What sectors look attractive?

Investors could be forgiven for being confused. The past six months has seen extreme volatility in the local stock market, with large intraday moves and two significant but short-lived market corrections. The All Share is currently trading within 10% of the all time high it reached last October, despite falling close to 20% late last year. The recovery in the index masks significant divergence of performance between various sectors. Is there anything out there that is offering compelling value, asks Krean Govender and David Crosoer from Glacier Research?

Much of the recovery in the stock market has been driven by resource shares, which are currently close to the levels they peaked at last October (after trading considerably higher in early March). The Financial Index is trading almost 20% off its October peak and the Industrial Index is close to 10% down. Neither of these sectors is without their risks. The financial sector remains vulnerable to continued financial write-offs in developed markets (even if SA’s exposure is limited), while the Industrial Index is sensitive to a slowing SA economy. Are there more resilient sub-sectors out there which offer value?

The Food and Drug Retailers sold off sharply in the beginning of the year, after holding up well through much of the recent market volatility. Food retailers are highly cash generative companies with little debt on their balance sheets. Cash is king in a difficult trading environment as it is a prized commodity (everyone wants it). Cash flush companies can distribute their excess cash as dividends to investors or use their cash to repurchase shares or make acquisitions to aid expansion. Although Food retailers sell products which are affected by food inflation, people have to eat and so will spend their last rands on food rather than anything else when push comes to shove.

Food Retailers are outstanding companies to own because of their non-cyclical qualities. Investors don’t often have attractive opportunities to purchase them at a discount to the market. Their recent sell off looks partly driven by foreigners who have indiscriminately dumped SA equities. This offers investors a unique opportunity to purchase companies that have consistently outperformed the All Share for over a decade.

The recent volatility has been stomach churning for investors and fund managers alike. But such turmoil often throws up profitable buying opportunities. Investors with a well thought through strategy should profit from this.