cover story investment
benefitted the index’s platinum and diversified
mining stocks. The rally in platinum, driven by vehicle
manufacturers increasing the metal’s loading in new
production after the diesel emission scandal, led to “tight
supply and demand dynamics”, says Van den Berg.
Current platinum members of the Top 40 Index, namely
Anglo American Platinum, Impala Platinum and Sibanye-
Stillwater, saw their share prices rise by 105.9%, 192.4%
and 135.7% respectively since the beginning of the year.
Sibanye wasn’t even included in the index five years ago.
Non-resources companies in the index with the bulk
of their revenue exposed to the SA economy will have
a harder time seeing their share prices rise and beating
inflation.
“The outlook is mixed at best, despite attractive
valuations on some of these Top 40 shares, especially
those exposed to the SA economy that have been
impacted by negative sentiment,” says Absa’s Koranteng.
A boost to the Top 40 depends on both international
and domestic improvements. Resolving and stabilising
issues that are currently impacting the global geopolitical
outlook, especially the US-China
trade dispute and the UK’s exit
from the EU, is an important step
to improving investor confidence,
says Koranteng.
Locally, consumers need
confidence to get them spending
and that will be attained through
economic growth, and subsequently
real wage growth, according to
Investec’s Van den Berg.
Asburton’s Els shares this
sentiment. “There is a lot of cash in
money market funds which needs a place to be invested
in,” he says. Government’s reform agenda, focusing on
issues ranging from attracting skilled workers, lessening
the red-tape burden for small businesses, luring more
tourists, to turning Eskom around, needs to get off the
ground, according to him.
“The market must believe we want to do something,”
says Els.
Shares that would benefit from a resurgence in local
consumer sentiment include most retailers. The index’s
consumer-facing shares have been sold off harshly over
the past couple of months.
Shoprite, on basic valuations using its estimated
dividend yield and price-to-earnings ratio (P/E), seems
slightly oversold. Its estimated dividend yield for the
2021 fiscal year is 2.81% compared to its actual yield of
2.83% for 2019, data from EquityRT shows. The share’s
estimated P/E is 16.26, with an expected 8.3% drop in
per-share earnings for the next financial year.
Mr Price Group is trading at an estimated P/E of
11.96 and dividend yield of 5.66% for its 2020 FY.
Food producer Tiger Brands is trading at similar,
relatively cheap valuations with its estimated
P/E of 14.7 and dividend yield of 4.67% in 2020.
Absa’s Koranteng says that for the Top 40
Index to show improvement in future, share price
appreciation may be driven “by investors recognising
that some of these Top 40 shares are considered
relatively cheap when compared to their US stock
market or developed market counterparts”.
A boost in emerging market sentiment, driven by
world economic growth, should support share prices of
local rand-hedge stocks such as Richemont. The share
is trading at a historic P/E of 13.73 and an estimated
P/E of 19.88, according to EquityRT data. This is despite
estimated earnings growth of 23.29% per share during
its 2020 fiscal year. The company went to great lengths
to streamline inventory levels, launch new product lines
and enter the online market with luxury products from
its “Maisons”.
Another stock that would benefit
from an improved emerging-market
environment is BAT. The company,
which has a large exposure to developing
economies, saw a share price decline of
21% over the past year. Its estimated P/E
is 9.2 with a forecast dividend yield of
7.04% for its current fiscal year.
As many of South Africa’s largest
stocks are exposed to emerging markets
abroad, or other developing nations on
the continent, Els’s observation that
these nations generally benefit from
strong global economic growth should dictate views on
the Top 40 shares.
Big rand hedges are exposed to markets across the
globe, whereas other local players, especially financial
and retail stocks, operate in several countries across the
continent. The linkages between the largest shares and
the world economy is an important consideration when
deciding to invest.
“Lastly, the outlook is particularly dependent on global
markets, given the high level of correlation between
the performance of Top 40 stocks and the major global
markets,” says Koranteng. ■
[email protected]*The FTSE/JSE Top 40 index (J200) has a fixed number of 40 constituents.
However, due to the dual-listed structure of Investec Ltd and Investec Plc, the
index has 41 instruments. Previously, Mondi had a similar dual-listed structure. The
Investec instruments are weighted separately in the index, but for ranking purposes
their market caps are aggregated to determine the position in the index universe.
**finweek is a publication of Media24, a subsidiary of Naspers.“People have seen
too many corporate
scandals,” says Van den
Berg. “Investors are
asking: Why should I
bear with this?”
@finweek finweek finweekmagazine finweek^ 24 October 2019^45