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‘Expensive’ label dogs SA stocks as Nedbank sits on cash

Investors park their money in cash-like securities to avoid losses.

Expensive. That’s the tag plaguing South African stocks and driving investors such as Nedbank Private Wealth and Momentum Asset Management to park their money in cash-like securities to avoid losses.

The FTSE/JSE Africa All Share Index was little changed in the second quarter, losing 0.7%. Even so, estimated earnings for the gauge are near a record relative to that of the MSCI Emerging Markets Index, as the attached chart shows. By contrast, investors in the money market can earn 7.18% with a nine-month a negotiable certificate of deposit, a tradable receipt guaranteed by the issuing bank that pays back the capital and interest at the end of the term.

“We don’t expect a massive increase in earnings over this next year,” Gavin Cawse, who helps oversee and advise on the equivalent of $8.2 billion as a Cape Town-based money manager at Nedbank Private Wealth, said by phone on Tuesday, predicting an average 12% increase in South African company profits for 2015. “Earnings have to catch up or the prices have to come down.”

The attraction of cash over stocks shows how President Jacob Zuma’s administration is struggling to revive the $366 billion economy against a backdrop of power shortages, rising joblessness and an inflation rate that may soon justify the first interest-rate increase in a year. Consumer confidence that dropped to a one-year low in the first quarter and a government seeking to rein-in a budget deficit by imposing limits on state spending are also weighing on company profits.

The all-share index dropped for a third day on Tuesday, declining 0.4% to 51,806.95 by the close in Johannesburg. The measure has declined almost 6.1% since reaching a record on April 24 to trade at almost 16 times estimated earnings. The MSCI EM index gained 1.2% on the day for a forward price-earnings ratio of 11.8.

Momentum investment

Wayne McCurrie, a Pretoria-based money manager at Momentum Asset Management, said that the unit of Momentum Investments, which oversees the equivalent of $27 billion, sold shares in May and increased cash positions.

“We’re very conservative,” he said. “We don’t have to sell anymore, we’ve already done the selling so now we’re just going to sit.”

Aveng, South Africa’s biggest construction company by sales, was the largest loser in the second quarter, sliding 49% to the lowest since 1999 as full-year profit more than halved. Illovo Sugar dropped 40% to trade near a nine-year low as a drought weighed on earnings. ArcelorMittal South Africa, Africa’s No. 1 steelmaker, is down 36%, while Hulamin, the country’s biggest aluminum-product maker, has lost 28%.

Top picks

“The market overall has underperformed cash,” Cawse said. “From our side we’re quite cautious of buying in this market, and, if we’re looking, its very stock specific.”

His top picks include SABMiller, the world’s second-biggest brewer, Richemont, the world’s second-largest maker of luxury goods, Remgro, a South African investment company controlled by billionaire Johann Rupert, and Standard Bank Group, Africa’s biggest lender by assets.

“Going forward you would certainly want to see prices at better values before you want to dip into the market,” Cawse said. “We don’t see strong earnings drivers coming through.”

©2015 Bloomberg News

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