trial and bank­ing stocks should ben­e­fit most from an im­prov­ing econ­omy and ris­ing con­sumer sen­ti­ment.”

Chan­tal Marx, head of re­search at FNB Wealth & In­vest­ments, says value seems to be less sec­tor spe­cific and more stock spe­cific. “We see good value emerg­ing in qual­ity stocks with di­verse op­er­a­tional and geo­graphic rev­enue streams, specif­i­cally within the lo­cal mar­ket.”

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