Welcome readers to my first column of the year. In this I will take a look at certain stock picks that I think will outperform the market in 2016. Last year was a rough year for the JSE as it returned a meagre 5%. To add insult to injury, the rand depreciated over 25% in the year making the US dollar return on the JSE a huge negative.
As I begin to write this, Bloomberg has indicated that the US dollar is currently at R16.30 whilst the Euro and pound are trading at 17.86 and 23.60, respectively. It is fair to say that the rand is officially the whipping boy of the world. We are at the mercy of global events. North Korea tests an apparent H-Bomb, the rand depreciates. China’s circuit breakers kick in at a 7% drop and halt trading, the rand depreciates. Iran and Saudi Arabia have a spat and the rand depreciates. While I may be a bit dramatic, it’s not too far from the truth. Coupled with rising interest rates in the US, the rand is getting hammered. The beloved ZAR is one of the worst performing currencies over the last 18 months. But the world is not totally to blame. To quote a favourite movie of mine, “if you’re looking for the guilty, you need only look into a mirror”. The Nene-gate scandal, SAA trading currently in insolvent status and our apparent appetite and need for nuclear energy have all added to this. Our lack of leadership and poor growth outlook has hit us hard. As a side note, that the rand is now worse than when Nene got fired, previously peaking at about 16.05 a dollar. So much for Pravin to the rescue… some market commentators have suggested the rand hitting 18, 19 and even 20 to the dollar.
Which stocks to invest in then? Let’s get into it.
1. DBX trackers
DBX-trackers are number one on my list given the currency risk facing South Africa. This is more a hedged bet. Overseas markets also seem to be taking a hit. But the daily decrease in the overseas markets have not been as aggressive as our daily decrease in the rand. Any positive return from these markets would yield very attractive returns come year end. I would focus on the DBX trackers for the US and the FTSE (London) rather than the world index. The funds are easy to get into and also provide instant access to foreign currency. For the less risk adverse investor I would recommend the option below.
2. Absa currency ETNs
Absa ETNs (Exchange Traded Notes) allow an investor access to currencies without physically holding them. Absa offers ETNs in dollars, Euros and pounds. There is usually a notable spread between bid and offer, as expected. To put it simply, it’s quick access to foreign currency without the administration of physically holding or buying it.
3. Brait se
I thank one of my colleagues for this great idea. Brait has four investments, namely: New Look (a fashion brand in the UK), Virgin Active (SA and UK), Premier Foods (mainly SA), and Iceland Foods (UK based). I like this share due to its mixed revenue base. I particularly like the food based revenue which spreads from staple foods such as Blue Ribbon bread and Iwisa maize meal to frozen pre-cooked meals in the UK. Other investments include Consol glass and DGB (supplier of alcohol products such as Bacardi). Earnings from the UK will most likely boost the share to further all-time highs.
In true risk taking ways, I’ve decided to call a buy on Sasol. We can thank our lucky stars that oil is currently at $30 a barrel, it could easily double from its record low price and we will be looking at (potentially) R25 a litre of petrol. Sasol has been engulfed in the perfect storm around the oil price. This won’t always be the case and in 12 to 18 months we could see the gradual increase in the oil price. If the OPEC countries decide to start limiting supply and if rand weakness persists there will be a notable movement in Sasol. This won’t be a major part of my hypothetical portfolio due to the current risks facing the company but I think it could be a good level to get in.
Torre is an interesting company. Management is very active in acquisitions and Stellar Capital’s interest in the company has definitely caught my attention. The company specialises in the finance and rental of heavy equipment. Torre has managed to position itself successfully in various African countries. Revenue is generated, once again in foreign currency. Torre has a strong balance sheet which allows it to take advantage of any potential opportunities. The share price has taken a hit of late and I think this presents a good buying opportunity.
6. Investec Plc
Investec Plc, is the London based operations of Investec bank. Investec has increased its presence in the UK to historically high levels. All you have to do is watch the England cricket team to realise how entrenched Investec really is in the high end of the UK market. Whilst the UK and Euro nations have been slow to increase interest rates (due to slow growth) it is only a matter of time until we start hearing murmurs of a potential increase. This will bode well for Investec.
Last year I wrote an article in August explaining the ways and means of Bitcoin (Bitcoin article). Bitcoin has started seeing a bit more interest and we have seen the Bitcoin price move from $239 in August 2015 to $449 today. Another massive punt. The reason for this is to incorporate some (albeit insane) risk. I have a feeling the popularity and acceptance is slowly starting to catch and I think it might be financial prudence to actually own one of these in case it does taking over the world one day.
Overall chaos in the market usually presents good buying opportunities. I think we are in for a tough 18-24 months, especially around the currency. That being said, I also believe that rand is massively oversold. The eternal optimist in me would like to believe that one day the rand will recover to sustainable levels. Calling the bottom is impossible though. This year the theme will be capital preservation with muted gains. Below is my table of hypothetical purchases made on my stock picks (R100 000), we will re-evaluate in June and December. Best of luck for the year ahead… we will all need it!