Warming up to South African retail
The hottest sector for three years in South Africa -- retail -- has been taken out and beaten in 2013. Beaten hard! We highlight this because it is worth doing some work and making a call as the market has had a large move.[caption id="attachment_56910" align="alignright" width="300" caption="Looking down on central Cape Town from Table Mountain, South Africa"] [/caption]
Concerns are many on inflation and labor costs, which feeds through credit issues from both concerns.
There is a slowdown in growth but not dramatically so. South Africa is a victim of its own success, but many of these names are seen as strong local plays and also with major exposure to broader Africa.
And there is a reason why this was one of the greatest trades in emerging markets, if not the world for a long time. South African retailers are some of the best-run companies in the world and there is a local market in South Africa that supports its own, in addition to plenty of emerging markets and EMEA (Europe, Middle East, and Africa) dedicated investors that think of the likes of Shoprite, Woolworth Holdings, Truworths Internal and the Foschini group as examples.
Violent moves lower in these names of 15-25% in U.S. dollar terms (the rand has sold off as well), have come in large volume. There is real rotation going on by international players. South African retail has been sold off. This is setting up for a great opportunity to own some of the companies whose charts and valuations had gotten away.
Earlier this week, sales updates were released that might allow the water to begin warming up once again. Clothing trends for retailers like Foschini ( FHNIY , quote ) are positive despite tough comps. Jewelry (Truworths) and cell phone sales have been sluggish and may remain so. Homeware operator Shoprite ( SRHGY , quote ) continues to be the most impressive on trend performance and is expected to maintain.