Opportunity to benefit from a sharp price rise in event of recovery
THE International Monetary Fund (IMF) last week awakened investors to just how deep the Great Lockdown recession is going to be: $9 trillion (R169 trillion) is expected to be wiped off the world’s economies, with global gross domestic product (GDP) expected to register -3 percent.
The outlook for South Africa is worse. It was already in a recession when it went into lockdown on March 26, and the IMF predicted -5.8 percent GDP growth this year.
Moody’s rating agency, however, predicts -2.5 percent growth compared with its previous forecast of growth of 0.4 percent.
Factors hurting the economy, apart from the impact on company earnings of a 35-day lockdown, include low commodity prices, capital outflows from emerging economies, while the weaker economies of our biggest trading partners means local exports will shrink.
China’s GDP, for instance, declined by an unprecedented 6.8 percent in the first quarter, while US jobless claims surged by another 5.2 million last week, bringing the jobless claims to more than 22 million in the four weeks of lockdowns in that country.
These figures are important for South Africa-focused shares on the JSE. South Africa has a small economy compared with developed countries, the profits and losses of South Africa focused listed companies, particularly the bigger groups, rise and fall in line with the general economy.
Most of GDP is driven by consumer buying. Over the past week, some analysis of consumer spending scenarios, post the lockdown, have begun to emerge.
What’s become clear is there is not going to be a big release of pent-up demand once the lockdown ends, as has happened in some other countries’ markets. It is a very risky environment to consider buying locally-focused shares as a first-time investor.
One of the top performing shares on Friday was Old Mutual, one of this country’s biggest financial services groups and assurers. Its share price increased 9.35 percent to R12.89, which still left it 46.3 percent off its 52-week high of R24.03.
The company has had its share of controversy over the past year following the firing of chief executive Peter Moyo, but it indicated recently that its balance sheet remained resilient. The p:e of just more than 5 appears low, if one intends to hold on to the shares for the long haul.
Sanlam was also a big mover on Friday, with its share price up 4.1 percent to R56.22. Its p:e is much higher than Old Mutual’s at around 15 due to a strong earnings record, well diversified markets and income, while it has a R760 million pandemic fund set up several years ago specifically to cater for increased mortality.
Another insurer featuring highly on the JSE on Friday was Liberty Holdings, which was up 6.9 percent to R67.40, off a relatively low p:e of 5.52.
The listed Standard Bank subsidiary has a presence in 24 countries across Africa. A 44 percent rise in normalised earnings per share to December last year was boosted by strong investment returns, which might be hard to replicate this year. If I were considering buying these shares, I would wait for a trading update.
Standard Bank’s share price also increased strongly on Friday, by 4.49 percent to R105.14. This price is well off the R167.50 it was trading at in February, ahead of the global slide in shares in March due to Covid-19. Headline earnings growth of only 1 percent last year doesn’t bode well for the 2020 financial year.
The share price was at a p:e of 5.9, which once again, seems a fair price to buy the biggest bank in Africa and hold for the longer term.
One of the interesting share price gains on Friday was the 5.2 percent rise Redefine to R2.63. It’s an actively traded share on the JSE.