With government scrambling to fund a R50.8bn revenue shortfall in the current financial year and negative GDP per capita growth, it is widely expected that further credit rating downgrades will follow in the early part of 2018.
Moody’s, the only major agency to still assign an investment-grade rating to South Africa’s local currency government debt, is forecast to downgrade the country to junk shortly following finance minister Malusi Gigaba’s National Budget statement in February, likely triggering significant capital outflows.
Political uncertainty and the likelihood of further downgrades illustrate the need for investors to have a well-diversified portfolio.
Market volatility offers opportunities, and cherry-picking companies that have fallen cyclically and are showing signs of recovering to retest prior highs may be a more lucrative long-term investment strategy to adopt for 2018 than betting on the big rand-hedge stocks.
My stock picks for 2018 are:
Kumba Iron Ore – BUY
A star performer on the JSE in 2017, I believe Kumba still has room to run on the back of continued solid demand from China, which will largely support global prices for the steelmaking material in 2018, and the premium Kumba demands for its quality ore.
Kumba has been surging since breaching major resistance at 23 130c/share in October.
The monthly chart shows further upside potential with Kumba returning to its all-time high at 62 000c/share in 2018. Gains through 38 350c/share would present another good buying opportunity. It is currently trading at around 36 969c/share*.
MTN Group – BUY
A new management team at MTN has been hard at work to restore investor confidence after a massive regulatory fine in Nigeria in 2015 highlighted governance concerns at the group.
At the time, a drop in the oil price and unfavourable currency movements also weighed on its performance in Iran and Nigeria, two major markets.
As the dust settles, MTN seems undervalued relative to rival Vodacom, and the charts are showing upside potential over the medium to long term. A move through 13 500c/share should see MTN recover losses towards 15 650c/share.
Increase positions above 15 650c/share as gains to the 21 110c/share resistance level would be possible. It is currently trading at around 13 173c/share.
Sasol – BUY
Still range-bound between 34 655c/share and 50 000c/share since 2015, petrochemical giant Sasol is forming rising bottoms within its huge sideways pattern – a sign of increasing buying appetite.
A recovery in the Brent crude oil prices and a relatively weak rand helps to boost performance, while its decision to scrap plans for a greenfield multi-billion-dollar gas-to-liquids plant in the US has helped to provide investor certainty.
A good buying opportunity would be presented above 44 775c/share, with potential gains to 50 000c/share.
Increase positions aggressively above that level as the all-time high at 65 300c/share could be retested and even exceeded. It is currently trading at around 42 216c/share.
Barloworld – BUY
Industrial group Barloworld, which has seen its share price recover significantly over the past two years, said in November that it is making good progress with its strategy to fix and optimise existing businesses, particularly in its logistics division.
On the charts Barloworld has breached the neckline of a long-term inverted head-and-shoulders pattern, confirming a positive breakout above 13 910c/share.
Go long above that level, as the target of the pattern is situated at 22 160c/share. It is currently trading at around 15 291c/share.
Hyprop Investments – BUY
Hyprop Investments is a leading specialist retail property real estate investment trust (REIT), with its shopping centre portfolio in SA including Canal Walk in Cape Town, and Rosebank Mall, Hyde Park Corner and Clearwater Mall in Johannesburg.
It also has exposure to Zambia, Ghana and Nigeria, and south-eastern Europe (Montenegro, Serbia, Macedonia and Bulgaria).
Currently testing a significant support trendline dated back to March 2011, a move above 11 590c/share would end its medium-term bear trend and commence upward impetus towards 12 675c/share.
Increase positions above that level as the all-time high at 14 295c/share could then be tested.
Refrain from going long below 10 200c/share (the long-term support trendline would be breached below that level) and downside could extend to 6 630c/share. It is currently trading at around 10 400c/share.
Woolworths – BUY
Clothing and food retailer Woolworths, long a stock market darling, has had a tough two years, with the market remaining unimpressed with its efforts to turn around David Jones in Australia, bought in 2014.
But it’s in times like this when investors are despondent and the share price has plummeted (by almost 50%) that Woolworths becomes an interesting opportunity. Attractive levels would be above 6 785c/share, with potential upside to 7 812c/share.
Increase positions above that level. Further gains through 8 700c/share could see Woolworths recoup all its losses to its all-time high at 10 800c/share. It is currently trading at around 5 835c/share.
*All stock prices provided by IRESS at the time of updating on 18 December 2017.
Moxima Gama has been rated as one of the top five technical analysts in South Africa. She has been a technical analyst for 10 years, working for BJM, Noah Financial Innovation and Standard Bank.
This is an updated version of an article that originally appeared in the 14 December - 17 January edition of finweek. Buy and download the magazine here.