To review the sector's performance, CNBC Africa is joined by Anthony Clark, Independent Analyst, Small Talk Daily Research.
The JEC's small caps index is up 17% since January, versus a more than 6% gain for the JEC all-share index over the same period. Essentially, the JEC's SMEs are expected to benefit from the upcoming rate cuts that could spur a lot more growth in the economy as a result of more spending. But to review the sector's performance in totality, and to take us through some of the topics, I'm joined by Anthony Clark, Independent Analyst for Small Talk Daily Research. Anthony, thanks so much for your time. Globally, what has been the main conversation is just the broadening of the rally across stock markets, as it were, and so the shift between the leadership on the stock markets that's been tech into the other parts of the market that are expected to benefit from a stronger US economy. In South Africa, not so much attention being given, but I can see that the broadening has been quite strong, nonetheless. So in the main, is the small caps index just positioning for a boost from rate cuts and possible economic growth that could follow? Yeah, good afternoon. That's a great question. Now, you mentioned about the small cap index today is up roughly 17%. So it's materially ahead of a movement in the Aussie index. But for the first nearly six months of this year, the indices, the small cap index and the mid cap index basically went nowhere. They were only up a couple of percent. And then interestingly, the exact dates of market movement was June the 10th, which is a few days after the formation of the government of national unity. Once it was confirmed, you'd have bought the index, the small cap and the mid cap index and back date, you'd be up about 17% of a small cap index and about 11 to 12% in the mid caps, showing that timing is everything. And a lot of that was due, I think, a combination of the euphoria that a lot of the political tension had been removed from the marketplace. And as we all know, small cap and mid cap stocks tend to have a domestic focus and any potential uplift in the economy from the government of national unity, as you mentioned, interest rate cuts declining and perhaps a bit more set of positivity in the market really spurred that index substantially higher. And it has not stopped. The small cap index has continued to run. It recently hit a new 52 week high, in fact, an all time high of the mid cap index is continuing to lag. But despite significant movements in the last three months in the small cap index and specific shares, there's plenty of value left. Many of your listeners may remember, but you could have easily bought some quite good quality small and mid cap stocks late last year into the early part of 2024, trading on PEs of threes, fours and fives, which is historically low for what are fairly interesting companies, if you catch them right. Yeah. So some of those interesting companies you have in your note, the likes of Affirmat, Argent, Astral Foods, Curo, Lipstar, Premier Foods, Raynet. Why are these some of the most loved parts of the small caps index, as it were? Yeah, at the start of every calendar year, I publish a top stocks list for my institutional clients showing the stocks that I believe in the course of the next 12 months could substantially outperform the indices. I've been doing this little self competition for the best part of 20 years, and I chose a number of stocks this year for their defensiveness. I believe there may be some political uncertainty because of the election, and I chose mid cap stocks for a combination of balance sheet certainty, robustness, liquidity. And if they were to do well on the back of a positive government, they should perform significantly better than the overall indices. And that has proven to be the case. The list there is quite diverse. You've got a couple of small caps like Argent Industrial and Novus Holdings and some very large caps. Raynet and Premier Group, for example, are north of 10 billion Rand each. So I updated this little list, as you saw there. And today, on average, we're up about 36 percent as a collective basket. But the best performing small cap yielded is Argent Industrial, showing that its diversity in moving its business offshore, particularly to the UK, using South Africa as a low cost manufacturing base and selling its beneficiated steel products into the UK, Europe and the U.S., has paid substantial dividends. And then on the bigger cap side, Premier Milling or Premier Group, which is the country's largest bread company, basically has benefited from a cessation of load shedding, soft commodity prices coming down by 10 percent, particularly in wheat. And the consumer, who we all know, is under the whip, looking for affordable price points in core basics like bread. And that's done exceptionally well. So every stock tells a story, depending on the sector that you're in. And that list, I believed, was the best performing individuals across the entire sector that I cover. So, so far, year to date, up 36 percent, but they are cast in stone until the end of the year. Any areas of concern in this complex? I mean, we do know when you were talking about the robustness of balance sheets, we do know that a lot of small caps did not have the most robust of balance sheets, particularly in the aftermath of the COVID-19 pandemic, with