With the Rugby World Cup behind us, we can proudly say that we are the world champions. We destroyed England in the final.
This when, in March 2018, there was absolutely no excitement about this year’s World Cup on a local front. Few South Africans would have expected a performance that would see us win.
The most important lesson we learnt from the whole experience, is how quickly momentum can spin in your favour when the wheels start to turn.
When you take a look at the local stock exchange, you will see that we had a very similar experience with mid-market capitalisation shares (mid-caps). The FTSE/JSE Mid-Cap Index consists of shares listed on the JSE that fall outside of the 40 largest shares, but within the top 100. In other words, mid-caps account for the top 41 to 100 largest companies listed on the bourse according to market capitalisation.
When you work your way through these 60 companies, you will see that most of them generate their earnings within the borders of South Africa. Therefore, most of them feature as so-called “SA Inc.” companies.
These stocks, unsurprisingly and with a dark cloud obfuscating their outlook, underperformed the major stock index in the three months to the end of July. The FTSE/JSE All Share Index with its 5.6% return, and underperformance of even the local money market, still beat the mid-caps with their -1.4% return over the three-month period.
Not unlike the Springboks, these mid-cap shares were pretty much a write-off at the time.
However, a mere three months later and the tables have turned. Of course, we don’t want to get ahead of ourselves. But not only did the JSE recover nicely, mid-caps also managed to run away from their opponents at warp speed.
As at the end of October 2019, the All Share Index was trading positively at 10.5% for 2019, growing by 3.1% in October alone. Mid-caps managed to more than double that performance, at 7.2%, over the same one-month period, and currently trade at 9.7% for 2019, not far behind the JSE’s year-to-date performance. The fact is that value opportunities can only hide for so long before they start to emerge again.
PJ van Niekerk, equity analyst at PSG Wealth Old Oak, identified four mid- and small-cap shares that seem to be on the cheaper side, especially for those investors who believe that this recovery is still in its infant phase.
Momentum Metropolitan Holdings
Momentum Metropolitan Holdings engages in long- and short-term insurance, asset management, savings, investment and employee benefits. Good progress has been made with the company’s “reset and growth” strategy, which is a three-year plan created in September 2018, to improve earnings to R4bn in the 2021 financial year. The group recently reinstated dividends after the completion of a R2bn share buyback programme.
AECI is an SA-based explosives and chemical speciality company. During the first six months of 2019, the group went through a process of restructuring its water processing and mining solutions segment. The benefits of the realignment projects, better rainfall in the Western Cape, and improved conditions in the mining sector could support earnings in the second half of its financial year.
Hudaco is involved in the importation and distribution of branded automotive, industrial and electrical consumable products for the local market. Group earnings will be dependent on economic growth and local business confidence. Despite challenging trading conditions, the group managed to deliver a satisfactory set of interim results. Hudaco is trading at a trailing price-to-earnings ratio of 9.15 and a dividend yield of 5.18%.
Coronation Asset Management
Coronation is a leading brand in the SA investment industry, with total assets under management of R571bn as at 30 September 2019. The group’s returns are correlated to the performance of equity markets. At the time of writing, the All Share Index had delivered an annualised return of 8.45%. Should current market levels hold, management expects an improvement in their results for the second half of the current financial year.
Shalk Louw is a portfolio manager at PSG Wealth.