Should you avoid stocks in 2019?

by , 09 January 2019

South African stocks ended 2018 as the worst year since 2008.

The FTSE/JSE Africa All Share Index ended the year down 11%, its worst performance since 2008. But this was still better than the emerging market average of -17%...

It's fair to say that 2018 was a torrid year for investors especially considering it started very promising with SA's new president replacing Zuma…

But a string of factors pushed us to the downside. Expropriation without compensation, a local recession, the US/China trade war and unexpectedly high fuel prices.

So, is there any hope left for investors?

Will 2019 provide you with better returns or should you just avoid stocks altogether?

 
 
 
Why I expect a better 2019
 
While politics in SA could certainly get worse than they are – I don’t expect that’ll happen.
 
President Ramaphosa has already ensured that corruption which was rampant under Zuma is being addressed.
 
There are three factors that will turn out positive for the stock market and the SA economy in 2019. 
 
Factor #1 – Eskom is being repaired from the Zupta damage
 
Reports are out saying that portions of Eskom’s overinflated workforce will be retrenched. That will be the start to restoring Eskom as one of the top utility companies in the world. It was rewarded a prize for the power company of the year at the Financial Times Global Energy Awards in New York in 2001…
 
Eskom has also apparently made progress in securing new coal supply contracts to ensure it can keep our lights on.
 
At the same time Eskom’s two new power stations are coming online bit by bit – and that’ll secure our electricity supply going forward.
 
It’s still too early to tell – but the direction things are moving in has turned positive after years of negativity.
 
Factor #2 – The oil price is providing sound inflation protection
 
The oil price has dropped to $58 from an October high of $86. In January 2018 Brent crude oil was at $69.
 
Considering the rand’s movement compared to last year oil is at least as cheap as it was at the start of 2018, and much cheaper than in October 2018.
 
That means cheaper fuel, cheaper transport costs and lower inflation all in all.
 
High inflation risks increased interest rates. So the longer oil stays low, keeping inflation low, the longer our interest rates stay low as well. That’s positive for indebted consumers and for businesses borrowing money for expansion.
 
Factor #3 – SA is out of recession
 
South Africa exited its recession in 2018. What’s more – the last quarter of 2018 will likely be a good one.
 
Figures show household debt to income has dropped from 86.40% in 2008 to 71.90% in recent years. That, and record retail sales over Black Friday, Cyber Monday and the Christmas period could help South Africa’s last quarter of 2018 economic growth as well.
 
In fact, Black Friday sales in 2018 were up 55% compared to 2017. Cyber Monday sales grew 36.4%.
 
Factor #4 – Political uncertainty will be lower following the election
 
With the looming election always comes uncertainty, big (undeliverable) promises and a lack of focus on the real issues.
 
Fortunately the election will be over by mid-year.
 
Early polls indicate the ANC will again win with around 60% of the vote, with the DA in second place (losing voters) and the EFF in third spot.
 
The election most likely won’t be near as close as we would’ve expected at the beginning of 2018 – and it's thanks to the ANC repairing a lot of damage done by Zuma. The DA has also done its part to ensure its electorate loses faith in the organization due to internal politics.
 
But the positive is if the ANC feels safe in its position again it can continue governing SA – and hopefully continue rapidly repairing the damage done under Zuma’s last decade.
 
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________________________________________
 
So what does this mean for penny stocks on the JSE?
 
I expect the first quarter of 2019 to remain choppy.
  
Investors will look for the final 2018 GDP figures as a guide to where SA is headed in 2019.
 
Then the election will mark what will (hopefully) be a turning point for our economy.
 
With that in mind, I believe the small cap / penny stock market holds great opportunity for investors right now.
 
Just consider the facts: 
  • Investment holding companies are trading at record discounts – African Rainbow Capital Investments trades at R5.50 – with its net asset value 67% higher at R9.23!
     
  • Santova trades on a PE ratio of 7 – and has grown profits 8 years in a row. That’s compared the JSE All Share index on an average PE of 16!
     
  • Small resources companies like Wescoal and Insimbi trade on PE’s of 3.96 and 7 – compared to the Resources index on a PE of 15!
Simply put –the penny stocks I follow and invest in are much cheaper than the large caps on the JSE. And in many cases, they have just as good or better records of consistent performance over a long period of time.
 
You will be better off investing in a fundamentally sound, growing small cap company that pays you a bigger dividend than in a large company that is overvalued but considered ‘safe’ because of its size.
 
Here’s to unleashing real value,
Francois Joubert,


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