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What to watch in the markets this year

Jan 11 2018 14:44
Schalk Louw
   

I think most of you will agree that 2017 can definitely be described as a roller-coaster year.

I usually sum up the year’s events in my last article for each year (A-Z) and although it doesn’t necessarily take me that long to compile my list, assembling my article for 2017’s A-Z was extremely difficult.

But why? Well, simply because our local investment environment in particular changed almost on a daily basis.

I just became comfortable with the idea of allocating “Z” to Zuma (like I’ve done almost every year for the past decade) when Zimbabwe kicked Robert Mugabe off the president’s chair.

The South African rand was an easy choice for “S” until the whole Steinhoff saga happened.

Let’s not even get started on “B” for bitcoin. Every time I wrote down the price per bitcoin, it literally either climbed by 20% or fell by 20% 10 minutes later.

The FTSE/JSE All Share Index managed to grow by 21% in 2017, which looks like a fantastic year on paper. When we dig a little deeper, however, it becomes clear that the bulk of this growth was driven solely by Naspers*.

Further, only 49% of the Top40 shares listed on the JSE managed to outperform the JSE and even more disturbing is the fact that 21% of these shares still showed negative growth for 2017. 

Now the question is whether this will turn out like the story of the tortoise and the hare? Will the “hare” be so tired from its performance in 2017 that it may just give the “tortoise” an opportunity to catch up in 2018, or are both of them still benched with injuries?

In my opinion, I feel that there is still value in our market and although I will definitely be cautious of certain “hares”, I believe that there are still good investment opportunities available. Investors can look out for the following possible investment themes this year:

The year when Z for Zuma is replaced by ZAR (South African rand)

The Zuma club definitely took a massive knock when Cyril Ramaphosa was chosen as the new ANC president in December, leading to one of the rand’s best months in years.

After a roller-coaster year, the rand managed to strengthen by 10.35% in December 2017 alone against the dollar. Now we have to wonder whether Jacob Zuma will finish his term as president, or whether he will be relieved of his duties (or resign) before his term runs out. 

The general consensus is that if he does end his term early, the rand could continue on its current path and we may even see it breaking the R12/dollar mark, which is something we last experienced in May 2015.

If this happens, companies such as PSG Group, Standard Bank, WBHO and Woolworths may benefit from a stronger rand-environment.   

The value tortoise may get another chance against the growth hare

Since the end of the value cycle in 2011, the trend moved in only one direction, and although we experienced a slight recovery in returns in 2016, growth shares pretty much set the pace for both local and international shares.

Since then, we have seen how growth shares relative to value shares (MSCI World Growth Index vs MSCI Value Index) are starting to trade at the same levels as shares during the dot-com era in the late 1990s, and one has to wonder whether 2018 will be the year when value shares will reclaim their rights.

If so, I personally feel that there is still good value to be found in some resource stocks, making African Rainbow Minerals and Anglo American good options to consider in 2018.

The possible recovery of small-cap companies

It isn’t only value shares that have lost their shine over the past few years, but smaller companies listed on the JSE have also dulled.

I do think that these companies carry more risk than more established large-cap companies, and events such as the Steinhoff situation will definitely make investors more sensitive to risk, but the truth is that there are still many good, healthy smaller companies out there. 

The big international investment company, Credit Suisse, feels the same and published the following statement in their 2018 investment report: “Our preference is for exposure to EM [emerging-market] small caps.

The EM rally in 2017 was mainly driven by large caps, and we expect small caps to catch up as fundamentals stay solid.” Smaller companies that appear to be fundamentally solid are Afrimat and Hudaco. 

Whatever your preferences are, the fact remains that 2018 is running ahead full steam and it promises to be a very interesting year at the very least. Wishing all investors a prosperous and successful year! 

*finweek is a publication of Media24, a subsidiary of Naspers.

Schalk Louw is a portfolio manager at PSG Wealth.

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