Volatility in an uncertain market

‘2020 was a volatile year, we’ll probably never forget March and April last year’ –  Hannes van den Berg, Ninety One.

NASTASSIA ARENDSE: This feature is brought to you by Ninety One, investing for a world of change. Covid-19 chaos and extraordinary volatility notwithstanding, it was gratifying for the team at Ninety One that the SA equity market recovered all its losses by the end of 2020. This year started strong with every indication that we are all well positioned for further recovery. So I spoke to Hannes van den Berg, who is the co-head of the SA Equity and Multi-Asset division at Ninety One about the year that was, especially as it relates to equity markets. Have a listen.

HANNES VAN DEN BERG: Yeah, 2020 was an extraordinary year, a year that we all would like to forget but probably never will, because of being sent back home, changes, and the impact it’s had on our personal lives, across South Africa, [and] for us as a team at Ninety One. Because we’ve got a global approach to managing money – with teams sitting in various offices across the world, how we set up our systems and how we communicate and interact with each other  – [it] was actually quite seamless to work from home and to still dial in and be on calls with colleagues because that’s sort of the environment. We’ve been doing it for a while.

Markets-wise obviously it was a volatile year. We’ll probably never forget March and April last year.

Speaking to some of our global colleagues when the markets crashed and the Covid-19 pandemic broke across the world, we realised that liquidity was drying up; global colleagues were talking about certain markets and the fixed income side, where there literally weren’t any bids and they needed the markets to get out of those positions.

And then as the conversation progressed, the weeks that followed, we realised the size and the speed with which central banks reacted globally, and maybe that’s something we learned in 2008 … they already had a plan that we could implement much faster, to inject liquidity and bids, and markets started to normalise. And it’s not often that you look back on 2020, a year where most geographies had negative GDP growth – maybe with China being the exception – that all the countries and economies swept through a recession, but equity markets, where we stand today, are higher than where we were in the last year. So it’s been an extraordinary year.

NASTASSIA ARENDSE: It’s [now] March 24th. So how would you characterise the start of the year, especially from looking at our equity markets?

HANNES VAN DEN BERG: That’s a very good question and a good point. The South African equity market[s] year to date, from the beginning of this year to March as you highlight, are up more than developed markets, equity markets.

Our equity markets are up about 10%, most developed markets are up only 5% and … to add to that, the value is much stronger than where it was. I mean, in [the] whole Covid-19 pandemic, etc, we also got downgraded by the ratings agencies. So that government bond rating got downgraded to junk and our rand went all the way to R18/R19 [to the dollar]. And as [of] today, the rand is below R15.

So to have your money offshore, in hard currency, versus local, you would have been better off investing in the South African JSE All-Share and some of the sectors in our market, the resources sector; the retailing sector has done phenomenally well. I mean, they are up, resources are up to 12% to 13%, the general retail index is up over 20%. There are a lot of opportunities on our local index.

NASTASSIA ARENDSE: I was looking at your Ninety One Equity Fund and the way the domestic portion of your portfolio is put together is quite interesting. Take me through that in terms of how you’ve positioned the portfolio, especially as a team, to access some of those pockets of the market that you believe could perform well.

HANNES VAN DEN BERG: …We’re quite fortunate to have a team of very experienced, what we call ‘career analysts’: people who [do] research and analysis of companies from a bottom-up perspective for a career. That gives them the opportunity to do research on the company, the industry around the company, the macro that supports that company, those companies relative to each other, go through financial statements, speak to management, speak to competitors. [This] puts us as fund managers on the front, which means we will have people who go through in-depth, bottom-up research. And [with that] when we hunt or look for these ideas, we like to invest in companies where the future earnings profile of the company [is] being revised positively or higher. And we want to buy companies with an improving earnings profile, at a reasonable valuation. And obviously we want to avoid those companies that have a degenerating earnings profile.

And then the thesis behind it is we believe that share prices in the markets one-year and two-year forward expectation of an earnings profile of a company and as the market upgrades that earnings profile, the share price moves with it, and obviously the opposite as well.

