As you position your portfolio for 2024, here are some local ideas that are worthy of consideration.
Before diving into some ideas for you to think about this year, it’s worth recapping an important concept about single stock exposure vs. Exchange Traded Fund (ETF) strategies.
A single stock needs to beat an ETF
The first thing to keep in mind when choosing single stocks is that they need to beat ETFs that track a broad index – and by quite some margin. This is because a single stock is riskier than an ETF, so it stands to reason that it must offer a better potential return in order to justify a place in your portfolio.
In other words, if you believe that a specific stock will give a return that is in line with the broader market, then rather buy the ETF. And of course, it’s a good idea to keep buying ETFs as part of growing your equity exposure, with single stock positions to complement the ETFs rather than replace them.
With that out of the way, let’s consider some local opportunities that have decent prospects in 2024.
Shoprite – the quality choice
This is a cliché option for a reason.
Shoprite operates in a market that is massive. South Africa may not have a growing economy, but we do have a growing population and more mouths that need to be fed. As large as Shoprite is, there is still much market share to be won organically. The company can literally feast at the carcass of Pick n Pay, a business that hasn’t yet shown any signs of a turnaround – at least not at store level, based on my experience on a shopper.
Although there are contrarians in the market who are punting at Pick n Pay under new management, grocery retail is much more difficult than most people think. This is a game of tight margins where a decade of strategic missteps can suddenly catch up with you all at once. It takes a long time to rectify those problems.
In the meantime, Shoprite can keep taking market share, as it has been doing in recent years. The group can also continue to give Woolworths a lot to think about at the top end of the market, particularly as middle-class South Africans continue to face major inflationary pressures in our “double tax” environment of paying statutory tax and then secondary tax in the form of private security, schooling and healthcare. Through its Checkers business, Shoprite offers compelling value to that market and the results have been speaking for themselves.
The biggest risk is arguably load shedding and the impact it has on a company trading at a Price/Earnings multiple of 23.5x. The best strategy with Shoprite is to watch for pull-backs (often linked to higher levels of load shedding) and take advantage of them. This is the type of stock where you want to build a position over time by actively keeping an eye on the chart.
Listed property – the thematic interest rates play
The market is expecting several interest rate cuts this year by the Fed. Although the cuts are not guaranteed, market consensus is that we’ve seen the worst of interest rates. This is encouraging news for the property sector.
There are two reasons why a drop in rates helps local property funds. The first is that debt in South Africa is typically variable in nature rather than fixed. This means that debt costs rise and fall with prevailing interest rates. Much like on a buy-to-let investment, cheaper funding is a good thing. The second reason is that lower rates in the market also lead to lower cap rates for valuing properties. In simple terms, this means that property valuations are more likely to increase as rates come down.
A combination of better dividends (thanks to lower rates) and higher property valuations is good news for share prices. Still, one has to be careful in this sector. The macro story may be favourable overall, but some funds are still dealing with painful office exposure or major debt refinancing requirements at higher rates than before. For example, based on recent guidance, a group like Growthpoint is perhaps best avoided this year. Names like Shaftesbury and Vukile look interesting.
My favourite play is to load up on local property ETFs in my Tax Free Savings Account (TFSA). The big win here is that the dividends are tax free, which is supremely useful when it comes to property funds as a Real Estate Investment Trust (REIT) dividend is taxed in your hands as normal income, not a dividend. In other words, the tax rate for most investors on such a dividend is much higher than on normal dividends – when held outside of a TFSA, of course!
This makes the property ETFs an interesting choice for a TFSA, especially when going into a period of hopefully declining rates. There are a few local ETFs you can choose from, like the Satrix Property ETF, 1nvest SA Property ETF and CoreShares SA Property Income ETF.
If you’re going to pick just one stock to play this year, Shaftesbury would be my choice.
Sun International and Zeda – the tourism winners
The tourism market is experiencing a wonderful rebound after Covid. Also, the relatively weak rand actually does us some favours here! Not only does it attract international visitors to our shores, but it makes it more difficult for South Africans to travel abroad with their green mamba passports and R100-for-a-beer problems. This means more locals taking a Sho’t Left and spending on local tourism experiences.
Although there’s no denying the pressure that the average consumer is feeling, it’s also quite clear that spending on experiences is a post-Covid priority for most families. This is the Instagram age, where the travel bug bites and keeps biting, as we are exposed to wonderful travel memories and experiences on an ongoing basis on social media.
The net result? Demand for flights, hotels and rental cars. You can invest in two out of those three sectors right here on the local market.
There are a few hotel stocks to consider, but Sun International could be a decent option. The group is feeling confident embark to chase the acquisition of Peermont, a transaction that is likely to take a while with the Competition Commission. There has been insider buying by both the CEO and Value Capital Partners over the past year or two, so that’s a vote of confidence in the strategy. There’s also a solid dividend yield!
Perhaps the less risky option is Zeda, which is still trading on a bargain basement P/E multiple of 3.2x. This would be my pick for tourism exposure, as the car rental business probably had a solid festive season. Of course, we will only know for sure when the next financial results come out!
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