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The GDP number for the first quarter of 2016 released by Stats SA last week was a shocker. The quarter-on-quarter number was negative 1.2% while year-on-year was negative 0.2%.
The year-on-year figure is what we should pay attention to – if we get another negative number for the second quarter, we will officially be in a recession.
The biggest hit to the GDP number was mining. That is no surprise coming in the week that the PwC’s Mine report was published, showing that the 40 largest mining companies in the world had had their worst year ever.
The question I want to answer this week is how you should invest in low or negative GDP growth conditions, regardless of whether we hit a recession or not.
The issue of a recession is a great headline grabber, but even if we manage a positive GDP number for the second quarter, the truth is that South Africa is not growing nearly enough and that’s hurting certain sectors of the economy.
The point is your investment portfolio should already pretty much be positioned for low to negative GDP growth. Sure, the number released last week was a shocker but even the most optimistic expectations were barely touching 1% growth.
Investing is about the long term and we need to make sure our portfolios are positioned to ride out the bumps along the way.
Now sure, recessions and low GDP growth are not going to be with us forever, but we’ve already been here for a few years and almost certainly have a few more years to go.
This is the theme I have been talking about when suggesting that we should be very selective when investing in ?SA Inc. stocks.
Scrutinising SA Inc.
The good news is that if you’re buying a general South African exchange-traded fund (ETF) you’ve got fairly low exposure to SA Inc. as around 75% of the Top40 stocks revenues come from beyond our borders.
Delving into the different sectors, financials continue to concern me. Our local banks are very cheap by pretty much any valuation methodology.
But recession puts more pressure on them as consumers get squeezed further. More loans start turning bad, corporates are not expanding or borrowing and their incomes gets hit as bad debts move higher.
Small-cap stocks are going to be one of the hardest hit spaces. A small company likely only has one or two revenue streams and if they are focused on the local market it will be very tough.
After the 2008 crisis, it was unsurprisingly the small caps that suffered the most – the majority of business rescue plans had to be implemented in this space.
The exceptions are companies with a lot of offshore earnings or businesses with solid moats. Metrofile* is one of those with a strong moat – corporates have to continue storing files and while they may have fewer files to store due to weakening profits, many are still storing older documents from previous years.
With regard to the large stocks, it is important to focus on companies with strong offshore earnings and we have a lot of those.
Consumer stocks should be suffering but we’re seeing them doing better than expected.
That’s more about excellent management rather than a robust consumer, so make sure you own the best of the best.
The real issue here is that your portfolio should already be positioned for the low growth locally and if (or when) SA gets downgraded, you’ll be ready for that. You do not want to be 100% non-SA Inc.
because our economy will start picking up again one day, but you do want to be positioned for the current lengthy period of local economic weakness.
* The writer owns shares in Metrofile.
This article originally appeared in the 23 June 2016 edition of finweek. Buy and download the magazine here.
