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Sector Snapshot: Cyclicals

By beled | September 28, 2013

David Leslie, a Director of Belmont Asset Management in Cape Town, gives a quick snapshot on cyclical stocks:

‘Several months ago, we identified relative value in cyclical shares.  The valuation levels of high quality companies such as BHP Billiton, Rio Tinto, Anglo American and Anglo Platinum were far more attractive than those of defensive stocks like SAB, Diageo and BAT.

‘One of the primary reasons for this was that investors have been chasing ‘safe’ yields for the last few years, leading to a lack of interest in cyclicals.  A further reason for the lacklustre valuations was China’s slowing growth, which saw rates fall from an unsustainable 10% plus per annum to a more reasonable 7 to 8% (still impressive, we should note!). In a purely South African context, an overhang of industrial unrest has also put pressure on cyclical share valuations.

The long and the short of it is that there was value to be found in selected cyclical shares and Belmont positioned client portfolios accordingly. In the current quarter (since July 2013) this strategy has already borne fruit: for example, Angloplats’ share price rose by 50% between early July and mid-September 2013, whilst defensive play, BAT remained largely flat over the same period.

Leslie adds, ‘Whilst possibly overbought in the last 3 months, relative to SAB and other industrial shares, Anglo as a proxy for SA resource cyclicals is offering as good value as at any time in almost 50 years. We believe that the current very bad news in the SA mining sector is creating excellent buying opportunities. While both companies have inevitably changed their makeup over the decades, until the credit crunch of 2008 Anglo’s share price had held its own with SAB for more than 40 years. A significant part of this may be ascribed to its leveraged rand hedge status.’

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