Is the global economy one jot different to what it was this time last year? The three issues confronting the world in 2013 – just as in 2012 – are: the US economy, the Eurozone crisis and slowing growth in China.
South Africa, like other emerging economies that have seen sharply lower growth this year, remains hostage to the global environment, which has seen planet-wide growth slip for each of the past three years: 2010 (5%); 2011 (3,8%); 2012 (3,1%); and 2013 (projected 3,4%).
Most of these problems affect governments, and investment analysts are quick to point out that companies are doing better and in some cases are rated higher than their governments.
Subtle economic shifts have taken place during 2012 which means that – bar a Eurozone recession and looming US fiscal cliff – we’re heading for more peaceful waters than a year ago. In the US, consumers are doing better but the economy is running a deficit that is bigger than Greece’s. Though it’s not a focus at the moment, the US will have to go through a phase of austerity like that of Greece and other European countries.
Future growth levels for China are expected to be in the region of 7% – 8% rather than 11% – 12%. Brazil and India have also demonstrated rapidly cooling economies.
Paul Hansen, STANLIB Retail director, anticipates that two major trends of the past 18 months may be due for a switch. The first is falling global interest rates which can’t really fall any further; and the second is the weak resources sector on the back of falling commodity prices throughout 2012, which has probably now bottomed.
Low interest rates
Interest rates have been low for several years in developed economies but over the past 18 months key emerging markets such as China and Brazil also cut their rates. Last year, the bond market (still on a 30-year bull run) and listed properties were the beneficiaries of low interest rates but there’s no guarantee this will continue into 2013.
Hansen believes the low interest rate trend will “continue for a while” but doesn’t expect much more from either the overheating bond market or listed property, although over the shorter term because of a recent 9% correction, STANLIB is expecting a 13% return from South African listed property in the next 12 months.
“STANLIB still likes offshore listed property, partly because of rental growth and partly because of the good yields of 4% on shares,” he says.
However, investors should be wary of buying anything interest-rate or retail related: real retail sales growth is slowing. In September 2012 it slowed to 4,3% year-on-year, from 6,7% in August, the third
consecutive quarter of slowing growth since a 7,7% year-on-year peak in the final three months of 2011.
Pieter Koekemoer, head of personal investments at Coronation Fund Managers, lists the themes of the past year.
“The winning asset classes of the past year were listed property, and financial and industrial stocks. Property was the beneficiary of a very benign monetary policy, as well as the unexpected 50bps cut in the middle of the year, and the fact that property carries the promise of a growing yield, thanks to rental escalations.”
The losers were resources and commodity stocks. “Overall, the JSE ALSI increased about 25% over the last 12 months, while the financial and industrial indices leapt 40%, and the resources index was essentially flat,” says Koekemoer. Compared to the 2008 peak for most resources stocks, they are down on average 50% since then, with some as much as 70% – 80% down.
South African retailers have benefited most from the fall in commodity shares since the 2008 recession. Growth has been fuelled by foreign buyers, and since September 2008 the listed retail index has almost tripled in value. Resources on the other hand have fallen 9,6% as lower commodity prices have in some cases severely dented earnings.
Mr Price trades on a price:earnings ratio above 30. Shoprite and Woolworths are approaching that level, while Truworths and Foschini are trading in the mid to high teens.
Therefore, something to watch out for may be retail weakness and a resources index rebound, and here Hansen sees some chance for investors to make money in 2013, “particularly if the Chinese economy picks up.” Growth rates in China may still shrink but there are signs that the bottom has been reached.
Hansen adds: “Offshore markets are likely to continue their bull trend, boosted by Asian markets, which performed particularly badly in 2012, but which I expect to recover in 2013, especially the Chinese stock market.”
Koekemoer endorses this view, saying Coronation, in common with many fund managers, is at its maximum 25% offshore allowance. “Low interest rates are supporting equity prices and this is likely to remain the case at least until 2015.
In our own portfolio, we have no bonds, are underweight listed property and also underweight domestic equities. Sectors of the economy are under pressure, and the consumer boom has been primarily driven by credit extension. This means it’s hard to justify some of the current domestic p:e ratios.”
Last year’s winning shares
Tom de Lange, chief investment officer at Emperor Asset Managers, says: “Using a momentum approach, on our buying list last year were the following shares (returns for 2012 in brackets): EOH holdings (74%), Metair (59%), Woolworths (48%), BATS (46%), Coronation (22%), Life Healthcare (37%), Shoprite (37%), Mr Price (23%), AVI (34%), Tiger Brands (31%), Vodacom (19%), Cashbuild (23%), Foschini (18%), SAB Miller (19%) and Exxaro (23%). With gearing of 150%, we returned close to 40% for our clients, not too bad if you consider the JSE All Share Index returned around 14% (which incidentally is quite a normal return).
We missed out on Bell (58%), Capital & Counties (52%) and Old Mutual (32%). So where to put your money for 2013? De Lange lists this year’s potential winners as coming from three hot sectors: Consumers, Services and Food and Health.
The lagging sectors remain Platinum, Resources and Industrials. “Using the same momentum approach, on our buying list for 2013 would be: Metair, Pinnacle, Woolworths, Life Healthcare, Mr Price, Aspen, RMI Holdings, Famous Brands, Invicta, Assore, Old Mutual, AVI, Omnia, Imperial, Litha Healthcare, Cashbuild, Shoprite, Coronation, EOH, Naspers, Clicks and RMB Holdings.
There are a number of retail stocks in there, but remember the interest rate cycle won’t change any time soon, so it remains appealing under the momentum style of investing.
“Slightly further down the list but still worth considering would be PSG, Resilient, SAB Miller, Richemont, WBHO, FirstRand and City Lodge. If you have the appetite for smaller counters with higher volatility, you may also consider Ellies, Curro, Taste, Brait, Metrofile and Afrimat.
“Happy investing,” concludes De Lange.
2013 stock picks
The stock pick for 2013 by Asheen Rabilal, equity analyst at Sanlam Investment Management (SIM), is EMIRA. “Even though this stock has not been well liked in the market, SIM believes that EMIRA’s significant de-rating allows it to offer investors better potential upside than the stronger performing, and better known, larger cap property stocks.”
Invicta is selected by Olof Bergh, investment analyst at Sanlam Private Investments (SPI). “This importation and distribution business has hit SPI’s radar screen recently as it’s a high quality company, delivering consistently high returns at low levels of volatility and high levels of growth, relative to the overall market.”
Tom de Lange, chief investment officer at Emperor Asset Managers, picks the platinum sector as one to watch for 2013, though it’s already recovered 20% – 25% from its lows.
“Even though you can probably pick up resource and platinum shares now at attractive prices, it doesn’t mean that your portfolio is going to outperform the market. So for those investors who do have an appetite for these shares, buy them on the dips, exercise patience and remain underweight until they show decent momentum,” says De Lange.
His picks for the platinum sector are: Implats, Northam, Aquarius and Eastplats. For resources: Billiton, Kumba, Exxaro, Sasol and Assore.
De Lange adds: “Investors can find as many things to worry over now as this time last year. Last year, the three hot sectors were Consumers, Telecoms & IT and Food and Health. The lagging sectors were Resources, Industrials and Platinum. Property, Services and Financials were in nowhere territory.”