We are still investing in uncertain times
You have to love the financial media… Every so often they coin a phrase to make light of a looming crisis. This morning’s “it would be funny if it was not so serious” word popped up on courtesy Reuters and fin24.co.za in their story titled: Stocks up as G
Although global stock markets rallied on the “good” news the Euro-zone economic crisis is far from over… Greece is now in its fifth consecutive year of recession and banks in both Spain and Italy remain under pressure. Despite the obvious need for belt tightening, governments in these countries are finding it impossible to implement austerity measures without groundswells of resistance. The reality is that the Greek people are suffering the consequence of years of diminishing labour productivity. As Johann Rupert, CEO of global luxury goods manufacturer Richemont, recently observed [MBendi Newsletter, 25 May 2012]: “You cannot work 35 hours a week, want to retire by 50 with full pension, have eight weeks of holiday [per annum] and expect to be bailed out by people who work their butts off, either in northern Europe or in China.” What does the ongoing Euro-zone debacle mean for South African investors?
Too many “potholes” for comfort
The answer to this question depends on how much of an impact the Euro-zone crisis has on the global economy. In their Q1 2012 Economic Update titled Navigating the Vastness of Uncertainty, Sanlam Private Investments (SPI) singled out four “potholes” to economic recovery. In their second economic update for 2012 SPI director, Alwyn van der Merwe, said each of these threats remained relevant. Aside from Euro-zone uncertainty investors also have to contend with geopolitical tensions in the Middle East, a slower than expected recovery in the United States and a significant contraction (whether by way of a “hard” or “soft” landing) in China’s GDP. “But the situation that will spook the market most [over the coming months] will be Europe,” he said. “Uncertainty over unity in the Euro-zone coupled with the regional economic slowdown has had a major impact on the performance of risky assets of late.”
Under the current “slow growth” scenario investors will have to modify their return expectations and carefully consider the financial health of companies before they commit their capital. “There are pockets of value in the domestic resources, small and mid-cap sectors, but you really have to dig to find it,” observed Van der Merwe. “Offshore is where the real value lies!” He added that a successful portfolio would depend heavily on stock picking skills within sectors. By way of illustration he referred journalists to the five opportunities SPI had flagged early in 2012. Of the five “picks” four had outperformed the market (two by almost 30%) and one had failed dismally.
Constructing portfolios for uncertain times
The laggard among the five was resources giant Anglo American Plc, which returned 20% less than the market over the period. “You have to be very careful which commodities you play in,” he warned, adding that the “across the board” rising commodity price trend – in place since 2000 – no longer held. Does this mean that commodities shares have become value traps? It could if you favoured companies with heavy dependence on iron ore, for example. Van der Merwe noted that the likes of Kumba Iron Ore and Anglo American carried attractive valuations due to the high prices earned on prior year iron ore production, but there was a risk of a steep decline in base metals prices if the economic outlook worsened. Those with a stomach for risk might find opportunities in the platinum sector, where return on equity is now lower than the cost of capital… “But given the risks that we face it would be imprudent to be heavy buyers in resources right now,” he concluded.
The group’s star performers include second-tier bank Capitec Limited and media giant Naspers. The former outperformed the market by almost 25%. “We know it is hard to justify Capitec’s inclusion on a valuation basis, but operationally the company is doing well. It is in the section of the credit market that is growing the fastest, and has a simple branch-based model to leverage this trend,” he said. Naspers performed even better, trouncing the All Share index by some 30%! British American Tobacco (+4%) and MTN performed slightly better than the market.
Editor’s thoughts: Among the messages we took from Sanlam Private Investments’ 7 June 2012 media presentation was the value of portfolio diversification. An investor who randomly bought just one of the five shares discussed would be sitting on a return of between -20% and 30%! By investing in a portfolio comprising all of the shares (and more) the investor outperforms the market with lower volatility / risk. Would you agree that the diversification on offer in today’s equity unit trusts makes more sense to investors than directly trading in listed shares? Add your comment below, or send it to gareth@fanews.co.za
