Emerging markets have recently been cast in a bad light. Nervous investors are deterred by South Africa’s volatile currency ahead of US elections announcements. There are increasing concerns over the country’s debt levels and its fiscal capacity. Coupled with the less than rosy macro economic picture, SA markets aren’t all that appealing at a glance. Old Mutual Investments has taken a closer look at the local markets and found some gems, formed under the pressure of global distress and deadly disease. – Melani Nathan
Old Mutual sees too much bad news priced into S. African stocks
By Adelaide Changole
(Bloomberg) – South Africa’s weak economy and poor growth prospects have hidden the “phenomenal” potential for the shares in some locally focused companies to deliver returns for investors, according to Old Mutual Investment Group.
So-called South Africa Inc. stocks have largely missed out on the 40% rebound in Johannesburg’s benchmark index from its March lows, an underperformance that is “not sustainable,” Meryl Pick, who helps oversee OMIG’s 10 billion rand ($533 million) Investors Fund, said during a webinar Wednesday.
“There are resilient and adaptive companies that can still outperform in a weak macro,” Pick said, citing stock-specific areas of the local market that the money manager sees as attractive.
Pick pointed to South African bank valuations as an example, with lenders trading at the same price-to-book multiples they had in the 1980s, even though their businesses are much stronger with more robust balance sheets.
Here are more of Pick’s views on “South Africa Inc.” stocks:
- Aspen Pharmacare Holdings’ deal with Johnson & Johnson to manufacture the U.S. company’s Covid-19 vaccine will allow the health care firm to generate volumes at its manufacturing facilities.
- Construction companies Raubex Group and Stefanutti Stocks Holdings are also favored, given their strong balance sheets, cost-cutting measures, and are poised to benefit from government infrastructure spending.
- MTN Group and Vodacom Group have benefited from work-from-home and have cut their costs in response to a low-growth environment.
- Italtile is poised to benefit from relatively low penetration in South African market.
- Hospital operators are priced as if the current low occupancies and slow rate of elective surgery will continue indefinitely, but volumes will return. “We have seen that in the U.S., we will see that in South Africa.”
- Among retailers, Massmart Holdings Ltd. remains “exciting,” given its rationalization and reorganization.
Foschini Group’s acquisition of Jet has given the fashion retailer additional local manufacturing capacity and a new platform.
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- Shoprite Holdings’ online shopping business and restructuring of its portfolio has positioned it to emerge from the pandemic stronger than it entered it.
- Retailers should also benefit from favorable lease terms with landlords in the wake of the virus