This article was first published in the first-quarter 2013 edition of Personal Finance magazine.
I have been providing stock picks for Personal Finance for the best part of 20 years and yet they remain the most difficult columns to write.
It doesn’t make it any easier that I write this particular column in October for publication in January, but I have always maintained that providing stock picks is foolhardy at the best of times. There are so many variables to factor into the mix, and so many unexpected things can happen to markets and companies in a relatively short time. So these recommendations should not be followed blindly. Make sure you do your own homework first – including, but not limited to, setting your financial objectives and defining your risk profile.
In my column at the beginning of last year, I outlined many of the problems that were facing the global economy. I am not going to repeat that litany of troubles; suffice it to say that the world did not deal with the issues and 2012 ended much as it began. The eurozone did survive; there was very little growth in the global economy and China also began to slow down; Europe is still trying to work out how to deal with its financial difficulties; Japan is going nowhere; and the United States still has huge household debt problems. In South Africa, we have been subjected to debilitating and, sadly in many cases, violent strikes that are affecting the entire economy.
My overwhelming concern for world markets is the apparent inability of governments to address the underlying debt imbalances. How debt and budget deficits are handled in the US, Europe, China, Japan and other significant economies will be crucial in determining whether or not we are plunged into a global recession and, if so, how long it will last.
For the record, the level of indebtedness – corporate, personal and governmental – became worse over the past year. In South Africa, 26 percent of the population pays for food with borrowed money, according to a FinScope Consumer Survey conducted in 2011 by FinMark Trust.
Despite the problems, in the period under review, markets surprised me on the upside, because most of them registered positive returns in very volatile trading conditions. South Africa led the pack, with the JSE up 12.25 percent; the US was next, with the Dow Jones registering a gain of 7.63 percent; and the United Kingdom and Japan gained 3.44 percent and 5.17 percent respectively (in their base currencies).
The performance of the JSE surprised me, because we in South Africa are facing so many difficult problems and are falling behind in the African competitive stakes. I am an Afro-optimist, so I am not going to harp on all the things that I imagine could go wrong. I believe that, despite all the odds, we are doing okay and will continue to do so.
Last year’s portfolio of JSE-listed shares did better than the previous year’s – gaining 7.12 percent compared with 4.84 percent – but, sadly, this time my portfolio under-performed the FTSE/JSE All Share Index (see the table, link at the end of this article). Only three of my local picks registered a negative return: the one I chose for the first time, Anglogold Ashanti (–19.67 percent); Anglo American plc (–15.46 percent) and Impala Platinum (–9.25 percent). I am dropping all three this year, because I simply cannot see their fortunes improving. I think resources may well take a breather for a couple of years, and I am retaining only Sasol, because the oil price seems to defy gravity.
Spur led the field, up by an impressive 41.94 percent after being flat the year before; SAB Miller was up more than 20 percent for the second successive year; and British American Tobacco (BAT) again did well. The other defensive stock, Tiger Brands, had a reasonable return after a stunning performance in 2011. BHP Billiton reversed its loss of last year, with a credible gain of 13.37 percent.
My JSE-listed portfolio for 2013 is (in alphabetical order): BAT, BHP Billiton, Mediclinic, MTN Group, SAB Miller, Sasol, Spur, Standard Bank, Tiger Brands and Vodacom. This selection represents a major shift away from resources, a complete absence of retailers and a preponderance of what would be classified as “defensive” companies. This is in line with my view that economic growth will be very low and that companies with defensive qualities and good, sustainable dividend yields will out-perform the other market segments.
I am making some big changes to the offshore portfolio (see table for performance, link at the end of this article), and my selection for this year is: Associated British Foods, Coca-Cola, GlaxoSmithKline, HSBC, Imperial Tobacco, Park 24, Roche, Royal Dutch Shell, Toyota and Vodafone.
Five shares are dropping out of my portfolio due to poor or volatile returns for the past two years. Supervalu is probably very cheap now, but, having fallen by 63 percent in 2012, it is blotting the copy book, and I have little reason to believe it will do any better this year. Another consideration is that an offer is being made by Cerberus Capital to acquire Supervalu – the third-largest US supermarket chain – with the express intention of carving up the company and selling it piecemeal to interested parties.
Amedisys was flat last year and down 60 percent in the previous year, and likewise Apollo was down 58 percent last year having gained 15 percent the year before. Nintendo has had two spectacularly bad years, and Nokia was dreadful last year and flat the previous year, so, for obvious reasons, those two are bowing out of the portfolio. It is my intention to avoid technology companies for the moment.
I am retaining Toyota, because I believe its growth trajectory has been restored. I am retaining Glaxo-SmithKline, HSBC, Park 24 and Roche because of their credible performance and defensive qualities.
The new boys on the block are Royal Dutch Shell, Imperial Tobacco and Vodafone, with dividend yields above four percent, and British Associated Foods and Coca-Cola, which are also defensive offerings but with a lower yield.
The rand has had less of an impact on the performance figures over the past year than it did in the previous year.
I must disclose that I hold shares in my personal capacity in some of the companies discussed in this column. Once again, I can only urge prospective investors to do their own research or seek professional advice and not to follow these recommendations blindly, although they are given in good faith.
* David Sylvester is a stockbroker with Investec Wealth and Investment.