the high cost of capital and the high debt burden on their balance sheets. So any ones that you would be shying away from right now? Well, in the list, no, because we're all chosen for a specific reason. In the general economy, so far, everything has done well. I've been through a number of cycles in the small cap sector going back to the mid 1990s. And whilst P.E. ratings have unwound consistently for the last 30 years, what we have seen is when the relative sentiment towards the sector starts gaining some traction, specifically because the ratings have been so low, the market looking for some underlying alpha to try and gain some performance in underlying portfolios tends to gravitate towards the small to mid cap sector to try and get that extra gain. So as it stands right now, there's no specific sector that I would really shy away from. There are certain areas that have some cause for concern, like, for example, in the leisure sector and the gaming sector, perhaps the implementation of a smoking ban may cause some traction or some ructions in the near term as the government and the industry sort of thrashes that out. In the supply chain and logistics sector, we've seen the likes of Supergroup, Grinrod, Cap, amongst others, still bemoan the fact that Transnet and Portnet are holding back the underlying potential of certain sectors. So it's very stock specific. But as a whole, I'd stick with the winners, which is, in this case, private education, certain types of exporters and domestic focus stocks that have a specific niche, either to the consumer or to an industry where they have very good performance and capital allocation track records. And again, in this list so far, there's nothing in that top nine, but I would certainly want to change. They all have exceptionally good management, good moats and fairly good, robust balance sheets going forward. Sure. Well, I would just choose or agree with you on your pick with Premier Foods on the basis that I like their speckled eggs, but that is no reason to make an investment decision. But Anthony, thanks so much for your time. So we'll leave it there. Anthony Clark, independent analyst over at Smalltalk Daily Research.
Theme: South African small caps index surges amid economic optimism
The South African small caps index has been making waves in the market, delivering double-digit returns and outperforming the broader all-share index. Since January, the JEC's small caps index has seen a remarkable 17% increase, compared to the modest 6% gain in the JEC all-share index over the same period. The surge in the small caps index has sparked discussions about the potential reasons behind the rally and the outlook for the sector. To delve deeper into the performance of South Africa's small caps and explore some key topics, CNBC Africa sat down with Anthony Clark, an Independent Analyst at Small Talk Daily Research. Clark highlighted the significant movement in the small caps index, noting that for the first few months of the year, the index remained relatively stagnant. However, following the formation of the government of national unity, there was a notable uptick in both the small cap and mid cap indices. Clark emphasized the impact of political stability on the market sentiment, as well as the anticipation of interest rate cuts and a more positive economic outlook. One of the key drivers behind the small caps' rally has been the optimism surrounding potential rate cuts and economic growth. Small and mid cap stocks, known for their domestic focus, stand to benefit from an uplift in the economy, as seen in the recent surge in the small caps index. Clark pointed out that many investors had the opportunity to acquire quality small and mid cap stocks at historically low price-to-earnings ratios earlier in the year, presenting significant value. Clark also discussed some of the most favored stocks within the small caps index, including Affirmat, Argent, Astral Foods, Curo, Lipstar, Premier Foods, and Raynet. These companies were selected for their defensive qualities, balance sheet strength, and growth potential. Among the top performers, Argent Industrial stood out for its successful expansion into international markets, while Premier Foods benefited from favorable market conditions. While the small caps sector has seen remarkable growth, Clark acknowledged that there are always areas of concern. He highlighted potential challenges in sectors like leisure and gaming, citing regulatory issues such as smoking bans. However, he remained confident in the overall performance of the sector, advising investors to focus on winners with strong management and robust balance sheets. In conclusion, the South African small caps index continues to show resilience and promise in the midst of economic uncertainties. With the anticipation of further rate cuts and positive market sentiment, small and mid cap stocks are poised for continued growth. Investors are advised to conduct thorough research and consider the specific strengths of companies within the small caps index to make informed investment decisions.
"The South African small caps index continues to show resilience and promise in the midst of economic uncertainties. With the anticipation of further rate cuts and positive market sentiment, small and mid cap stocks are poised for continued growth."
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