Stocks to own in SA's
new dawn

Construction shows promise

Patrick Cairns

The recent changes to South Africa's political landscape have had a clear impact on investor sentiment. Foreign buyers have returned to the JSE, and there is far more optimism towards companies exposed to the South African economy.

Cyril Ramaphosa's election as President of the ANC, the recall of Jacob Zuma, an encouraging state of the nation address and a pragmatic budget and cabinet reshuffle have all contributed to a far more positive environment.

Cyril Ramaphosa’s election has resulted in a sense of optimism Jacob Zuma’s recall has been positive for stock momentum

Source: Bloomberg Source: Bloomberg

Roger Williams, Centaur Asset Management

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“We have experienced exciting changes in South Africa that only three months ago did not seem possible,” says Roger Williams from Centaur Asset Management. “We believe that in the medium-term growth will improve, underpinned by improved confidence and lower long-term interest rates.”

The question for investors is what this means for local stocks. Where are opportunities going to arise on the JSE?

Williams says that despite the improved sentiment, it is important in this environment to be extremely selective.

“Domestic cyclical stocks have already moved up dramatically,” he points out. “The banks are up 40% to 50% in the last three months, retailers like The Foschini Group, Truworths and Mr Price have also gained a similar quantum. So they have already discounted a rosier future.”

Positive market sentiment saw gains at The Foschini Group of 59.49% over the last 90 days.

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A consumer favourite, Truworths gained 44.25% over the last 90 days.

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A stock foreigners love, Mr Price is up 45.3% over the last 90 days.

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This is despite the fact that the reality on the ground has not really changed.

“We haven’t seen any stimulus to consumers, so they may be more confident, but they won't be feeling that much wealthier,” Williams points out. “There was no tax reduction, no interest rate declines, and we saw the VAT hike. So these share prices moves seem a bit premature.”

He therefore believes that the easy money in these sectors has already been made. One area which is interesting is the construction sector.

“If an investor is willing to take a five-year view, you should see higher economic growth and greater infrastructure investment in

South Africa,” Williams says. “An improvement in mining spend and the need for companies to spend on pollution control in light of the recently announced carbon tax could be further positives for construction spend.”

If government upholds its commitment to timeous payment of debt, this would also help the construction sector, as this has been a major concern in the past.

“Construction companies could face the trifecta jackpot of higher revenue growth, margin growth and rating increases making them outstanding performers,” Williams says. “The blue chip of the sector, WBO, will benefit, but for the more adventurous private investor there are a number of small capitalisation construction stocks which could give multiple upside, albeit with higher risk.”

“If an investor is willing to take a five-year view, you should see higher economic growth and greater infrastructure investment in South Africa.”

Roger Williams

He also believes that there may be opportunities in the listed property sector, notwithstanding the significant declines this year in the values of the Resilient group of companies.

“You have to be very selective in property because I think a lot of companies are tainted by their offshore holdings, poor leases that need to wash out and over-supply of office space in Johannesburg,” says Williams. “So, one has to be extremely cautious.

“But the lower cost of capital will benefit the sector,” he adds. “Growthpoint, for instance, has been a very good performer so far this year.”

The JSE's largest REIT is up over 10% for the year to date.

The blue chip of the sector, WBO, will benefit in the future.

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The stronger rand and the implementation of carbon taxes will hurt exporters who are carbon emitters.

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Certain sectors will however be hurt by the budget. Williams believes that a stronger rand and the implementation of carbon taxes will detrimentally impact exporters who are also major carbon emitters.

“Sasol’s equivalent carbon dioxide emissions were 69 million tonnes in 2016, so a carbon tax will be quite material to that business, even though it will be phased in,” says Williams. “Other large export-oriented carbon emitters such as Sappi, ArcelorMittal and Merafe will also be adversely affected.” ■