Despite a four year bull market, pundits are expecting another solid year from shares. Chris Freund of Investec Asset Management says conventional wisdom is that after four consecutive years of strong growth there should be a correction. The JSE’s 40-year history shows, on average, a negative return once in every four years. Despite this, Freund is optimistic about this year and is expecting a total return including dividends from the equity markets of 13% to 18%. “That is a very handsome real return, although, no doubt, the market will throw up its usual curve balls, and this return will not be in a straight line,” he warns.
Freund bases his optimistic views on the fact that, while valuations of companies around the world have gone up, so have their earnings. “Nowhere are the valuations stretched and it is the end of the global rate-hike cycle.”
When comparing his estimated 13% to 18% return from equities with his estimated 10% from bonds, 12% from listed property and 8% from cash, he is favouring equities.
Freund is positive on banks and retail shares, which he believes will benefit when the rate hikes come to an end. “They got hammered last year and institutions have little exposure to interest-rate sensitive shares. Once we become more comfortable with the interest rate environment they may start to stock up.”
Freund is particularly positive about the infrastructure sector. While everyone agrees that there will be a continuation of fixed capital formation, consensus is that these shares are very expensive and the growth is already in the price. But Freund believes that there is still value. “The South African institutions don’t appreciate the Aussie connections.”
Freund says Murray & Roberts and Aveng have Australian subsidiaries that are doing extremely well as Australia is experiencing the same construction boom as South Africa. Then there is Dubai, which is still building like crazy. “The offshore portion of these companies is under-appreciated,” says Freund. He also believes that Barlows offers an exciting opportunity on the back of its recent corporate restructuring. “I have a good feeling about construction. The prices keep going up but then earnings come in stronger.”
Freund will not be investing in Telkom or the life assurance companies, which he believes are not out of the woods in terms of new legislation. He says that some food companies that did well last year are likely to take a breather this year.
Most fund managers are cautious about commodity shares going forward. “Commodity shares had a phenomenal run and I don’t expect them to do particularly well,” says Freund.
Wayne McCurrie of Advantage Asset Managers argues that our mining shares are too expensive and will come under pressure because their current price is based on the assumption that the resource cycle will continue. But a weaker rand will protect the mining companies, which have strong local operations like the gold companies. Global companies such as Anglo American may fare worse.
“The main overvaluation sits in those shares that did well last year like Anglo and the platinum shares,” says McCurrie. Mark Appleton of BJM Private Client Services says that while they expect strong earnings growth from resource companies over the next 12 months, they could turn negative thereafter as commodity prices come off the boil. “The sector looks more expensive than industrials and financials, but the super cycle and rand uncertainty means some exposure here is wise,” says Appleton.
McCurrie argues that gold shares offer the better value in the resource sector but that locally there are better options, such as banks and industrials, which are offering good value. If the mining shares do take a hammering there will be a contagion affect on all South African shares, but non-resource domestic shares should fare better.
Ultimately, McCurrie’s money is on overseas equities. “As a broad view the United States share market is better value than our market. They are offering at least as good a value as our domestic non-resource shares.”