In the short term, the rand could strengthen to R11.30 – R11.50, but I expect it to return to a range of R12 – R13 a dollar by mid-2018 to year end.
That said, I expect the economic recovery that took hold in the last quarter of 2017, to intensify in 2018. And if Ramaphosa sets the right things in motion I expect 2018 to usher in the start of a big economic recovery for South Africa.
The World Bank believes we’ll see 1.1% GDP growth in 2018. I expect South Africa will prove them wrong.
GDP Growth will likely come in between 1.6% and 2.2% this year.
And there are a number of signs I look out for as ‘leading’ indicators to show me the economy is heating up:
Expectations are that car sales will grow by 2% in 2018. Because a car is an expensive item, increasing car sales show that people have more disposable income and that they are willing to use it because of their confidence in the economy.
Retail sales are recovering – After a full year of dropping retail sales in 2016, 2017 saw a recovery in retail sales (again towards the end of the year).
Considering we’re seeing retail sales rise, even while inflation is low is a good sign. It shows that people have more money to spend – keeping the economy growing.
Amidst all the positivity – this is the market to look out for…
Between 2009 and 2017, the JSE Small Cap Index averaged 18.24% growth per year.
Over the same time, the JSE Top 40 Index averaged 14.21% a year (including dividends). The small cap index outperforms the Top 40 index roughly 2 in every 3 years.
But 2017 saw the Small Cap index underperform against the Top 40 index by its biggest margin in a decade.
That’s because a weak local economy is typically bad for small companies with local operations.
But a rapid recovery in in South Africa, will see a rapid recovery in smaller shares…
Think of small, South African focused businesses that have been able to weather the storm during the 2017 recession, and still grow!
Onelogix for instance.
The company grew earnings per share by 143%. These do however include a profit it made on the sale of a business. Because this isn’t repeatable, we usually look at the performance from businesses it still owns.
Continuing businesses increased earnings by a formidable 27% for the first half of the company’s financial year. That equals 23.3cps earnings for a half year. If the company equals this performance for the second half of the year, earnings come to 46.6cps.
At that level, the share is currently on a PE of only 8.15.
I expect the share price to break through the R4 level soon.
With the sale of businesses that aren’t core to Onelogix, and its profits, the company lowered debt from R365.9 million to only R220 million. And it still managed to invest R60.5 million in new vehicles for its logistics fleet (R43.3 million of which is for expansion).
OneLogix has purchased an adjoining property
to its OneLogix VDS Pomona facility for R16,5 million in order to increase vehicle storage capacity and facilitate further value-add customer service offerings. The transfer of the property is expected to be completed during February 2018, with a further R10 million expenditure allocated to develop the facility to the required operational standards.
Lastly, the company will pay you a 6cps dividend by 9 April.
Or Mustek, a small computer manufacturer and distributor.
On 26 January 2018, Mustek announced that it expects profits for the first half of its financial year to be at least 20% higher than the previous year!
The company stated its expectation that profit will be at least 44.69cps for the half year.
That means the company is on a rolling twelve months earnings of 88.69cps, or a PE of only 6.2.
I expect 20-30% growth from the share when results are released in February. The company should also be in a position to pay a dividend of around 20-22cps when it releases full year results later in 2018.
And I haven’t even touched the list yet…
There are companies like CSG Holdings, Hulamin, Insimbi, Wescoal and Torre. All of these are businesses on SINGLE DIGIT PE ratios – while the JSE averages a PE of 20.
Now’s the time to invest in these small caps, they’re at the bottom of the cycle. And once the economic recovery becomes a greater certainty their share prices will run the hardest…
Here’s to unleashing real value