17 Feb LEGAE SECURITIES: INVESTORS MONTHLY | FEBRUARY 2016
In this edition we review market performances for the first month of the year, briefly comment on the chances of a turnaround in the resources sector, and lastly we look at SA telecommunications sector.
As always, we welcome your feedback and look forward to assisting you with your equity portfolio.
The Legae Team
A rough start to the year
Following on from last year, global markets had a tumultuous start to the year. Continued worries about a Chinese hard landing, lower oil prices (down 6.66% in January), the likelihood of the Fed hiking rates and fears of a global recession were all worthy contributors to the market turmoil. What seemed to be a trend in January, though it lost momentum towards the end of the month, was the price of oil’s influence on world markets. Whichever direction oil prices went the markets followed.
Our market was not immune to these changes, the FTSE/JSE All Share Index came off 3.06% in January with retailers being some of the biggest losers and resources, particularly gold stocks being the biggest gainers. The main catalyst for the rally in gold and some platinum stocks was the significant increase of the price of both gold and platinum in rand terms. The gold index was up 26.8% for the month.
The slight comeback in resources stocks was marred with volatility, with intraday price swings of about 8% in some stocks. Harmony Gold (86.54%) remained the star performer, while Lonmin (-34.97%) remained the worst performer for the month overall.
There is still some scepticism on the stability of the resources comeback as the fundamentals are still firmly against a sector over-performance. The global environment is still rather hostile towards the sector. Though to some of the companies’ credit, the management teams have started to restructure the companies with a goal of surviving the next few months in a challenging market environment.
After the huge dip in December following the finance minister debacle, the rand continued its slide against the dollar though not as extreme. The SARB increased rates by 50bps which provided some relief to the currency and appeased some rating agencies. Of course this can only be seen as a short-term relief as the economy remains underpressure. All eyes will be on the finance minister’s budget speech.
We see no catalyst in the short term for a change in sentiment towards the resource sector, but we also think the valuation gap between resources and other sectors is stretched.
SA Telcos— Too close to call
It’s been a shaky start to the year for telecom stocks. MTN continues its downward trajectory since the $3.9bn, initially $5.2bn fine, imposed by Nigerian authorities. January has seen the stock revisit its 5-year lows. However the beleaguered telecoms giant ended the month up 7.38% to establish a new normal trading range of 13000 to 140000. The fine is still pending as the company is still embroiled in a court case with the Nigerian authorities. MTN is claiming that the action to impose a fine was not in the Nigerian Communications Commission’s legal framework. Judgement has been reserved until 18 March, while the chance of a settlement is not ruled out. The company is expected to release its full year financial results later in March.
Vodacom, after being preferred to MTN in the past few months retreated its gains. Vodacom released its third quarter results and although robust they were received with lukewarm reviews. The company continues to spend on its infrastructure and to see growth in its group revenue, up 7.6%. Data revenue up 27.5% across the whole group. The number of active users in South Africa also increased 8.7% yoy to 34.1 million. Notwithstanding the solid results Vodacom shed 3.24% in January and underperformed even the likes of Telkom (up 2.89% in January) after the latter said it expected a 20% increase in HEPS for the 6 months ended September 2015.
Telkom faired much better in the month on the back of the announcement of somewhat positive interim results according to a trading update issued by the company. The market reacted positively to the news and pushed the share to a high of 6400 in the month and closed the month up 2.89%.
On a comparative basis MTN was the best performer of the lot, gaining 7.38% in the month while Vodacom lagged losing 3.4%. Going forward we expect MTN to trade around the current levels until the fine is resolved and believe there is still more upside, so we are overweight at current levels.
Global Markets Outlook
Oil prices weighed heavy on global markets. The crude oil price was down 6.66% for the month taking down with it, most international indices. In the US, the S&P 500 lost 5.7% in January, the worst January performance since 2009. The Nasdaq Composite lost 7.86% in the month and the Dow Jones lost 5.38%. The Federal Reserve also kept rates unchanged in January as expected, which further raised speculation of a rate hike in March.
The US economy continued to grow albeit at a slower pace than market expectation, which further added to more speculation about a delayed Fed rate hike.
In Asia, new fears of a hard landing of the Chinese economy and the lower oil prices drove markets down to bear market territory. During the first week of the year, the People’s Bank of China allowed the biggest fall in the yuan in five months, twice triggering a circuit breaker that saw markets close early. Beijing has since suspended the mechanism amid fears it only increased investor jitters about the health of markets.
The Shanghai Composite index tanked more than 24% last month while the Shenzhen Composite tumbled 27%, taking the title of Asia’s worst-performing indices in what has been a tumultuous start to the year. Hong Kong’s Hang Seng Index tanked 11% in January, the second-worst monthly performance since 2008.
The Chinese government promised to increase stimulus which provided an short-lived relief however the selloff still continued for the rest of the month.
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