Which shares are you invested in as South Africa enters a recession?

by , 21 September 2017
Which shares are you invested in as South Africa enters a recession?
South Africa has just officially entered a recession.

GDP figures for the first quarter of 2017 show a GDP contraction of 0.7% quarter on quarter, and it follows the fourth quarter of 2016 which saw a 0.3% contraction…

This is the first time since 2008/2009 that South Africa's entered a recession, which is defined as two quarters of negative GDP growth.

So if our economy isn't growing it must be bad for business right?

Well, in 2008's third quarter the recession basically started - up to mid-2009.

Between May 2008 and March 2009 the JSE dropped by 45%!

So clearly this isn't an event you can just ignore…

Which is why you need to ensure you recession proof your portfolio.

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As you’ll see below, Real Wealth more than doubled the returns
of the JSE between 2010 and 2017!
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The sectors that’ll struggle most in the coming 6 to 12 months
 
Looking at the GDP figures that came out there are two main sectors that attracted my attention.
 
That’s household consumption, which dropped 2.3% in the first quarter of 2017.
 
That means people are spending less at restaurants, supermarkets and other retailers.
 
The other significant figure is that of government consumption.
 
The government also cut expenditure by 1%. That’s bad news for construction companies on big projects building roads and railways for instance.
 
What’s more important is that all of this happened BEFORE the JUNK DOWNGRADE.
 
Following the junk downgrade there’s a couple of things we know happened:
  • Consumer confidence hit rock bottom levels, last seen in Apartheid. This means I expect consumer spending could be worse in the second quarter of 2017.
     
  • Government bond auctions have been unsuccessful following the junk downgrade. That means it will become more difficult for government to raise debt to pay for infrastructure projects in the future.
     
  • Interest rates won’t come down soon, and they probably would’ve if we weren’t downgraded.
So, what I am saying is that the retail and construction sectors haven’t finished bleeding yet.
 
I would also avoid shares like ArcelorMittal, exposed to the construction industry, and large logistics companies will also struggle to remain profitable.
 
Higher interest rates will affect property companies, as we can already see.
 
Looking at results releases from JSE listed companies in the last month, the ones that have seen profits drop are:
 
Raubex (construction), Holdsport (retail), Oasis Crescent (property), Efficient Group (asset management), Atlantic Leaf (properties) and Purple Group (asset management).
 
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If they wanted to take advantage of our trade, they didn’t need any special knowledge. They didn't even have to look at a chart.
 
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How to protect yourself, and profit, during this recession
 
I’ve just completed a report on the shares I see as recession proof for my Red Hot Penny Shares readers.
 
These are all companies that are GROWING profits in the current tough environment.
 
So not only do they protect you in these tough times, but they still have explosive profit potential!
 
The secrets to these companies are that they earn income from offshore, or by selling their products and services in dollars and euros.
 
One of my favourites right now is Jubilee Platinum.
 
The company has just completed building the largest platinum from chrome tailings facility in the world. It produces both chrome and platinum from old dumps above ground.
 
At this stage the company is profiting from the project, even before its sold a single ounce of platinum.
 
And the best part is, the weaker the rand gets, the more it earns when converting from dollars! 
 
Another company I am very excited about is Santova.
 
The company is freight forwarding and Logistics Company, with a twist. It doesn’t own trucks or ships. It just manages the process. And the best part is, it is not dependant on South Africa. It operates around the world in countries such as Hong Kong, England, Australia and China. Even if the local logistics industry struggles, Santova will grow. In fact, on 17 May it announced results.
 
Revenue increased from R266 million to R99 million.
 
Earnings per share shot up from 33.68c to 38.53cps.
 
And it grew its dividend to shareholders from 5.50cps to 6.25cps.
 
Simply put, investing in these businesses that are still showing positive growth, whilst the economy languishes, will pay off big time as soon as the economy recovers.
 
Remember, after the 45% drop of the JSE between 2008 and 2009 a bull run started. And that lead to a boom of 198% between March 2009 and April 2015. So even when things are bad – you need to invest because cycles turn…
 
Here’s to unleashing real value
Francois Joubert

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