Is there value to be had in the local market?

‘You have to depart from the crowd, think differently, and find those new opportunities’: Hannes van den Berg of Ninety One.

NOMPU SIZIBA: For a number of years there’s been a view that the South African equity market hasn’t had that much to offer by way of decent returns, and so offshore [investing] has been all the craze in the interim. But following the Covid equities crash of last year and the improvement in valuations in the domestic market, the conversation is shifting slowly to the notion that indeed there may be value to be had from the local market.

I’m joined on the line by Hannes van den Berg. He’s co-head at SA Equity & Multi-Asset at Ninety One. Thanks very much for joining us, Hannes. The view has been that South African assets have been struggling to beat inflation for the past five years or so. What’s your assessment of how the domestic market has performed over that time, perhaps excluding 2020 and 2021?

HANNES VAN DEN BERG: Good evening. Thanks very much for the opportunity. Global markets have been the place to be over the last few years – three to five years over the medium term – as offshore assets have outperformed local assets, more specifically the SA Inc [stocks] – banks, the retailers, and the property companies in South Africa.

And then to be exposed offshore – as well as the fact that the rand has weakened over that period, as you say, relative to the last few months – the weaker rand and strong global markets have been a better hunting ground for South African investors. In the shorter term, the past three to six months, that story has changed a little bit. But definitely over the medium term that was the place to invest.

NOMPU SIZIBA: Yes. Fast-forward to 2020, now what’s been the reality in terms of equity markets’ performance?

HANNES VAN DEN BERG: The South African equity market year to date is up 13% relative to most developed markets, where those equity markets are up a single digit.

Our SA government bonds in real terms give you a nice return relative to inflation, inflation being around 4.5%. You can get 9% to 10%, and maybe even a bit above, in some of the SA government bonds.

Our view and our investment philosophy is one where we look at behavioural biases of investors, and if you listen to the same television channel or radio channel or read the same newspaper or go to the same website every day, you struggle because of a sort of confirmation bias. You read the same things over and over, and therefore it’s very easy to have a negative view on South Africa and people maybe, because a lot of headlines over the last five to eight years have got that very negative view towards South Africa.

One of the benefits at Ninety One is we leverage off our global colleagues, guys who sit in London and Hong Kong and other parts of the world, who look back from there towards South African and say: “Guys, you’ve got quite a lot of good investment ideas right under your noses.”

NOMPU SIZIBA: A different point of view. So, from your professional investment point of view, what stocks are looking like they could have good value in the South African setup?

HANNES VAN DEN BERG: I’ve mentioned bonds that offer good value at these levels. But domestic equity as well. I’ve mentioned the likes of the SA Inc sector, and some of the companies that recently reported.

A company like Truworths gave just short of R4 earnings for the first six months of the year. The market was expecting R4.50 to R5 for the full year.

So suddenly the market realises, okay, well they’ve delivered in six months what we thought they were going to give us in the full year, and the market starts adjusting their forward earnings expectations higher.

We tend to believe that as the market adjusts those added expectations higher, the share price follows.

A stock like Motus, the vehicle dealerships, delivered R5.07 earnings for the first six months. The market was expecting R5 to R6 for the full year. So now suddenly the share price has gone from R40/R50 to close to R90 and above. That’s because the markets have moved their earnings expectations to R9 and R10 per share. The share price follows.

NOMPU SIZIBA: I see that you’re highlighting the mid-caps more than anything else. Do you think that’s a better place to be because of course there’s more scope for growth than in something like Naspers?

HANNES VAN DEN BERG: Because of 2020, a lot of the earnings bases of companies were halved. The earnings expectations for companies went down 40%, 50%, 60% and the share prices followed. So companies that had a decent market cap you can argue are now mid-caps because of the share-price movements that we’ve seen during the pandemic. But yes, that is a good hunting ground for retailers.

Having said that, our commodity producers, the likes of Anglo American, BHP Billiton and the whole platinum sector, Impala Platinum and Sibanye, those companies have also been supported by very strong supply-demand dynamics for their commodities. Therefore, the earnings expectations were also exceeding to the upside, and the shareholders have benefitted from being invested in some of those companies – I would say some of the resources and some of the SA Incs.

We can talk more about retailers or we can talk about the banks and financial companies that offer very attractive return profiles from an earnings perspective, and these are very reasonably priced at the moment.

NOMPU SIZIBA: But I suppose the key thing is that even if you do decide to take an interest in these stocks, you’ve got to be in for the long haul.

HANNES VAN DEN BERG: As I said, the basis was shot, and share prices followed to very low levels. What we’re seeing is a strong recovery in those earnings profiles and share prices.

Now you have to ask, how does that play into 2022 and 2023 to the medium term? We tend to think that this country was given another lifeline because of high commodity prices, lower deficits, and low issuances. Therefore, the rand is a lot stronger because our fiscus is in a much better position. And we tend to think that, coming through this, consumers’ savings rates have gone up because people, due to lockdown, were more at home and there was less spending on entertainment, consumer income was more resilient, and credit health is better than expected.

So, household consumption, together with a positive current-account surplus, is a big tailwind for consumers and for interest rates that are 300 basis points lower. That’s quite a big injection of liquidity.

And, as I said, strong commodity prices because of global markets being well balanced give an opportunity potentially for this to continue into the medium term. Lots of tailwinds for global markets as well as the South African market.

NOMPU SIZIBA: So, with offshore investment having been the craze in recent years and valuations going through the roof, particularly in the United States, what needs to be the strategy there, especially given that one day the stimulus rug will be removed – which could see some counters come back down to earth in terms of their evaluations.

HANNES VAN DEN BERG: What is so different in this crisis relative to maybe 2008 is that a lot of the monetary and fiscal stimulus went straight into the bank accounts of consumers, whereas in 2008 it went to inject liquidity into the banking system. So a lot of the stimulus has gone directly to the consumers and we’ve seen a lot more speculation earlier on in the cycle than maybe one should find.

Often in a recession you get a recovery and then the growth; euphoria follows, and then a lot of speculation comes to markets. This time around people would be familiar and remember the GameStop event in January this year, ETFs [exchange-traded funds] being quite involved in markets. And as money, because of all the stimulus that was going on, found its way into markets in ETFs, as money flies in those, those products just keep on buying the equities, irrespective of the price and the fundamentals linked to it.

So it’s a great opportunity for active fund managers to find mispriced opportunities and to sell those opportunities where we feel they’ve overshot to the upside.

Passive funds have little discretion. They must invest those inflows, whereas active fund managers can do the work fundamentals, find confidence in their ideas, and then allocate capital to do that. To do that better than most others you have to depart from the crowd and think differently, think outside the box and find those new opportunities.

NOMPU SIZIBA: That was Hannes van den Berg, co-head at SA Equity and Multi-Asset at Ninety One.

Brought to you by Ninety One. 

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