The local front

Last week was a relatively quiet one amidst all the public holidays says Adrian Clayton, fund manager at PSG Fund Management.

The low volume and the volatility in the offshore markets caused tremendous fluctuation in the local market.

Since January this year, the JSE All Share Index, has been moving sideways at best. It is quite clear that the clever money has been made and it now boils down to stock picking to extend last year's performance.

One of the winners during last year was the general retail sector, which gained almost 60% for the 12 months to December. Earnings growth was supported by growing consumption expenditure on the back of falling interest rates and falling inflation.

Consumer spending is still expected to surprise on the upside, but the cycle will not continue at this rapid pace forever.

Although inflation will pick up pace during the next few months, we do not expect a sharp drop in spending or a big drop in share prices. Some degree of inflation in this sector is not a bad thing at all.

During the last two years a big question mark has been placed over the ability of retailers to maintain pricing power in an environment of falling inflation.

In many cases top line growth was saved by an improvement in volumes, rather than price increases, while the currency volatility made procurement a rather unpleasant experience.

This is likely to change during the next 12 months as inflation starts creeping back into the economy. Earnings for the next 12 months look attractive, although most of the good earnings news has been factored into share prices.

The best value currently can be found in some of the large and mid-cap financials and industrials, of which the ratings against the rest of the market have declined while the action was focused on the Resource Sector.

This anomaly is highlighted in the case of Bidvest, Standard Bank and Afrox, where the companies have established themselves as industry leaders and where earnings growth over the past ten years has outperformed that of the JSE.

Although one has to rely to some extent on mean reversion for these shares to re-rate, earnings prospects and the attractive dividend yields for these companies will inevitably result in pleasing returns for the patient investor.