Tempting stock picks emerge from SA’s woes
Despite the economic gloom, there are pockets of opportunity in banks, diversified industrial companies, healthcare providers and pharmaceuticals
SA’s economy is producing a steady stream of negative headlines: recession, record unemployment and the weakest manufacturing in eight years.
Amid all this bad news, some locally traded stocks are beginning to look attractive. Investors seeking value should keep an eye on lenders, diversified industrial companies, healthcare providers and pharmaceuticals, said Feroz Basa, who helps manage about $150m as joint head of Old Mutual Investment Group’s emerging-markets unit.
"You’re finding some pockets of opportunity in banks," particularly in Barclays Africa Group, following the sell-down by Barclays, Basa said by phone from Cape Town. The stock trades at the lowest valuation among its peers, as measured by its price-to-earnings ratio and "the dividend yield is very attractive", he said. After rising 43% last year, Johannesburg’s index of banking stocks has lost 0.4% in 2017.
While Johannesburg’s main stock gauge climbed to a record high this week, the frail local economy has held back its gains compared with its peers. The index trails far behind other developing countries, rising 9% in 2017 against a 24% surge in the MSCI Emerging Market Index. South African stocks are also pricier, with members of the benchmark index trading at an average of 14.5 times future earnings against 12.8 times for their emerging-market counterparts.
"For a foreign investor looking into emerging markets, SA isn’t looking like a very attractive prospect at this point," Basa said. "However, as the growth outlook continues to suffer, pockets of market value are likely to emerge."
Policies put forward by the government have rattled investors, with mining stocks tumbling 3% on the day in June that Mineral Resources Minister Mosebenzi Zwane put forward new regulations, in the form of a new Mining Charter, for the industry. Slow-moving plans to introduce National Health Insurance (NHI) have contributed to the local healthcare sector index dropping about 9% this year.
"There are good opportunities in healthcare because of all the government issues and noise around NHI," Basa said. "South African companies have de-rated nicely."
An economy that’s in its second recession in a decade, a jobless rate of 28%, and the lowest manufacturing activity figures since 2009 are testing the optimism of foreign investors, who have been net sellers of $4.8bn of local shares this year. The Reserve Bank forecasts growth of just 0.5% this year.
"While the negative sentiment around SA is slowly starting to feed into the companies, none of these companies have de-rated to a level that would position SA as a screaming buy right now," Basa said. "A continued decline of South African market performance should create better buying opportunities."