So coming back to your question around the SA market, we found quite a lot of those opportunities in what we defined as the SA Inc space – I’ve mentioned the retailers, some of the industrial companies on the South African side, some of the banks. There are analysts who, in the second half of last year, started indicating that the market [was still too] pessimistic on earnings expectations and that these companies [were] going to exceed consensus and market expectations from an earnings perspective and they were trading at incredibly attractive valuations.

I’ll give you one or two examples: with a stock like Truworths and a stock like Motus – one being in retail and the other one being in the industrial sector but more into vehicle sales – these companies, when they recently reported their half-year results, reported earnings numbers that were very close to what the market was expecting them to deliver on the full year. And if you expected a company to give you R5 earnings from a full year, and you put a 10 P/E multiple on it, that share should trade at R50. But when these companies report that to show … the earnings need to go up to R8, R9 or R10. And if you put 10 P/E on that, then the stock should be trading at R80, R90 or R100. So some of these stocks have given 40%/50% returns over the last six to 12 months.

We’ve allocated to that SA Inc space, and we are also very positive on the resources space: some of the platinum miners where supply and demand dynamics for platinum, palladium and rhodium are still very supportive.

the copper price is much higher than what people expected but at this stage miners benefit from it. The iron ore price, roughly today trading at $160, a material higher than what most people have got in their models. So this cycle of the market continuously upgrading their one-year forward earnings expectations for these companies, we still think is intact. And therefore we’ve allocated a lot of capital to resources as well as some of the SA Inc opportunities.

NASTASSIA ARENDSE: A little bit earlier on, you were talking about where we are right now. What are your expectations for the year in terms of the way central banks will continue to be supportive, the way you see vaccine rollouts affecting different sectors? Are you expecting more of a stop/start when it comes to the global economy, South Africa included? Or where are you seeing things?

HANNES VAN DEN BERG: That’s the crystal ball question. The honest answer to the crystal ball question is we don’t have a crystal ball. …our view and I think consensus views [are] not too far from that… in 2008 the central banks and the monetary and also fiscal stimulus that took place was to help out in the banking and financial sector. This time around a lot of that cash went into the postbox and the bank accounts of consumers. So it’s a bit different this time around than it was in 2008.

But the size and speed of injection of liquidity is unheard of. And where we are now, if the markets are obviously priced in a lot of the positive [elements] that that brings, the balance between the rollout of vaccines and third and fourth wave infections is what people want to get their heads around. Who knows how many waves we are going to have. Who knows how effective the vaccines will be, how many variants of the virus we will still see. We all want to be positive about it and therefore believe that some form of normalisation or increase in mobility for the services sector globally [will happen] to also recover as the manufacturing sectors have recovered. And that keeps on driving good growth, which is good for equity markets and therefore we continue to think that equity markets will drive higher domestically as well as globally.

There’s obviously going to be volatility because [there is] consensus to be negative on the dollar, therefore expecting a weak dollar. It’s consensus that vaccines will be rolled out; it’s consensus for central banks to stay as accommodative as they can. And usually when things turn consensus, you have to worry about what can potentially go wrong. So we are trying to stay close to the risks that are out there. I’ve highlighted some of the risks and then the South African market as well. The jury is still out. I mean, we just spoke to Pepkor management this morning and they tell us they are still cautious on lending into the South African economy to consumers because we don’t know whether the job loss effect has played out in the South African economy.

We had a recent, decent budget in February. How can we execute on Mr [Tito] Mboweni’s budget? There is lots of good intent there, but we’ve seen since then that the unions and one or two other parties [that] are not too happy with the budget. So a lot of political will, but can we execute on all of that? And if we can, then yes, then there’s fantastic profile and the potential recovery for our South African economy that we can also look forward to. But as I said, there are also risks attached to that. So somehow I think we are fairly constructive and we think, globally as well as locally there will be pullbacks, there will be volatility, but we tend to think that markets will continue to grow higher.

NASTASSIA ARENDSE: That was Hannes van den Berg, co-head of the SA Equity and Multi-Asset division at Ninety One. This feature was brought to you by Ninety One, investing for a world of change.

Brought to you by Ninety One.

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Just buy some AIL (ArcInvest) shares,
they go up when the old banks keep dropping.

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