At the start of a new year, market commentators and participants have a tendency to reach for the "crystal ball" in order to reassess our investment strategies.
At this juncture, the vision is murkier than usual, but the consensus seems to be that an international recovery is being built upon a gradual slowdown in China as global growth continues to surprise on the upside. It is anticipated that world economic growth will be 4.1 percent in 2005 - growth that should see emerging markets move to centre-stage and grab the limelight for quite a few years. Emerging markets being Latin America, parts of Africa, China and the Far East.
The deficit in the United States is one of the major issues that will determine future growth. The deficit is something of a chicken-and-egg situation. To a large extent, the deficit is funded by Chinese and Japanese investments in US Treasury bonds, which serve to peg the exchange rate, thereby driving US export-led growth stimulated by the under-valued dollar. This delicate balancing act currently represents a win-win scenario for both sides.
A growing world economy seems to predicate the perpetuation of continued strength in commodity prices. This is good news for South Africa, although it probably means the three-year bull market in the rand will continue, possibly for another three years. With many local portfolios having produced staggering results in 2004, one cannot help but wonder whether this performance can be repeated for a second year.
There were some truly spectacular gainers last year. Iscor raced ahead by a whopping 92 percent, while Edgars gained an impressive 72 percent and Foschini, another clothing retailer, added an impressive 59 percent. Good results and a possible Barclays takeover bid propelled Absa 52 percent.
The strong performance of the rand took the shine off many commodity shares, and profits came under pressure. Randgold and JCI both fell about 60 percent, Durban Deep was down 44 percent and Palamin, the copper producer, fell 40 percent.
So where should we invest for growing capital and income returns in 2005? The financial sector begins the year with positive drivers in place that make our major banking groups - Absa, Firstrand, Nedcor and Standard - look attractive. As far as the life assurers are concerned, the pick of the pack seem to be a revitalised Metropolitan and Liberty Life - if the latter is able to build upon its reversal of its lacklustre performance of the past few years.
At a 20 percent discount to net asset value and with the potential for generous special dividends, Remgro should attract considerable attention. Remgro is still dominated by its tobacco interests, which have served it well for generations, but significant financial and industrial holdings give it added stability.
When it comes to the big industrials, Barloworld looks under-valued and ready for some robust growth. Underpinned by the cash generation of its 70 percent-held subsidiary, PPC, all one can see is blue sky. The apparently insatiable demand for cellphones seems to pulsate with the refrain "hello the future", so the MTN Group is also up there with the potential winners.
Other shares that make it into my winning selection for 2005 are: Anglo American, BHP Billiton, Sasol, Impala Platinum, Liberty International, Bidvest, SAB Miller, Woolies, Pick 'n Pay, Afrox, Reunert and Tigerbrands. For the first time in a long time, it looks as if Richemont should be added to the shopping list.
All things being equal, this should be a good year for financial markets, and thanks to the strong rand, "local is still lekker!"
- David Sylvester is the chairman of the Shareholders' Association, telephone (021) 686 7567 or 689 7855.
This article was first published in Personal Finance magazine, 1st Quarter 2005. See what's in our latest issue