Aug 7 2008 3:42PMMarc HasenfussCape Town - The sustainability of...

Aug 7 2008 3:42PM
Marc Hasenfuss
Cape Town - The sustainability of earnings in listed companies has prompted asset management firm Allan Gray to adopt a more conservative approach to equities.
At the end of June 2008, the group's well-known Balanced Fund held only a 57.6% equity position if derivatives (market shorts) were stripped out.

Allan Gray's position is interesting in light of contentions that recent market weakness had returned segments of the JSE to levels that could be regarded as affordable.

Speaking at a media presentation on Thursday, Allan Gray's Delphine Govender warned the earnings multiples on the JSE may not be a true reflection of share value.

"One has to be careful about earnings multiples because there has been an explosion in earnings growth. There is a huge risk in expecting earnings growth to continue."

Govender estimated that current earnings multiples of 13 times could in fact be closer to 25 times based on trendline earnings growth going forward.

"There is considerably more earnings downside to come, especially with the economy looking a lot tighter right now."

No to big resources

Govender cited resource giants Anglo American and BHP Billiton as two counters that Allan Gray was currently avoiding specifically because a "normalisation" of commodity prices could have a huge impact on future earnings.

"We think Anglo and BHP Billiton are very expensive based on current high commodity prices. We have hedged out portfolio appropriately."

Govender pointed out that at current prices of around $177/ton for thermal coal it would take a new colliery roughly nine months to payback the start-up capital.

"We see $62 as a sustainable price for thermal coal, which would mean a new coal mine would require just over four years to pay back the initial investment."

Govender said Allan Gray was focusing on companies that showed defensive earnings growth or where earnings could be regarded as below-normal. "These are companies with distinct competitive advantages and geographic diversification or those that we hope will have earnings that normalise to a higher level."