Why now is the time to bet on the JSE
SA equities are cheaper than they’ve been in a long while after a terrible 2018. But picking the right stocks, and building a diverse portfolio, will be key to how well investors do in any recovery
So much for Ramaphoria. When Cyril Ramaphosa replaced Jacob Zuma as president in February, there was giddy expectation that he would move quickly to stop the rot in the government and fix the economy. Of course, it didn’t work out that way. Instead, the new president took his time sorting out the problems, and the economy stalled and briefly went into a recession.
The equity markets suffered. The share prices of heavyweight stocks tumbled. For the year to early December, Naspers is down 24% to R2,750, Shoprite has fallen 14% to R183 and British American Tobacco plunged 46% to R490.
Nor were these exceptions. The JSE’s all share index (Alsi) has fallen by 10.18%. The largest shares, represented by the top 40 index, have slumped 14%.
Looked at another way, 308 of the JSE’s 456 listed instruments are negative for the year so far, says Keith McLachlan, fund manager at AlphaWealth.
McLachlan says there are several factors still affecting the economy, which makes it difficult to figure out the trajectory of the market for 2019. "This is an environment that’s extremely difficult to predict."
SA has been caught in an economic hurricane. The troubles in Turkey drove sentiment against emerging markets, the struggling local economy put valuations under pressure and the possibility of a US-China trade war slammed local equities.
Worse: it’s not entirely clear how easily any of these issues will be resolved next year. McLachlan says that given the uncertainty, the best strategy for investors is to diversify their investments and not bet large on any particular sector.
If people have all their holdings in one sector, there’s a chance that that sector might miss out when there is an economic recovery. "Missing a recovery is as risky," he says.
The good news is that the JSE’s dire performance of 2018 means that some quality blue-chip shares are selling for a song right now.
McLachlan says investors should seriously consider Naspers, which has fallen in value but whose valuation is underpinned by its 31% holding in Chinese gaming and chat company Tencent.
All 14 analysts who cover Naspers rate it a "buy", with a target price of R4,308 — 50% above its current price.
Naspers shares have taken a beating in recent weeks after Chinese regulators froze approvals for new games. But things have changed quickly. An improved performance from Tencent grew Naspers’s earnings 39% to R23bn for the six months to end-September. It also has $8.7bn in the bank and is in the market to make acquisitions.
In a nutshell, SA’s largest company has shown impressive growth and has a huge pile of cash, though it has lost a quarter of its value in the past year.
There are other bargains too. Nearly 80% of the analysts who cover brewery powerhouse AB InBev rate it a "buy", after a year in which its share price has tumbled 32%, even though its earnings have remained stable. Those analysts expect a 44% upside to its current share price.
Paper company Mondi Plc is equally favoured, after a year in which its price has fallen 5.8%. Analysts expect a 42% upside on its current share price. Shoprite, a perennial favourite until this year, also seems to be worth more than the market is giving it credit for.
There are also more risky options that could provide value in the long term. Top of this list is probably MTN, which has had a nightmare year, as its share price plunged 34% due to a huge fine in Nigeria. Here, analysts expect that on average, MTN’s share price could gain 18.5% within a year.
In fact, as Old Mutual sees it, SA equity valuations have got a lot cheaper over the past year. This is clear from the forward p:e ratio of the Alsi, which is now at 12.26 — lower than its recent average.
Peter Brooke, head of MacroSolutions at Old Mutual Investment Group, says SA offers better long-term returns over the next five years than the global market. So, while SA equities are getting cheaper, equities outside SA could increase in risk as liquidity shrinks.
The story for bonds is similar. SA bonds look on track to deliver good real returns, whereas global bonds are becoming expensive.
In fact, if SA moves quickly to address issues such as land reform and the mining charter, it would create much-needed certainty in the economy, says Hywel George, director of investments Old Mutual Investment Group. "Certainty will bring confidence. Sound macro policies will bring growth."
Investors have their fingers crossed.