Coronation warns of value traps on JSE

South African stocks appear cheap as they trade at low price-to-earnings multiples, but many are potentially value traps. The biggest risks are those who do not earn revenue in stronger currencies. 

This is feedback from Coronation portfolio manager, Charles de Kock, who outlined where their multi-asset portfolios are investing their clients’ money in the current environment. 

Stock markets in the developed world marched higher in the first quarter of the year, with the S&P 500 posting several new all-time highs. Europe and Japan followed suit, with the Nikkei index in Japan surpassing its 1989 high. 

The positive sentiment is driven by the resilience of the US economy in particular, despite the sharp up-cycle in interest rates, explained De Kock. 

The biggest positive surprise for financial markets over the past year is how well the US coped with the sharply rising interest rate cycle. 

Growth has been strong, and unemployment has been extremely low. Company earnings have consequently been healthy, which translated to the strong performance of the US stock market.

On the downside, inflation has yet to retreat to the 2% target area, lingering around 3%. A gradual slide lower is still expected, enabling the Fed to start the cutting cycle later in the year. Sharp rate cuts are not needed at this stage.

This stands in stark contrast to the South African economy, which has continued to struggle, hampered by ageing infrastructure and poor maintenance. 

With inadequate power supply, inefficient rail transport and harbours struggling to move exports, the outlook for growth remains constrained. 

Therefore, shares linked to the local economy had to contend with an extremely difficult low-growth and rising-cost environment. 

De Kock said It is no wonder the performance of “SA Inc.” stocks has been poor. Many of these stocks are trading at very low multiples and appear cheap, but Coronation is wary of falling into value traps. 

The SA equity portion of our portfolios consequently remains tilted heavily in favour of global businesses listed on the JSE. 

Some domestic stocks are gaining market share from competitors, and a few others have carved out niches of growth, but one has to be very selective in the local market, De Kock warned.   

He added that the country’s national election on 29 May presents another headwind to economic growth and thus, financial market performance in South Africa. 

Coronation believes that the problems facing the South African economy cannot be fixed quickly. Even if the correct decisions are made and implemented, it will take years to fix the major problems of electricity, logistics, and water.

Thus, De Kock said Coronation’s multi-asset funds maintain full exposure to global assets, including significant holdings in global businesses listed on the JSE and believe this strategy is the correct one to protect and grow our clients’ wealth.