Is a new Gilded Age upon us? | Fin24
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Is a new Gilded Age upon us?

Mar 12 2020 09:20
Maarten Mittner

In a force majeure event, such as the present coronavirus epidemic spreading worldwide, blind selling or buying in the market becomes the norm. 

But under more normal circumstances, when to buy and when to sell equities are important considerations based on calculated assessments.

There is a saying that a share can climb much higher than hoped. Or linger at the bottom far longer than feared.

A selling spree represents a correction, with buying opportunities. Some shares are usually overvalued. But many are also undervalued. 

Local property and retail shares could have been considered overvalued before the present dip. 

But now they almost certainly are in undervalued territory.Platinum and gold shares have risen to overvalued levels, delivering growth of 200% over the past year in some respects, benefitting from higher commodity prices and a weaker rand. 

The same for the major global tech stocks, growing on average 50% from a year ago before the slump, just when it was thought that a correction then could have been imminent.

Inherent value is the real value of a company, usually linked to its net asset value. 

But companies rarely trade at these levels. Therefore, the price at which to buy or exit a share is fraught with difficulty and danger. 

But it is immensely important for future returns.The safest rule is to reduce exposure to overvalued shares and to increase investments in undervalued counters. 

But following this approach has also proven to not be a long-lasting solution in ensuring optimal returns, when exiting too early or sticking with undervalued shares for too long. 

If an average investor sells under the present trading conditions, it could be a worse decision than buying at the top. Sitting tight has more benefits than exiting at the bottom, as Warren Buffett has proved. 

And immense wealth has been made from junk bonds by others.Sibanye-Stillwater, with shares hitting R50 recently, is clearly overvalued. But it can still go higher. 

Sasol, losing four-fifths of its market value in a year, is obviously undervalued, but could go even lower. Is there more upside potential in Sibanye-Stillwater or in Sasol?

Difficult to say. But fundamental factors, such as high debt and lower oil prices, could hold Sasol back over the short term more than Sibanye-Stillwater, benefitting from a surging platinum and gold price.

Often a winner is not spotted.Capitec has surged way above its real value, now trading at a price-to-earnings (P/E) ratio of around 20 and a share price of over R1 000. 

Very few mainstream general equity funds had any exposure to Capitec through the years, selling out in favour of the mainstream banks. 

But a recovery at average deflated P/E levels of below 10 for the traditional big four local banks – FirstRand, Standard Bank, Absa or Nedbank – remains elusive.

Internally, debt levels and customer growth as well as prudent takeovers and development spending drive the value of a company. 

Externally, “barriers to entry” to the market is a handy indicator of likely sustainable growth as new entrants to the same markets are unlikely to present a threat.  

Capitec’s growth was largely on the back of the subdued performances of the big four, as well as the likelihood of lesser competition from any new entrant into the sector due to huge start-up costs. 

The authorities also made it clear that mergers of existing banks will not happen, thereby boosting organic growth at Capitec. 

Globally, the large, trillion-dollar market cap tech giants – Alphabet, Apple, Amazon and Microsoft – have all delivered strong returns by operating in “captive markets” with little competition and spinning out large amounts of cash. 

Riding on the crest of the fourth industrial revolution, there are apparently still many opportunities to be harnessed in the rising digital world.

Already reminiscent of the Gilded Age and the robber barons of the early 1900s in the US, these companies are forecast to double growth in the next decade, further crowding out established players.

It seems unlikely that history will repeat itself as then, when the wings of the robber barons were clipped by the Progressive Era administration of president Theodore Roosevelt. 

This led to the eventual growth of the American middle class, boosting equity markets. Now the prospects for the middle and lower-middle classes are under threat due to the price and productivity dominance of the tech giants, with average income growth stagnant over the past decade in the US. 

And inequality rising exponentially.Barring a Bernie Sanders presidency, big tech stocks are unlikely to lose their allure. 

Cash flow levels remain positive. Proposed digital taxation and steps from the authorities to curb excessive market dominance have been notoriously ineffective up to now.

But do not discard the potential of undervalued shares. The rewards could be greater. Ask gold and platinum investors. 

Maarten Mittner is a freelance financial journalist and a markets expert.

This article originally appeared in the 19 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

globally  |  tech giants  |  cash flow levels

19 March issue
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