This article was first published in the first-quarter 2014 edition of Personal Finance magazine.
Personal Finance readers have become accustomed to seeing this “stock-pick” column at the beginning of each year. As always, I remind you that these stock picks are based only on my view of the market; they do not reflect any consensus of opinion. So please view them in that light.
Of course, you do not generally invest for only one year, so the returns are meaningless taken in isolation, but they might provide you with food for thought for your investment portfolio. Bear in mind that my selection of shares is not tailor-made for you and does not take into account your risk profile or investment objectives. I recommend that you take professional advice before acting on any of these “picks”; the caveat as usual is “buyer beware”.
Because of the constraints of publishing a quarterly magazine, we cannot use the percentage returns over the whole calendar year, so the returns given are from January 2 to November 20, 2013.
I was very interested to read a research report from one of my Investec colleagues, Chris Holdsworth, in October that gave me the confidence to stick with equities in 2014 despite my fears that the markets are too high. He points out that, “despite tepid gross domestic product (GDP) growth and the persistent current account deficit”, the South African equity market has performed particularly well over time. Since 1965, the FTSE/JSE All Share Index (Alsi) has out-performed the United States’s Standard & Poor’s 500 by three percent a year in rands and 1.8 percent in dollars.
In his well-researched and well-argued work, Holdsworth identifies a new sector of exclusively South African industrials that invest and operate in South Africa, make their money from the local economy and are not particularly sensitive to domestic long bond yields, which means that they are not greatly affected by interest rates. Ten large companies were identified: AVI, Barloworld, Bidvest, Imperial, Life Healthcare, Nampak, Shoprite, Spar, Tiger Brands and Vodacom.
Holdsworth believes that South African long bond yields will rise in tandem with those of the US, and that South African industrials have enormous scope for improving their capital efficiency. His expectation for the next two years is stable commodity prices and a less volatile rand. This does seem counter-intuitive, and it certainly goes against many of the research reports in circulation, but it is based on solid research. If we all stuck to the herd mentality of investing, we would never out-perform.
South Africa faces many challenges in the year ahead. GDP growth has been revised down to 2.8 percent; infrastructure development and services will have to be the drivers of domestic growth; industrial relations need to stabilise and improve; stronger exports are needed; low employment creation must continue to be addressed; the current account deficit remains stubbornly high; power generation problems are a constraint on growth; the general elections will involve much rhetoric; and relations between government and business could be better.
The stock markets were kind to us over the period under review (January 2 to November 20, 2013), producing positive returns. This can probably be explained largely by the continuation of the quantitative easing (QE) programme in the US and the introduction of a QE programme in Japan.
Japan led the way, with a massive rise of 45 percent in the Nikkei 225 Index, due primarily to the economy winning the currency and QE battle (but not yet the war) of 2013. The S&P 500 was in second place, registering a healthy gain of 22 percent. Europe was led by Germany, with its Dax 30 up a robust 18 percent, while France’s CAC 40 gained a respectable 14 percent and the United Kingdom’s FTSE 100 a subdued 11 percent. The Alsi was up 13 percent, and the Australia All Ordinaries Index had gain of 12 percent.
My South African stock-pick portfolio for 2013 returned a solid and pleasing 18.2 percent, although this masks a contrast between some fantastic and other rather pedestrian performances. It turned out to have been the right move to reduce the mining component last year by dropping Anglogold Ashanti, Anglo American and Anglo American Platinum, while the retained BHP Billiton grew by only three percent. The other laggards were Tiger Brands (down eight percent), Vodacom (two percent) and Standard Bank (four percent). The star performers were Sasol (41 percent), Spur (38 percent), SAB Miller (32 percent) and Mediclinic (31 percent). British American Tobacco (BAT) held its head high for the umpteenth time, with a return of 28 percent and great dividends. MTN disappointed with 12 percent, having got off to a promising start, like competitor Vodacom.
My JSE-listed portfolio for 2014 is: Bidvest, BAT, Life Healthcare, Nampak, Remgro, SAB Miller, Sasol, Spar, Spur, and Vodacom. The new additions are Bidvest, Life Healthcare, Nampak, Remgro and Spar. The stocks that have been replaced are BHP Billiton, Mediclinic, Tiger Brands, and Standard Bank. That leaves me with Sasol as the single resource share.
Moving on to offshore markets, they are probably in the best shape since the 2007/8 financial crisis. The growth outlook is improving in the US, Europe and Japan, partly due to the postponement of QE tapering in the US and the success of QE in Japan.
A decline in geopolitical tensions is holding energy prices at lower levels, and commodity prices remain flat. This means that the expectation is for inflation internationally to remain subdued. The Japanese economy will benefit from the weaker yen, which will result in rising exports, investment, job creation and wage increases. And it won’t be long before the 2020 Tokyo Olympics gives economic activity a substantial boost. All things considered, it looks as though the world will continue to grow slowly in 2014, with gradually improving economic fundamentals.
The offshore portfolio gave incredible performance in both rand terms (47.4 percent) and in the local currencies (29.2 percent). I am focusing on the rand return, because most of us invested our “mighty” and hard-earned rands (see link, below, to the table for the details). Associated British Food and Vodafone led the charge, returning in excess of 70 percent, followed by Roche (65 percent), Toyota (64 percent), Imperial Tobacco (49 percent), GlaxoSmithKline (43 percent), and Park 24 (41 percent), while Coca-Cola (27 percent), HSBC (24 percent) and Royal Dutch Shell (17 percent) brought up the rear.
I have decided to leave the offshore portfolio unchanged, partly because the performance has been very good, which surprised me, but also because the outlook remains positive and it seems silly to fix something that isn’t broken.
I must disclose that I hold shares in my personal capacity in some of the companies (both local and offshore) discussed in this column.
* David Sylvester is a stockbroker with Investec Wealth and Investment.