Introduction: Local shares and bonds currently offer good value. The longer dated 10-year bond yield is trading at 10.15% versus 9.71% in January 2022. The Price Earnings (PE) ratio of the JSE All Share index is 12x.This is the same level as in March 2020 when Covid started. One year later in March 2021 the PE ratio doubled to 24x. At the present PE ratio of 12x, the JSE is offering value. For both shares and bonds, the downside is limited – opportunities abound. Peter Armitage, Anchor Capital CEO, said in a recent presentation: “An investment in local shares and bonds is bound to deliver the best returns over the next 12 to 24 months. Domestic equities are expected to give a return of around 15%, and local bonds just more than 10%. Global equities will return only 10%, and government bonds 3%. Domestic shares are very, very cheap.” We look at attractive local shares.
Banks: Last week we wrote about the benefits of exposure to banks in times of rising interest rates. The PE ratios of our biggest banks, Nedbank (JO:NEDJ), Absa (JO:ABGJ), Investec (JO:INLJ), Standard Bank (JO:SBKJ), and First Rand (JO:FSRJ) (FNB) vary between 8.08x and 12.20x. Bank PE ratios are very low. Mike Hutchings of Reuters wrote: “Bank share prices are reminiscent of a ‘fire sale’ with several at low price-earnings ratios of six to seven times.” PE ratios move in tandem with share prices.
Commodities: While the start of monetary policy tightening in the US and war in Ukraine spurred weakness for most risk assets, commodities benefitted. Commodity prices have soared in 2022. The S&P Goldman Sachs CI (commodity index) is up 19.87% year-to-date, boosting the JSE, strengthening the Rand and improving our trade balance. Which commodity share to buy? It is now more important than ever to distinguish between specific commodities since each has its own identifiable structural driver. Identify the driver, then invest accordingly.
Platinum group metals (PGMs) stand to be negatively impacted by the decline in sales of internal combustion vehicles as they are replaced by electric vehicles for short-distance travel and hydrogen-powered vehicles for both longer distances and heavy-duty transportation needs. Analysts recommend PGM shares as a “hold.” Copper’s widespread use in electric motors and electricity conduction could see demand increase over the coming years. Reducing our dependence on fossil fuels is in fact not possible without the use of copper.
Anglo American (JO:AMSJ) is a diversified, but not too diversified, leading global mining company that we hold. Glencore (LON:GLEN) is one of the world’s largest global diversified mining companies, producing more than 60 commodities. According to Glencore, capital expenditure at major miners has not reached the levels of 2013 that led up to the downward cycle in prices of 2015. It seems that capital expenditure is trending downwards, with miners prioritising returns to shareholders through dividends and share buybacks. From a supply-side view, one could certainly argue that the current commodity cycle could be longer than past cycles. Gold? When a recession is looming, it is a good time to buy gold. Gold prices tend to increase when stock markets tank. We do not hold any gold shares as we believe the best investments when recessions loom are energy stocks (like oil) and banks. This is backed by data over 95 years from research house SSRN. We hold Sasol (JO:SOLJ) and banks.
Helium: Renergen (JO:RENJ) is a popular topic in investment circles. Renergen is an emerging producer of helium in Virginia in the Free State. Its natural gas contains one of the richest helium concentrations recorded globally. Renergen was on track to start production by mid-2021. However, by the end of July 2022, production had not yet started. Phase Two of the project will require around $900 billion to start production. Ivanhoe, a Canadian mining company listed on the Toronto Stock Exchange, bought a 4.35% stake in Renergen in March 2022, and had options to increase it to as much as 55%. The deal lapsed in July 2022. With the production time overrun and uncertainty with funding Renergen is too risky in our view.
Other Shares: “Tech continues to have a place within a balanced portfolio. Tech spending is increasingly mission-critical for businesses to grow their earnings. We believe that it would be a mistake to avoid the sector as a whole” says James Bennett of Anchor Capital. We believe that both Naspers (JO:NPNJn) and Prosus (JO:PRXJn) will perform well. Other shares we think will outperform are construction companies, Raubex (JO:RBXJ) and Afrimat (JO:AFTJ), and mobile phone operators MTN (JO:MTNJ) and Vodacom (JO:VODJ). We hold shares in Transaction Capital (JO:TCPJ), operator of three businesses: SA Taxi, WeBuyCars and Transaction Capital Risk Services. In the retail space we hold Mr Price (JO:MRPJ) and AVI (JO:AVIJ). There are more attractive shares on the JSE, like Reinet (JO:RNIJ), but we do not have space to discuss them all.
Bottom Line: As mentioned in the introduction, local shares are “very, very cheap.” Investors will be rewarded but they must be prepared for volatility. The Russia/Ukraine war, quantitative tightening (QT), high unemployment, Eskom, and corruption can be negative for markets. There is also a general election scheduled for 2024. If you are interested in investing, please contact one of our highly qualified consultants. Remember, when you invest, you are buying a day that you do not have to work.