Value window narrows, still not shut
Just over two months ago when the JSE fell more than 10% on a single day, even rookie investors could have made money with minimal expertise because bargains were to be found nearly everywhere following substantial sell-offs.
But now the all share index has recovered a lot of what it lost, although it is still hovering about 13% off its high of 57,940 in
Fund managers say the speed of the recovery is of concern and that investors should tread carefully as there could be another market correction when poor economic data and poor earnings are reported.
Even so, some of the hardest-hit sectors now languishing in the doldrums, such as retail, may yield hidden gems.
Wayne McCurrie, portfolio manager at FNB, says the stock market has "detached itself a little bit from economic reality, which is not unusual because the stock market looks two years to three years ahead. Having said that, I think the market has rallied too quickly, too soon."
Adrian Saville, CEO of Cannon Asset Managers, says investors should be circumspect in the current market.
"Two months back you could have taken a dart and thrown it at the market and you would have had a good chance of hitting something that was going to rise quite substantially. I wouldn't be taking that broad-brush approach now."
Saville says the market has to be prepared for an environment where companies' earnings are going to fall by two-thirds.
McCurrie says stocks with exposure to online gaming, such as Naspers and Prosus, which have "continued to do well", are a good prospect. For the year to date, Naspers is up more than 30% and Prosus more than 40%.
"Smartphone gaming in China is up 30% during the lockdown. They [Naspers and Prosus] are clearly the winners in all of this."
Another sector that has done surprisingly well is tobacco.
Hannes van den Berg, portfolio manager at Ninety One, says "everyone thought tobacco companies would struggle but a lot of pantry loading has happened on the tobacco side".
The tobacco ban in SA has also had a minimal effect on British American Tobacco (BAT), which is up more than 12% year to date on the JSE as it is still able to sell its products in other markets.
Van den Berg says the lockdown would have a far milder effect on BAT's earnings than on other companies, where "we have seen earnings pushed back 30%-60%".
Gold stocks, a traditional safe haven, have done well, says Van den Berg.
AngloGold Ashanti is up about 44% year to date, while for Gold Fields the rise is 49%.
Companies supplying essential products such as medical supplies may have good prospects.
Van den Berg says the share price of Aspen - which provides drugs used in the treatment of Covid-19 patients - is up nearly 13% year to date.
Shane Watkins, chief investment officer at All Weather Capital, prefers retail stocks with his top picks being Pepkor, TFG and Pick n Pay.
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GDP in 2018
"In apparel it's notable that the companies with the best operating models also have the most debt. Hopefully the robust model outweighs the debt concern."
He says TFG, which owns Foschini, has "best-in-class local management" and with its acquisition of Australian retailer RAG two years ago is one of the few South African retailers to make a success offshore. TFG is down about 55% for the year.
Watkins says some "good things" that have come out of the Covid-19 crisis include lower oil prices, which feed into lower transport costs as well as reduced interest rates.
These factors help the consumers who shop at Pepkor, who tend to be lower-income earners. "[Pepkor has also] got the benefit of R35bn-R50bn of additional government grants going to its lower-end customer base."
Watkins notes Pepkor has "R17bn of interest-bearing debt, all at variable rates. A 250-basis-point cut in interest rates is nearly R450m of interest expense saved."
He says the group's 3,000 Pep and Ackermans stores sell affordable clothing, which is not a highly discretionary purchase.
Pepkor's share price is down more than 45% over 12 months, offering an attractive buying opportunity, says Watkins.
Pick n Pay, which is down 13.2% since it released its full-year results almost two weeks ago, is another "obvious buying opportunity" having delivered "reasonable results". He says its management has been wise to defer payment of a final dividend, opting instead to pay off interest-bearing debt.
"I feel at current prices retailers are discounting a significant amount of further bad news." Watkins says lower short-term interest rates are good for retailers, but tend to compress margins for banks. Banks will also be hit by insolvencies among small and medium enterprises.
"I think the banking sector, while it looks extremely cheap, is one where the outcome is still unknown," he says. "Unforeseen negative events are always more impactful on banks."
McCurrie says the share prices of banks have been under pressure in the past two weeks with the market "obviously worried about [their] bad debt".
Year to date, banks are down about 45%.
But the stock market is a "funny animal", McCurrie says, and sometimes there is "too much bad news in a share price".
"So even though you think the sector is in trouble and you don't like the factors that are applicable to that sector, the shares might be cheap enough to buy despite all the negativity. I think banks are cheap right now."
Saville agrees that banks may be cheaper than they deserve to be, saying Nedbank and Absa are trading at half of their book values - what a balance sheet is worth after a bank has paid everyone it owes money to.
Saville says that ordinarily a bank would trade at 1.5 times its book value, implying that at current levels the sell-off in these shares may have been overdone.