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Market commentators’ stock picks for 2015: Mohammed Nalla, head of strategic research, Nedbank Capital

‘I think US stocks may be going into bubble territory right now.’

SIKI MGABADELI: It’s 2015 so we doing our annual stock-pick session, looking at the stocks you should be watching for this year. Mohammed Nalla is with Nedbank Capital and joins us now. Mohammed, thanks so much for joining us tonight.

MOHAMMED NALLA: Thanks for having me, Siki.

SIKI MGABADELI: So 2014 – was it what you expected?

MOHAMMED NALLA: Well, I must say it ended off being one of the more difficult years of recent times. By and large I think it was, but we had the negative bit come a lot later on.
   We started off 2014 fairly negative on South African equities, but even then I expected at least single-digit positive returns. We ended up pretty much flat – in fact slightly negative for the year. And then I guess, yes, in terms of what international markets did.
   We were very bullish on US markets specifically, and that’s really been a star performer. It has rallied, gone through to record highs. What was the surprise, I guess, in terms of 2014 is perhaps the fact that we had this very strong US dollar and that has really impacted us on the rand. We did expect the rand to weaken, but perhaps not by the extent that it went. I was expecting it to top out around R11.40/dollar, thereabouts. That was my target for the year, and it went well beyond that into the tail end of last year. So thankfully I wouldn’t say we have retraced, but we are there and thereabouts, and we haven’t gone through the R12 just yet.
   And 2014, just maybe summing it up, a tough year. The positive thing I guess is that our central bank, given the decline that we’ve had in the oil price, has managed to hold off increasing interest rates – and hopefully long may that persist. Any relief for the consumers will certainly be well received. But 2015 I guess will probably prove to be as tough if not a little bit more exciting.

SIKI MGABADELI: If the oil price continues along the trend that we’ve seen, what would that mean for different sectors of the JSE in 2015?

MOHAMMED NALLA: That’s a very good question. I think first and foremost we’ve got Sasol. Sasol is a player of quite significance and you’ve seen what’s happened with that Sasol share price. In fact, it has held its own around this R400 mark. I must say once it [oil] broke through that $60 mark, there was a technical support level there. So I expected it to get through down to $60. Beyond that, this is really an extension and we are in kind of nowhere land in terms of how far this can go. Probably now the next technical support level comes around $38/barrel. So that’s significantly lower.
   The pain you are going to feel obviously will come through directly in terms of a player like Sasol, but will certainly help the consumer. So you could potentially see sectors like the financials doing OK, because you are not necessarily going to get the uptick in interest rates. It means your non-performing loans should probably not be as much of a problem. You might see some support for the consumer sectors. The industrial sectors that are generally users of energy may also do a little bit better.
   So on aggregate I think low oil prices are generally good news for the consumer, but obviously you want to steer away from anything that’s quite sensitive directly to that commodity.
   Commodities in general have really been a tough space.

SIKI MGABADELI: And, when you look at the current global situation, we’ve had some promising numbers, with economic data coming out of the United States. Europe at the moment is in a bit of a flux, because we are waiting to see what the ECB is going to do in extent of their monetary easing, and what Greece decides they are actually going to do. And of course Japan has had some wobblies in the past year.

MOHAMMED NALLA: Ja. So if we just look at those broadly speaking, the US has certainly been the bright spot. But if you look at the Q4 numbers, they’ve been a little bit patchy. So I certainly expect the Fed to hike interest rates as we go into this year, probably in the first half of this year; if not maybe just push it out into the third quarter. I don’t think the pace of those hikes or that hiking cycle is going to be very aggressive. I think that’s maybe what the market’s getting wrong right now.
   In terms of the ECB I certainly don’t believe we are going to see the eurozone disintegrate. This Greece story is obviously very topical right now, but I don’t see them letting this entire thing unravel. I think there is too much invested in the Union and I think we are going to see some sort of bond-buying QE programme come through from the ECB. It might buy them some time. They’ve got a heck of a lot of work that still needs to be done there.
   Japan, I must say, in 2014 was late to the party on the stimulus level. I expected it early in the year. It only came right at the tail end of the year. And I guess from the ECB and then again from the BoJ I would certainly be expecting a lot more stimulus as we go into 2015.

SIKI MGABADELI: So, given all of that, then, what are you going to be picking for this year. Remember, we are going to hold you to account.

MOHAMMED NALLA: Absolutely, as you should. I don’t like picking specific stocks. I’m going to cheat a little bit here. I like ETFs, because they’ll give me a nice broad exposure to the market. But specifically I am going to go with a kind of non-consensus view. It’s a little bit contrarian. I’m going to say db x-trackers on the Euro Stoxx 50, and the reason for that is I think Europe’s pricing in this negativity ad infinitum and the US is currently pricing in positivity ad infinitum. So I think US stocks may be going into bubble territory right now. The eurozone I think is pricing in this doom-and-gloom to a very severe extent and degree, so I think there is possibly some value in European stocks.
   Then I also like db x-trackers on the Nikkei as well. So these are two ETFs that will give you exposure to the Nikkei and then also give you exposure to the Euro Stoxx 50. As a South African investor you can invest in these. They are nice mechanisms to get exposure to offshore markets, even as a retail investor.

SIKI MGABADELI: And how does one invest?

MOHAMMED NALLA: Effectively you’d buy this the same way you would buy any other ETF. There are platforms like an ETF SA. I’m not sure if these specific ETFs are actually on these platforms, but if you have a normal stockbroking account, you’d be able to buy them through your normal stockbroker as well.

SIKI MGABADELI: Thanks to Mohammed Nalla. Before we chat to Viv Govender, let’s hear what David Shapiro thinks. It looks like tracker funds. It was the same thing on Monday with Chris Gilmour, and he favoured the DBX US tracker fund.

DAVID SHAPIRO: The US is fine. What the problem is, and I agree with Mohammed in terms of Euro Stoxx. Euro stocks should do very well, European stocks. Why? Because the euro has come under pressure. A lot of them are exporters, therefore their cost of production is down, and they also earn their money in dollars. They might be housed in Europe, but they actually operate globally. The problem is, what our issue is, will the euro underperform the rand? If the euro underperforms the rand, then unfortunately you’ve got to hope that the Euro Stoxx 50 goes higher than the underperformance of the euro against the rand. That’s the problem. We are valuing the euro against the rand, and that’s what you are buying in this particular…

SIKI MGABADELI: But with these sorts of tracker funds – is this the best exposure that South African investors can have to offshore?

DAVID SHAPIRO: Absolutely. There’s a wonderful choice of them, and they are good stocks. If you look what’s in the Euro Stoxx 50, if you look at those top 50 stocks, they are superb companies, companies that you would like to own. The same applies to the US stock as well, also a very good selection of companies.

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