GRAPH: Highest returns come from firms that didn’t exist 20 yrs ago

Sasfin Securities' deputy chairperson David Shapiro reveals how the highest returns over five years come from companies that didn't exist 20 years ago:

Five years ago I began encouraging clients to take advantage of easing exchange controls and begin internationalising their equity portfolios. My thinking wasn’t influenced by the deteriorating path of our economy or concerns about the currency – although they did play a part – but rather by the widespread range of compelling options available in the global market place.

The JSE was already more reflective of the global economy than the local one. Ever since the late 1990s a number of our big groups had transferred their primary listings abroad, using their new base to launch aggressive growth strategies into diverse regions. My contention to clients was that why own SABMiller [JSE:SAB] when they could also own Diageo and AB InBev [JSE:ANB], or why only Aspen when there were other equally-attractive pharmaceutical picks such as Novartis, Roche and Pfizer. In other words, why choose a spaza when you could shop in a supermarket.

Convincing clients to diversify offshore was a major challenge, though. Many had fled our shores financially after the world went into a wobble after the internet bubble burst in 2000, and were still suffering the consequences of their hasty actions. The rand had recovered dramatically from those depths, as commodity producing nations like South Africa started benefitting from China’s limitless appetite for materials, needed to feed its rapidly expanding economy. The JSE outperformed developed markets on the attractive advantages that booming resource prices were delivering to the economy, while the rand strengthened on burgeoning foreign investment flows.

Emerging markets were battered heavily by the financial crisis that followed the collapse of giant investment banker, Lehman Brothers, in September 2008, but China’s efforts to inflate its economy, in the aftermath of the fallout, lulled investors into believing their hunger for commodities would continue indefinitely, and that the beaten developing economies would soon recover.

Shift to consumption, service economy

By 2011, though, signs were emerging that China was shifting its emphasis away from building roads, bridges, tunnels and dams to promoting consumption and advancing its service economy. Commodity prices soon began suffering the upshot of excess supply created to meet projected Chinese demand. This was complicated by increased oil production stemming from the US where improved technology had significantly reduced the cost of fracking.

The plunge in commodity prices had extensive consequences for the emerging world, coming at a time when the global economy was battling to find momentum, despite painstaking measures by central bankers to raise business and consumer confidence. Developing economies such as Brazil and Russia dipped into recession, while the South African rand lost half its purchasing power.

Five years on, the uncertainty persists, aggravated recently by increasing terror activity in Europe, troublesome geopolitical tensions in the Middle East and Britain’s surprise decision to leave the European Union. Amid constant warnings of pending danger in the global economy, investors have fled equities in droves for the safety of sovereign bonds. In the US the annual interest rate on 10 year government bonds has fallen to 1.5%, while in Germany, Switzerland and Japan interest rates are negative.

Yet, not everything in the world has come to a standstill. There are millions of young kids hunting Pokémons on their mobiles or playing Clash of Clans. By 2020 there will be 225 million Chinese earning between $10 000 and $40 000 a year who will go to gym, spend money on cosmetics and travel abroad.

Big pharmaceutical companies will allocate billions of dollars to seek cures for cancer, heart failure, diabetes and other deadly diseases. Motor manufacturers, determined to reduce the dangers of carbon emissions, will continue to perfect electric cars, while robotics, 3D printing and thinking computers will transform manufacturing facilities.

Businesses geared to these changing consumer trends and to the benefits of the industrialising revolution will profit considerably, presenting exciting opportunities for equity investors.

Return on R100 invested over 5 years

To support my claim that there are many businesses that don’t heed the headlines, I investigated what R100 invested five years ago in a selection of companies in South Africa, Britain, Europe and Japan would have yielded today.

I chose establishments that produce brands or products with which we are familiar, trying to cover as broad a spectrum of industries as possible. I converted the returns to rand, understanding that the value of our currency has depreciated quite considerably over the past five years. To put it into perspective R100 invested in the US dollar five years ago would be worth R210 today (R6.76 versus R14.22).

The chart below details the top 50 gainers in my selected universe over a five-year period – showing the value of R100 invested as well as the average annual percentage return. The results are astounding, even after discounting the rand’s fall. But what’s more astonishing is that instinctively these are companies we understood were doing well. We didn’t need a great deal of research to identify them. They were obvious choices, not hidden gems.

The leaderboard is populated with businesses that weren’t around 20 years ago, but define the future direction of global business – Tencent (e-commerce, instant messaging and mobile gaming), Amazon (e-commerce), Gilead (biopharmaceuticals), Facebook (social media, internet advertising) and Alphabet (formerly Google – search and internet advertising). Visa is a cutting-edge global payments business; Starbucks is an international chain of coffee shops and Walt Disney is an important producer and provider of entertainment.

Interestingly, included in the top performers are old-style, tobacco companies Altria and Japan Tobacco and brewer AB InBev. Lifestyle fashion producers Adidas and Nike, and trendy retailers, Inditex (Zara) and Fast Retailing (Uni Qlo) also make the cut, as well as local winners Naspers, EOH, Aspen, Cashbuild and PSG.

What I haven’t highlighted are the companies crowding the foot of the table. Once a proxy for South Africa’s mineral and industrial might, Anglo American is half the value it was five years ago. If you’d bought Kumba, Impala Platinum, Anglo Platinum, BHP Billiton and Gold Fields you’d also be under water. Banks, construction and oil, too, have disappointed.

The obvious question is whether the winners colonising the top of the list will still be there in five years’ time. In a fast-changing, hi-tech world it’s hard to predict, but for sure they will be techno-driven and easy to spot. They certainly won’t be those industries currently occupying the bottom-end of the scale.   

GRAPH: Highest returns over five years come from companies that didn't exist 20 years ago

Source: David Shapiro


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