South Africa: Small Caps Pose a Significant Buying Opportunity

analysis

The underperformance of the JSE has mid- and small-caps trading at dirt-cheap levels. This offers some hope in an economy and financial market drowning in doom and gloom.

While countries like the US and China have seen strong economic growth over the past decade, allowing corporations to thrive, South Africa stands in stark contrast. The country has made negligible to zero real economic progress.

The gravity of political malfeasance over the same period has created further structural headwinds for domestic businesses.

This has left the local stock market worse for wear and a growing number of listed companies are reporting results below expectations.

Corporate-specific challenges have added to the aggravation. There were multiple corporate failures due to mismanagement (think Abil, Steinhoff, Tongaat) and over-leveraged institutions that became vulnerable in a structurally low-growth environment (think Aspen, Ascendis Health, Tongaat and more recently Omnia).

But even enterprises previously proved to be resilient and former JSE stalwarts such as Mr Price, AVI and Shoprite have seen their share prices come under pressure following the release of unexpected disappointing trading updates.

Moving further down the JSE size curve, earnings reports and subsequent price movements have made for even more dreary reading.

The construction industry...

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