In a recent Corion Capital report these interesting facts were highlighted:
• Approximately 36% of the companies listed on the JSE have depreciated by 15% or more for the year.
• According to the Reserve Bank, South Africa is currently enduring the longest downward business cycle phase in over 73 years.
• Bill Gates expects Africa to have the largest workforce in the world by 2035.
• The US accounts for approximately 120% of the MSCI World Index return for 2018.
It is fair to assume that if you are a market watcher, you are probably feeling rather despondent at the moment. Nothing seems to go right, but there is one market analyst who can see light at the end of the tunnel. His name is Keith McLachlan and he is a small-cap specialist, who analyses small- and medium-sized companies on the JSE.
This is his opinion about small caps on the JSE in general: “The JSE-listed small caps are amongst the cheapest stocks in the entire world, but what is going to drive their re-rating or growth over the next three years? The answer is earnings growth from the improving SA economy.”
And to support his positive outlook, Keith continues: “You need to step outside of Twitter and the mainstream, toxic media for a moment and consider several facts that people seem to have forgotten.”
These are the facts he mentioned:
• Our recent recession: South Africa’s recession was caused by the Western Cape drought. That drought is over. Hence, future GDP numbers look more promising based solely on this agricultural output coming back online.
• Our public sector spending: South Africa’s economy has a very close correlation with State-owned Enterprises (SOE) spending. These SOEs are currently under intensive internal changes, such as audits of supply chains and the like, that should make them far better, sustainable organizations over the long term.
• Mining Charter: The recently announced Mining Charter is a balanced document with defined and achievable goals and rules. This is a massive positive for the sector, investors, communities, and ultimately our entire economy.
• Telcos policy: Spectrum allocation and a WOAN coming to market are positive. Very positive. By increasing spectrum and offering a WOAN, ultimately communication costs in South Africa will drop. The multiplier effect of lower communication costs on our economy is massive.
• VISA regulations improving: Tourism is a large industry and lowering the costs and complexities for tourists to travel to our beautiful country will boost volumes.
• Experts de-risking the Land Debate (EWC): While EWC remains a known-unknown, the President’s panel is superbly picked. This goes a long way to bolster confidence that the country will find a solution that benefits most people.
Nothing is risk-free but South Africa is now on the right trajectory. Hence, future domestic GDP looks promising. And, therefore, future earnings in SA Inc, in other words small-cap and mid-cap equities on the JSE, look positive.
