CAPE TOWN – After the start to the year that markets have had, there is understandably a lot of nervousness around. Investors are worried about how much worse things might get.
One must however be careful of letting short-term noise distract from long-term fundamentals. This is a point made by the chief investment officer at PSG Asset Management, Greg Hopkins.
“At the moment we think the market is thinking too short-term and reacting to negative news flow,” Hopkins says. “But as asset prices fall, things become less risky, not more risky.”
He argues that there is actually better news for investors than there was 12 months ago. If one takes a holistic view of asset prices, there is actually more to take comfort in now.
“A year ago we felt that equity markets on balance were expensive, particularly blue-chip companies,” Hopkins says. “We also felt that government bonds were expensive. Yields were at low levels and we didn’t think they compensated for the risk.”
PSG was also negative on local listed property, which it saw as expensive as counters were trading at large premiums to the underlying assets. The best opportunities were offshore.
“We also had record cash levels, which peaked around April and May, at about same time as the market,” Hopkins adds.
Since then, however, PSG believes that there has been a notable change across asset classes, with perhaps one exception.
“We still think that high-quality blue-chip shares are expensive,” he says. “A lot of them are rand hedges, and because the rand has fallen, they have stayed at elevated levels.”
However, government bonds are looking more attractive in their view, and they are starting to see opportunities in the listed property space as share prices have fallen.
“We have mixed emotions about offshore equities because we still we still think you can get global brands at bargain prices,” Hopkins says. “But the rand is now at record levels, nearly four standard deviations away from its long-term average, so if you are taking money offshore you are not going to get the same tailwinds from the depreciating rand.”
Importantly for investors looking for income, the yields on cash are also more attractive than they have been for a long time.
“You can now get an 8.5% yield on one year bank NCDs,” says Ian Scott, PSG Asset Management’s head of fixed income. “So you are getting real yield without taking a massive amount of credit or duration risk.”
He adds that the story in the bond market is similar. Investors can currently get a 3% real yield on short-term government bonds.
Property shares are also starting to attract PSG’s interest.
“We have not owned property for many years because it was trading at such high premiums to net asset value (nav),” says Scott. “For instance, Growthpoint was trading at 40% above its nav. But what we have seen with the shift up in the yield curve is that property prices have come down, and they are starting to look more attractive than they have in many years.”
When it comes to local equities, PSG believes that the best opportunities are to be found outside of the big blue-chip industrials that have driven the market over the last few years.
“The current price-to-earnings (PE) multiple on a basket of cyclical shares is around eight times,” Hopkins says. “The whole basked has de-rated by about 30% since 2012.”
By comparison, a basket of blue chip shares is trading at a current PE of around 25 times, which is even higher than it was three years ago.
“When we look at these companies we actually see risk that you are buying at a very high price,” says Hopkins. “From a philosophical point of view we would rather buy companies on low PEs, where the chances of the market being wrong and seeing an upward mean reversion is greater than expecting even rosier performance from already high bases.”