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[TOP STORY] Resources and property stocks for 2021

‘Both are on my buy list at the moment, but in very different ways’ – Chantal Marx of FNB.

SIMON BROWN: I’m chatting now to Chantal Marx, head of research FNB Wealth and Investments. Chantal, good morning, a happy new year to you. I put a tweet out last night. I was looking at some index charts. The property index ended 2020 at 15-year lows, the Resi 10 index is at 12-year highs.

It hasn’t yet got past those 2008 highs, of course. Property, resources  – [are] both of those potentially on your buying list for 2021?

CHANTAL MARX: Both are on my buy list at the moment but in very different ways. When it comes to resources, I think it’s very important to start picking your stocks, simply because some of the valuations have run ahead of themselves. You also have a situation where you’re in a place in the mining cycle where guys are probably going to start spending money pretty soon. The reason I’m saying this is because cash generation is exceptionally high. Regulatory risk is more or less the same as it was five to 10 years ago. And balance sheets are looking in pretty good nick. 

You also have an undersupply in many commodities at the moment, so they’ll have to start investing somewhere in order to replace the supply that is basically lost wherever, once you’ve taken it out of the mine and you’ve sold it on. 

So for that reason, I think you need to start looking at companies that are conservatively managed and really manage their gearing well, and aren’t looking to make any crazy moves at the moment, because I think that’s going to be probably what will shift resources towards the sell list.

SIMON BROWN: I’ve had this conversation with colleague Wayne McCurrie a number of times, where the balance sheets of those resource stocks are probably the strongest they’ve ever been, literally, in a hundred years of mining. But I take your point. The risk is now what do they do? Do they give it to shareholders? Do they go and buy some giant assets somewhere and, frankly, bring risks. Are you going to look at individuals, and do you prefer single-commodity miners or the diverse? Or is it, again, horses for courses?

CHANTAL MARX: Well, I’ve always been a big proponent of only investing in the big diversified miners. I really like BHP Billiton, I really like Anglo American. But what’s been happening in the PGM (platinum group metals) space is very, very interesting. You have a situation where the market is in a quite a significant deficit and demand continues to pick up. And, even if you have a situation where …combustible engines, which are basically the big driver for PGM demand, are replaced by EVs [electric vehicles] or hydrogen vehicles, the loads in many of those vehicles are still very high for PGMs. So you don’t have a perfect kind of situation where PGM demand just falls off of a cliff. 

We also have a situation where refining capacity at the moment is very constrained, so that should also support the price. Again, within PGMs I’ll go for quality over probably super excitement. And there I think Implats (Impala Platinum) looks particularly interesting, even though it has already run hard. And then Amplats (Anglo American Platinum), which has actually lagged, is also a very high-quality name worth watching.

SIMON BROWN: And then on the property side, this was the sector for a decade or so. It has really fallen out of favour. We saw some big moves yesterday in the property space. It’s still tough for them, but there must be some values there. But perhaps again, stock-picking – was this sort of a sector-wide?

CHANTAL MARX: This one, I actually think you need to look at an ETF, and it’s not necessarily because I think everything is going to move up. But I think you need to start spreading your risk a little bit. So, on the one hand, you have the risk of kind of the smaller, more levered companies not being able to pay dividends. And then you have the high-quality, strong balance sheets, niche players who will be able to pay dividends. But the valuations are so different. So the levered companies are very, very cheap, offering very attractive dividend deals, and the high-quality names have rerated already. 

You’ve got Growthpoint, for example, on a forward distribution yield of 6.5, 7%, which is below the long bond yield. So already that stock starts looking a little bit more expensive, but it’s much safer.

And for that reason, I think going into a property ETF is probably the best way and the least risky way to play the sector currently.

SIMON BROWN: That’s usually how I play property stocks. I’ve always just taken the property ETF as a rule. Chantal Mark, head of research at FNB Wealth and Investments, I  really appreciate your time and insights this morning.



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How long is FNB in commercial property – as much as both you and Investec were during the 2007-2008 financial crisis?

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