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Are you on the right track with shares?

I heard a wonderful expression recently: it doesn’t help for you to only be on the right track, because if you stay there, you will still get hit by a train.

I think most will agree that it has been high tide on the market these past few months. They also say that all boats will float when the tide is high. 

What the train track and the boats have in common, is the fact that it’s always good to be on the right track, or in a boat during high tide, but things become a little more complicated when, as we have often seen in 2017, the boat you’re in doesn’t want to float as well as it should. 

Up until the writing of this article (15 November), the FTSE/JSE All Share Index (JSE) was already up by 21% for 2017. At first glance, you’d think that it was high tide, which is good news, right? Not so much. Of the total of 21% growth, Naspers*, which grew by 79%, makes up 16.5% of the total of 21% (nearly 80% of the total growth).
 
What makes this more interesting, is when you see a stock exchange that’s up by 21%, you’d think that things are generally quite positive. Again, you’d be on the wrong track, because out of all the shares listed on the JSE, only about half (56%) find themselves in a positive environment for 2017 so far.

What many investors want to know now is what they should do. Quite a few investment companies, including PSG, have pointed out the possible risks associated with these figures on the stock exchange over the past few months.
 
Please note that I am not saying that there is no more value to be found in our stock exchange. I am saying that last year’s winners won’t necessarily be next year’s winners, and that the time has come for investors to take another good look at their investment portfolios.

Investors who feel too uncomfortable in current market conditions can always take a leaf out of Warren Buffett’s book. He works according to a very strict strategy through which he only buys when he sees value. When he doesn’t see value, he stays put in cash.
 
My strategy is somewhat different. I will always recommend that investors buy when they see value, but I also recommend that they focus more on lower beta shares.
 
I have identified 10 shares, which according to Thomson Reuters’ consensus forecasts for the next 12 months (these forecasts were compiled by top analysts), will still be able to offer investors good exposure to the JSE. They are:

• Anglo American
• BHP
• Hudaco
• Investec PLC
• Mondi
• Reinet
• Remgro
• RMI
• Tongaat
• WBHO

If consensus forecasts are correct, these 10 shares should be able to provide investors with returns in the region of 12% to 13%, compared to the market’s expected growth of only 6.8%.

Over the same period, investors should be enjoying a dividend yield of around 4%, while the index should be able to deliver only around 3%.

They may not have been the most attractive shares in 2017, but they definitely offer more value at a beta rate of around 0.8% of the JSE. 

The beta identifies the potential volatility of a particular share’s returns or drop in share price compared to the volatility of the entire market or index.

In simple terms, a share with a beta of 1 will mean that for each percentage that the market moves up or down, this share should move up or down with the same percentage.

A beta of 0.8 as indicated on the shares above, therefore, means that for every 1% the market falls, these shares should only fall by 0.8%, but for every 1% that the market rises, these shares should only rise by 0.8%.

To conclude, I think the time has come for investors to grab a pen and paper and take a good look at their portfolios to determine if they still offer the best forecasts at the lowest risk.

With the selective growth that we’ve experienced over the past few years, there’s no denying that there are many risks in certain areas of our market. By focusing on value, you may just be able to stay on the right track when the tide begins to pull back.
  
*finweek is a publication of Media24, a subsidiary of Naspers.

Schalk Louw is a portfolio manager at PSG Wealth.

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