Bruce Whitfield
The Investec chief investment strategist’s favourite financial services stocks are somewhat unusual. Market commentators on Moneyweb’s Classic Business radio show this year tended to pick leading banking shares in this sector, but Piet Viljoen’s picks break that mould.
He argues that investors will be able to extract the most value from the separately listed short-term insurance subsidiaries of Old Mutual and Sanlam. His favourite financial services shares at the moment are Mutual and Federal and Santam, both of which recently published results.
“Both of them turned quite substantial underwriting losses for the first half to quite large underwriting profits for the full year, so the second half was really a good time for them.
“That’s in line with global trends, where insurance premiums or premium rates are starting to harden across the board,” says Viljoen.
That doesn’t mean you should immediately bail out of the banking stocks you may have bought at the beginning of the year, despite the prospect of a government clampdown on the amount of tax being paid by them. Viljoen says their shares are still offering fair value and are neither massively expensive nor cheap. On the downside, there is still room for some investor disappointment, when they realise that banks will be unable to keep growing their earnings at 25% a year in perpetuity. But, on the upside, he believes the tougher tax stance will affect them only slightly.
“The mooted additional tax that banks might have to pay in future will probably take a percentage point or two off the earnings going forward but we don’t think it’s a huge issue and it shouldn’t lead to market-cap losses of five to 10%.”
One-time favourite Discovery Health is still on Viljoen’s list, but he’s a little more cautious about investing in the company than he once was.
” I think a lot of upside is built into the Discovery price. I think it’s the sort of share that you probably want to own for the longer term, but don’t expect fireworks over the shorter term, whereas Santam and Mutual and Fede-ral remain very undervalued and, interestingly enough, have outperformed the all-share index over the long term by quite a handsome margin. And we think there’s more of that to come.”