Assessing JSE’s small cap premium

The small caps market in the Johannesburg Stock Exchange (JSE) has shown notable performance in the first half of the year, with a 9% increase year to date. Keith McLachlan, Chief Investment Officer at Integral Asset Management, shed light on the current state of small caps and provided insights into potential stock picks for investors looking to capitalize on the market's positive trajectory. McLachlan emphasized the historical performance of small caps on the JSE, noting that they should ideally generate mid to low teens total returns over a 20 to 30-year period. However, recent years have seen these returns fall short, with small caps struggling to outperform inflation due to economic challenges in South Africa. The outlook for the second half of the year remains optimistic, with the possibility of a strong performance driven by a favorable SA Inc narrative. McLachlan highlighted the impact of the new government of national unity on small caps, indicating that South Africa's peaceful democratic election and the formation of a balanced cabinet have helped de-risk the country politically. Global investors are starting to take notice of South Africa as a potentially attractive investment destination, especially in comparison to other regions facing economic pressures. The positive sentiment towards South Africa is reflected in recent upgrades by major financial institutions like JP Morgan and UBS. Looking at specific stock picks, McLachlan mentioned companies that have demonstrated growth and resilience, such as Pan-African, Grinrod, Ultron, and AFRIMAT, which is well-positioned to benefit from a pickup in industrial growth. Additionally, Hudeco and Spur Corp were highlighted as potential beneficiaries of positive changes in disposable income and consumer spending. McLachlan also discussed the education sector, pointing to Advitec, Stardeo, and Cura as key players that could thrive in an environment of increased demand for quality education. Despite the positive outlook, there are certain stocks that investors may want to steer clear of in the small cap index. McLachlan advised avoiding Pick n Pay and Telkom, citing challenges in their respective industries and competitive landscapes. Both stocks were experiencing losses on the day of the interview, reflecting the volatile nature of the market. In conclusion, navigating the small caps market in the JSE requires a granular approach, with careful consideration of individual company performance and industry dynamics. Investors may find opportunities in companies that align with the emerging trends in South Africa's economy and consumer behavior, while being cautious of potential pitfalls in certain sectors.