Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Richard Middleton, portfolio manager at STANLIB Standard South African Equity fund.
With global markets and economies in a state of uncertainty, the South African market is in a unique position. After years of consumer growth between 2003 and 2007, driven by falling interest rates and an ever-growing middle class, 2007 saw a central bank push to reduce inflation, which resulted in the reserve banks raising interest rates by 5%. I expect inflation will fall over the next 12 to 18 months on the back of lower oil and food prices. So we should see at least a 3.5% drop in interest rates before the end of the year. This will result in rising disposable income, and in turn create more consumer demand.
The impending 2010 World Cup has fuelled a huge infrastructure drive. R800bn ($80bn) of government money has been ploughed into spending on projects such as new stadiums and public transport systems as the country prepares for this event. I aim to invest in stocks geared towards the development and growth of infrastructure within South Africa, particularly in the lead up to the World Cup, and in companies which will benefit from the resurgence of consumer spending. While the larger infrastructure companies are exposed to the Middle East, and have therefore been hit by the slowdown in hotel construction in Dubai, I am more interested in the smaller infrastructure-related stocks which invest in Africa and South Africa. Our investments in consumer-related stocks are focused on the more defensive cash retailers.
Among my top picks is Distribution & Warehousing Network (JSE: DAW). I am expecting 15%-25% earnings growth over the next three years from this company. It is exposed to all areas of both private and public infrastructure growth, and is successfully expanding into commodity-rich countries such as Angola, Mozambique and Nigeria. This is one of our biggest holdings in the STANLIB growth funds. Successful growth of smaller companies such as this depends on the quality of management, and DAWN has an excellent management team.
My second pick is Massmart (JSE: MSM), a low-cost, high-volume retailer which is regarded by many investors as the Wal-Mart of South Africa. Like DAWN, this exceptionally well-run company is successfully expanding into similar countries in Africa. Being a cash retailer, the profitability of Massmart has proven to be defensive during the recent rising interest-rate cycle, and will certainly benefit from an increase in disposable incomes as interest rates decline.
African Bank (JSE: ABL) is a micro-lender exposed to the lower end of the consumer market. Regarded as the blue-chip company in this sector, African Bank has grown by leaps and bounds over the past ten years. The regulatory environment has improved significantly with the introduction of the National Credit Act, making it a lot safer to invest in companies of this nature. African Bank will benefit from growth in employment, and a slowdown in lending to consumers by the bigger South African retail banks.
I believe this infrastructure boom will go beyond the World Cup, with government spending to continue for at least another ten years as the country continues to invest in transport infrastructure, water reticulation, sewage plants, and low-cost housing.
The stocks Richard Middleton likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Distribution & W. Network | R1,474.55 | R608.85 | R690.00 |
| Massmart | R9,029.00 | R5,650.00 | R7,700.00 |
| African Bank | R3,024.00 | R1,940.00 | R2,618.00 |