Richemont and Bidvest are among the top choices with analysts this year, having shown great resilience in tough economic times, something clearly evident in the performance of their share prices.
The luxury goods market is generally less affected by high inflation and poor economic conditions thanks to its well-heeled customers, who do not change their spending habits much in tough times. Sales in the sector are expected to remain robust.
For this reason, Richemont — which has brands such as Cartier, Van Cleef & Arpels and Mont Blanc — has become a heavyweight on the JSE. For many analysts it is top of the list to hold. Its share price is up as much as 17% so far this year, with a gain of 32% in the past 12 months.
“For Richemont specifically [compared with other luxury-goods stocks] we like the exposure to branded jewellery — a fast-growing segment within the broader luxury goods market,” said Chantal Marx, head of investment research at FNB Wealth.
In a recent update, Richemont showed it was experiencing a slowdown in the US market, raising concern about how weak the world’s largest economy may get. While it did not provide an outlook for the rest of the year, it did raise concern that China’s macroeconomy “could affect both high-end and aspirational consumers”.
Still, Marx said the company is in a strong financial position. “The current share price looks like an attractive entry point.”
Echoing Marx’s sentiment is Tasneem Samodien, research analyst at Old Mutual Wealth. “Management has been exceptional at managing the health of the balance sheet and navigating economic crises, which positions the company as an ideal long-term holding in an investment portfolio.
Long-term case
“The valuation is attractive currently, given the sell-off in response to short-term market surprises — particularly slowing growth in the US and China remaining weak.We think it is a good entry point into a quality investment,” said Samodien. “We view Richemont as a ballast in our local equity portfolio, providing SA investors with a rand hedge given the rand’s depreciation to hard currency over time. We hold Richemont for the long term.”
Regarding Bidvest, analysts appreciate the company’s resilience through a diversification strategy, as opposed to Richemont’s organic resilience. Analysts say Bidvest management’s agility and adaptability are key factors of its long-term investment case.
Even during Covid-19, Bidvest they were “able to pivot their portfolio to parts of the market that are experiencing growth, and are able and willing to make difficult decisions when it comes to downsizing divisions that are underperforming or have a poor outlook”, said Samodien.
“Their renewables division and Voltex sales increased five times in their recent interim results, driven by sales of solar panels, inverters and batteries,” she said.
Marx said the company is good at making smaller bolt-on acquisitions complementary to its existing portfolio, “thereby blending inorganic and organic growth to show steady expansion and good returns on invested capital over time”.
The company’s share has gained more than 24% so far this year.
Not cheap
Though Bidvest, which has interests spanning cleaning services, and vehicle and freight management, isn’t entirely immune to economic cycles, it is preferred as its ability to diversify makes it defensive in difficult times.
Marx did point out the company’s share price is not particularly cheap relative to its longer-term ratings, and though it is a solid bet over the long term, “we would probably wait for a better entry point beyond the weakness seen over the last two weeks”.
Another one to hold onto is Bidcorp, a global market leaders in food services. The company has benefited from the strong rebound in the travel and leisure sector as economies reopened after the pandemic.
Marx said there is scope for more to come, particularly in China and the rest of Asia, but cautions that slowing economic growth globally may prove to be a dampener.
“Bidcorp is highly cash generative, with low gearing, and it is another quality investment option with rand hedge benefits for local investors,” said Samodien. “The group has had a strong run this year and growth potential is strong. Food services are in high demand and we don’t see that slowing down. Thus we view it as a hold in our portfolio for the long term.”
Analysts are also bullish on the services sector, particularly banking stocks. SA banks are benefiting from higher interest rates while lending and transaction activity is still holding up well, analysts say.
However, credit losses have been rising due to deteriorating macroeconomic factors such as higher rates and high inflation that have knocked consumers in recent months.
Under pressure
David Shapiro, chief global equity strategist at Sasfin Wealth, said the banks held up well, having come out with good numbers, but “concern about the US economy and the global economic growth remains at the back of our mind”.
As such, bank earnings are expected to come under pressure in the short term.
In the longer term, Marx said concerns over credit quality are expected to normalise should interest rates come down, inflation becomes more manageable and economic growth recovers.
FNB Wealth see the most value in Nedbank, Absa and Investec at the moment, but “structurally lower returns on equities for Nedbank and Absa and exposure to the UK for Investec could limit a rerating in relative terms”.
Much like the case with Bidvest, Samodien said banks are also benefiting from investment in renewable energy and backup power solutions, “which we view as a medium-term growth driver for bank loans and advances”.
“With rates remaining higher for potentially longer, banks also benefit from higher net interest margins, driving strong earnings and healthy dividend growth for investors,” Samodien said.
FirstRand, Standard Bank, and Capitec are in Old Mutual Wealth’s local equity portfolio, she said.
“FirstRand has been more conservative in advancing credit since the Covid-19 pandemic, and thus their earnings are expected to be more resilient. Standard Bank has been benefiting from strong growth momentum in the rest of Africa — setting them apart from other local banks, while Capitec’s business bank, which is set to launch soon, will be just as disruptive as their retail proposition,” said Samodien.
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