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Should investors be drawing up their stock-pick fantasy wish list, even as markets continue to plunge?
The uncertainty around the Covid-19 pandemic is playing havoc with investor sentiment and recent falls — like Monday’s worst-ever intraday dive — would spook even the hardiest investor.
The JSE all share index has now lost about 30% in the year to date — a value smack that investors have probably not seen since the market ructions in the late 1980s.
At the time of writing the FM counted about 125 shares — excluding exchange traded funds (ETFs) and special situations such as Investec, which spun out its asset management arm — that were trading at 12-month lows.
It’s a frightening moment, but recalling previous market corrections, such an enormous wipeout would signal that it’s time for smart investors to start nibbling some quality stocks. But there is something disturbingly different about this correction.
FNB Wealth & Investments veteran market commentator Wayne McCurrie stresses this is not (yet) a financial crisis.
"People still have money in the bank … there’s definitely no inflation and there’s not excess debt in the system."
McCurrie, though, concedes it is difficult to tell when the market will regain traction. "It could be this week … or the next. But at some point there will be big buyers of shares."
Timing, of course, is the central issue for bargain-hunting investors.
Central banks around the world have begun flushing in liquidity, so far to little effect.
Neil Shearing, chief economist at London-based Capital Economics, says the ability of central banks and governments to "put a floor" under stock markets is limited.
"As we have noted before, history suggests that equity markets are only likely to bottom out when it becomes clear that the flow of new cases of the virus has peaked. Until this happens, we should expect stock markets to remain under pressure."
Shearing says that doesn’t mean policymakers are impotent, and they should have main objectives.
"The first is to prevent the dislocation in financial markets over the past week from developing into a severe liquidity squeeze. The second is to provide short-term assistance to those affected directly by the economic disruption caused by measures to contain the virus. And the third is to engineer a more fundamental and longer-lasting expansion of demand," he says, this last being a way to help to defuse fears of deflation.
Readers will understand that under these circumstances it’s extremely difficult to suggest shares that could rebound or offer value in the prevailing contagion.
In the past few days investors on the JSE have turned (to put it politely) irrational — which really means fundamentals are hurled out the window in a desperate bid to cash out of the market.
This scenario was ominously summed up by Greg Katzenellenbogen, a director of Sanlam Private Wealth, who noted a severe dislocation in certain ETF markets. He pointed out that a 20-year US government bond ETF had traded at a price 5% below the underlying value. "Never seen that before … can only indicate someone desperate for cash and unwinding positions at any cost. Somewhere, some fund is definitely blowing up."
Even gold — traditionally a safe haven in times of market turmoil — has failed to find traction.
This "liquidity" strategy is also evident in the cryptocurrency markets, where prices of the best-known instruments like bitcoin and ethereum were markedly weaker over the past week or two.
Platinum group metal (PGM) stocks — which were making the early running on the JSE this year — have also been smashed back violently as the Covid-19 fever spread.
The share price of Impala Platinum, poster child for the resurgent PGM sector earlier this year, has more than halved since its 12-month peak at around R170 on February 19. Similar value collapses are evident at Northam, Angloplat and Sibanye-Stillwater.
However, the real apocalyptic valuations are being seen in the broader travel and leisure sector — with particularly sharp drops after President Cyril Ramaphosa’s address on Sunday announced drastic restrictions on foreign travel into SA.
Over the past few days, the share prices of gaming giants Tsogo Sun and Sun International — both recognised as solid cash generators even in tough times — crashed by more than 30%. At the time of writing budget hotel group City Lodge had lost more than 35% in a week, and airline Comair plummeted more than 37% over roughly the same period.
So where do brave investors start to look for shares that have been oversold in the pandemic panic?
And perhaps, more importantly, what sectors should be avoided … at least for now?
Afrifocus Securities senior analyst Des Mayer, a market veteran of more than 50 years, warns sternly against dabbling in highly geared counters. "Debt is an absolute killer."
AlphaWealth portfolio manager Keith McLachlan says: "Consider the balance sheet carefully before looking at income statements. The world is likely to go into a synchronised recession, and there will be loads of earnings downgrades. Solvency first!"
The FM suggests self-isolating your portfolio from stocks in the hospitality, leisure, travel and airline sector — even if the companies have strong balance sheets. There will be a profound (short-term) impact on earnings from travel restrictions and social distancing protocols.
That said, casino group shares — like Sun International and Tsogo Sun — are worth watching.
The global economic lockdown will have a significant impact on SA’s mining stocks, particularly the PGM sector, if the motor industry stalls for a prolonged period.
With the diamond sector likely to suffer in a prolonged Covid-19 episode, those who can stomach a long-term bet might want to carefully monitor Anglo American’s share price.
A number of investment trusts might also look interesting with share prices now offering gaping discounts to last-stated intrinsic value measures.
Both Hosken Consolidated Investments and Brimstone come to mind, but whether Brait can sell assets in the current environment to cull its debt is another guess.
Bearing all the anxious isolation in mind, consider sin-stock heavyweights such as British American Tobacco and AB InBev, though it’s worth remembering that corporate activity has resulted in both these groups carrying more debt than historical norms.
The FM’s specific share picks must be viewed as part of a policy of careful accumulation, rather than a "pile-in-boots-and-all" strategy.
So here are our top 10 stocks:
RMI:
Assurance and insurance will still be a part of people’s lives and RMI offers a spread of well-regarded operations in the form of unlisted OUTsurance, MMI and Discovery, as well as offshore exposure via Hastings.
Adcock Ingram:
A solid health-care business owning household brands that generate dependable cash flows. A weak share price might even entice major shareholder Bidvest to pursue a buyout of minority shareholders.
Astral:
Poultry is likely to remain a staple in SA households. Astral is superbly managed by the cost-fixated CEO Chris Schutte, and its strong cash flows should keep the dividend taps flowing.
Prosus:
This Naspers-aligned tech giant could receive a boost from the Covid-19 outbreak, with gaming and food delivery benefiting from stay-at-home quarantines.
NewGold Debentures:
Gold was not spared in the recent sell-off. But this gold-linked instrument still provides solid defensive attributes if volatility lingers.
Zeder:
The sale of its stake in Pioneer Foods means a huge cash inflow, and a potentially big payout.
Oceana:
The export of more exotic seafood (lobster and abalone) has been severely curtailed by the Covid-19 outbreak. But Oceana’s real store of value is its Lucky Star canned pilchards brand, which is an affordable protein staple in many local households.
Vodacom:
With more employees allowed to work from home, cellular services providers are likely to score from increased data and voice usage.
Long4Life:
This "lifestyle" investment company’s shares have taken a huge smack in the past few weeks. But CEO Brian Joffe is a smart operator with plenty of cash on the balance sheet to buy back (more) shares … or seek out a well-priced "big opportunity".
Remgro:
This Stellenbosch-based investment company offers a widely diversified portfolio — including companies like RMI, RCL Foods, Distell and Mediclinic International — that should be able to shrug off a pesky virus.
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