Once upon a time in our very own country, a miracle took place. A decade ago, an oppressive regime was replaced by one with great popular appeal in an unprecedented democratic success. A wise, gracious and humble leader initiated a dramatic period of rapid transformation while at the same time following a programme of fiscal discipline. This was not always popular with the masses, but it gradually laid the foundation for a period of sustained economic growth.
The traditional opening to a fairy tale. But this is no fairy tale. It is the true story of the blood, sweat and tears that has brought the South African economy to is present robust state.
This is clearly an oversimplification of the case, but serves as a good introduction to the first column for the year in which I shall give some share tips.
South African equity valuations are not particularly demanding given forward multiples based on companies earnings growth. The combination of low inflation and low interest rates is having a positive impact on business and consumer confidence. The outlook for emerging markets remains favourable and will attract more foreign investment to South Africa. Robust tax receipts are likely to produce another large revenue overrun and this together with foreign investment will easily finance the current account deficit.
All this, added to the fact that the economy has embarked on a more sustained cycle of higher growth, leads me to conclude that the market could grow by 20 percent next year. If we are two years into a five-year bull market, as I suspect we are, then many shares will double over the next three years, baring any unforeseen economic or political mishaps.
As such, I expect the best growth to come from industrials and financial companies and to be driven by the currency, inflation, consumer spending, interest rates and the effect of the global economy.
Resources could have a good run if the currency were to weaken or commodity prices increase dramatically.
Here are some shares (in alphabetical order) that I believe will do well this year:
- BHP Billiton will continue to benefit from high commodity prices, the unstoppable Chinese economy, strong cash flows, the roll-out of new projects and higher dividends.
- Bidvest is reaping the rewards of being a diversified consumer company. Involved in areas as diverse as motor sales, cargo and freight, travel, stationery and service industries in general, it should feature high in this year's honours lists.
- Firstrand/RMB Holdings is another share with attractive qualities. Banks are the key beneficiaries of lower interest rates, and low inflation and rampant consumer spending will not hinder earnings growth.
- Impala Platinum is pregnant with potential. The strong underpin to the platinum price promising production growth potential and an outside chance of a big special dividend could see healthy capital growth.
- Naspers has already had a brisk trot, but for the brave there is good upside potential with the anticipation of high earnings growth, increased print media advertising budgets and the expected turn around of formerly loss-making operations.
- PPC is probably the lowest risk share in the construction sector, with cement sales likely to surprise on the upside. PPC is a price leader in the Western Cape and Gauteng. It is investing R1 billion to increase its capacity at a time when other cement companies are operating at full capacity.
- Reunert will benefit greatly from gross domestic fixed investment, and strong earnings growth is anticipated well into 2007. A strong brand in Nashua, reliable cash flows and management with a proven track record augur well for good capital appreciation in this share.
- Richemont, with a 20 percent stake in British American Tobacco and a huge footprint in the lucrative fast-growing luxury goods market, should give good capital growth. It is trading at a discount to its peer group and, despite being a rand hedge, is not dependent on rand weakness to support its price.
- Sasol, despite flirting with high territory, is trading at a discount to its international peer group. High oil prices bode well for good results. The growing international awareness that the gas-to-liquid technology is viable and the recognition of Sasol's leading position in the field should do much to propel the price.
- Sun International is looking for good earnings growth in 2006/7, and with profits driven by strong casino revenues and underpinned by solid resorts, it is well-placed to produce good growth.
- Trencor is perhaps a share with an outside chance now that recent weakness in the share price has exposed value. Trenstar, the logistics business, is still making a loss, but should become a healthy contributor to earnings in due course. Textainer, the second largest container leasing business, is highly profitable. There is a strong view that the company is undervalued by as much 50 percent.
Big infrastructural projects, such as Gautrain, and the planned improvements to the railways, harbours and electricity supply give the South African economic outlook a very positive slant. Investors should benefit from this scenario.
- David Sylvester is the chairman of the Shareholders' Association. Telephone (021) 686 7567.