South Africa’s Inflation Rate Seems To Be Under Control

Last year was tough as global markets recovered from the recession and the financial crises. South Africa’s inflation rate seems to be under control, trading within the Reserve Bank’s target range, while interest rates are expected to be kept lower for longer. This environment should inspire confidence and encourage consumer spending, which should translate into more company revenue and better earnings and therefore higher share prices.

Price/ Earnings (PE) ratio’s, earnings yields and market ratings are often confusing. At first glance, shares with very high PE ratios (or low earnings yields) seem the least attractive, yet they will be described as "highly rated" by market analysts. Others with a low PE ratio (or very high earnings yield) will be considered "poorly rated". This paradox needs further explanation. The market rating of a share is simply the price at which the shares are trading viewed in relation to the past earnings levels. If the price is high in relation to past earnings we say the share is "highly rated", and if the share is low in relation to earnings, we say that the share is "poorly rated".



The JSE Gold Mining Index, for example, is trading on a historical PE ratio of 77.39 times and when compared to the benchmark JSE All Share index, trading on a PE ratio of 17.32 times, we need to ask whether there is any value of investing in this sector now? The gold price performed well last year, hitting new record highs as demand increased for the yellow metal whenever the US Dollar weakened and investors fled and looked for its safe-haven status. The share performance, however, was not as sterling. Anglogold, South Africa’s biggest gold producer is loss-making, while Harmony and Gold Fields, two favourite institutional shares, are trading on historical PE ratios of 209.69 and 24.10 times, respectively. This is almost double the benchmark rating. DRD Gold is the cheapest gold miner and offers further upside potential. Although the share price is trading just below its moving averages and the trend is bearish, it is trading in oversold territory and should move higher.

The other "highly rated" sectors included the platinum mining sector with a historical PE ratio of 34.42 times, as well as the media sector with a historical PE ratio of 33.82 times. Naspers in the media sector was the darling amongst investors last year with almost 32% growth. Avusa and Caxton are the two shares in this sector that seem cheaper and also offer opportunities. Caxton recently acquired a major shareholding in Alt-X listed internet publishing company Moneyweb, sealing a partnership to build, manage and operate an online presence for Caxton-owned local newspapers. The share price of Caxton is trading above its 200-day moving and although the trend remains bullish, it has a sideways bias as the share price consolidates. The "poorly rated" sectors included Alt-X as investors looked for quality shares elsewhere, while the construction sector also underperformed. This was due to higher competition leading to lower margins and difficulty in securing new projects, particularly in the public sector.



As we reflect on last year’s market performance, we can learn that past performance is no guarantee of future performance. In the sectors that outperformed, there were shares that underperformed, while in the underperforming sectors, there were shares that outperformed. A person would need to be some kind of contrarian investor to take advantage of situations like this. Essentially, contrarian investing is a risk-averse mode of investing because it is usually entered into with the idea of getting in on a good deal before the rest of the investment community notices. Contrarian investors usually try to zero in on opportunities that are overlooked by others, choosing to focus on a sector that is not in favour and making an investment in a company within that sector that is stable and doing very well. By choosing to invest in overlooked companies that are part of an unpopular market sector, the contrarian investor stands a good chance of making a significant return on the investment while facing little to no competition for acquiring shares. There are still some selected undervalued, profitable and quality shares in the small capitalization and Alt-X sectors, ready for the picking for any investor with at least a three year view.