Mike Schüssler wrote a piece about how the pandemic-induced rate cuts are impacting South Africa (Economic recovery: Low rates are playing a starring role). Taking this further, I am going to build a top-down investment shopping list for those who believe that rates will remain low-for-longer and inflation benign.
Simplistically, low interest rates are stimulative for an economy and drive (1) credit growth, (2) fixed capital formation, & (3) risk-taking while (4) keeping asset prices buoyant. These magical ingredients stand to benefit a range of industries, asset classes &, indeed, investors.
Credit Growth:
The interest margin between our repo rate (what banks borrow at) and our prime rate (what the rest of us borrow at) is currently extremely high. While prime is typically 3.5% higher than repo, this is a 100% “mark-up” if the repo is only 3.5% (as opposed to only a 50% margin if the repo is 7.0% and prime is then 10.5%)!
Thus, the winners here are logically the banks, especially if lower rates start to induce more demand for credit. (Yes, yes, we know all the regulatory and other arguments against our banks… That said, they are the single largest extenders of credit domestically and, thus, cannot be ignored.)
Other winners from credit growth would be the credit retailers in South Africa (e.g. The Foschini Group, Truworths & Lewis) and those whose sales are funded by this credit growth (e.g. the rest of the discretionary and luxury retailers, the residential property market & the automotive sector, amongst others).
Fixed Capital Formation:
This is a fancy term for building things. South Africa desperately needs this, and its beneficiaries are the heavy construction stocks (e.g. WBHO, Raubex et al) and the building materials stocks (e.g. Afrimat, Cashbuild et al) to the supply chains into these and related sectors (e.g. Hudaco for parts, Barloworld for capital equipment, & ADCorp, Workforce & CSG Holdings for labour).
Risk-Taking:
Who benefits from risk-taking? Offerings that provide people options to literally take more risks would benefit, for example, the casinos, LPM operators, stockbrokers and sports betting operators.
More economically relevant, though, this growth in risk-taking should help a new generation of entrepreneurs. Thus, beneficiaries could be businesses that offer commercial property (for those starting businesses and needing space) to banks (for financing these new businesses) and, even, to developers like Calgro M3 and Balwin that offer both residential house and the ability for individuals to buy-to-let.
Buoyant Asset Prices:
Low interest rates lift the valuations of most assets in an economy, thus bolstering balance sheets. This provides positive equity against which credit can be extended.
And, thus, we arrive back at positive credit growth…
I.e. This is a virtuous cycle.
Filtering the JSE:
Finally, irrespective of their industries, highly indebted companies are natural beneficiaries of low interest rates (assuming they have floating debt and/or can refinance at a lower rate).
Taking the above top-down & debt-sensitive aspects into account, I have done the following:
- I have filtered the JSE to show those stocks with the highest gearing (based on their Debt:Equity ratios > 100%),
- After ordering these from highest to lowest, I have further filtered for only the financial, consumer and industrial sectors (e.g. clear cyclical beneficiaries of the above), &
- Finally, I have worked through and cut out many inappropriate stocks (majority offshore exposure, small market caps, and various other subjective criteria).
Other than the stocks mentioned above, the below list may form a “lower-for-longer” shopping list worthy of that rare soul—a bullish South African investor:
| Code | Name | Sector | Debt:Equity (%) | Market Cap. (Rm) |
| SUI | SUN INTERNATIONAL LIMITED | Consumer | 3316,5 | 4,156.51 |
| MSM | MASSMART HOLDINGS LIMITED | Consumer | 1212,8 | 11,870.75 |
| TSG | TSOGO SUN GAMING LIMITED | Consumer | 801,1 | 6,931.24 |
| CLH | CITY LODGE HOTELS LIMITED | Consumer | 435,6 | 2,646.79 |
| TCP | TRANSACTION CAPITAL LTD | Financials | 257,8 | 23,095.97 |
| DCP | DISCHEM PHARMACIES LTD | Consumer | 174,1 | 21,054.87 |
| FBR | FAMOUS BRANDS LIMITED | Consumer | 172,1 | 5,912.94 |
| BVT | BIDVEST GROUP | Industrials | 169,9 | 58,785.80 |
| TFG | THE FOSCHINI GROUP LIMITED | Consumer | 135,4 | 39,852.38 |
| CMH | COMBINED MOTOR HOLDINGS LIMITED | Consumer | 128,6 | 1,514.74 |
| TRU | TRUWORTHS INTERNATIONAL LIMITED | Consumer | 112,3 | 21,824.84 |
| MTH | MOTUS HOLDINGS LIMITED | Consumer | 109,6 | 17,426.96 |
| HCI | HOSKEN CONSOLIDATED INVESTMENTS LIMITED | Financials | 105,8 | 5,137.24 |
| ATT | ATTACQ LIMITED | Financials | 101,6 | 5,230.80 |
| IPF | INVESTEC PROPERTY FUND LIMITED | Financials | 101,5 | 8,854.10 |
Finally, in a lower-for-longer scenario, consider how attractive high real yields might be too? This topic alone is worthy of another article but for brevities sake, you can see my JSE Power Hour over here on finding income on the JSE (LINK).
ORIGINAL ARTICLE APPEARING ON MONEYWEB.