The question of whether there is still value to be found on the JSE – with the All Share Index (Alsi) at record highs – elicited an interesting discussion between fund managers at a recent investment conference hosted by Morningstar Investment Management SA.
The short answer is that there are still a few sectors that offer opportunities.
Sean Neethling, portfolio manager at Morningstar, noted that the past 20 months have been unprecedented in financial markets – with most experiencing a sharp sell-off at some stage, only to recover to historic highs.
“Just when you think you know what will happen next, the ballgame changes. It’s no wonder investors often don’t know which way to turn to and sometimes seek safety in cash-like instruments,” he says.
The performance of the JSE proves his point. In March 2020, the Alsi crashed by around 30% in a few days to a low of 40 000 points. It recovered to a high just shy of 73 000 points last week, rewarding courageous investors with a gain of more than 80%.
Alternatively, one can measure the performance since the beginning of the year. Since January, the JSE has chalked up gains of a more-than-satisfactory 22%.
Will local still be lekker?
However, Neethling says local investors are now facing a challenge: “Going forward, will local still be lekker, or should investors be venturing more into offshore equities?”
He says he was reminded, during a panel discussion on the potential for local equities, of how volatile and uncertain equity markets can be, and how the best opportunities can often be found in less popular and unloved parts of the market.
It was easier when the whole market was unpopular for a few days in March 2020, but more difficult with the whole market seemingly very popular at the moment.
Neethling lists a few basic fundamentals that are currently influencing markets: economic growth is slowing down, inflation is on the rise worldwide, interest rates will increase, and geopolitics will remain an issue.
“Let’s face it, it was mathematically impossible for growth to continue the way it did,” he says, adding that rising interest rates shouldn’t “upset the apple cart” as long as monetary authorities increase interest rates in a sensible and structured way.
“The tension between the US and China continues, the tension in Afghanistan claimed its fair share of airtime, and we continue to witness social unrest and riots across the globe,” he says.
In addition, isolation and social imbalances remain, with governments being criticised for how they are handling the pandemic, says Neethling. “People are fed up and tired over rules and regulations that don’t seem to be moving the needle.”
In all, the picture for markets has looked better.
However, the panellists at the Morningstar conference did not back down.
Tempting yet tempestuous
Chris Freund, fund manager at global asset managers Ninety One, says equities are still very likely to outperform other asset classes, and that periodic setbacks will continue from time to time to “test your mettle”.
Chantelle Baptiste, analyst and portfolio manager at Fairtree Asset Management, and Shaun le Roux, fund manager at PSG Asset Management, hold the same views.
The latter says that every now and then a strange thing happens where everything goes on sale, as in 2003, 2009 and 2020, to name a few examples.
“We act like kids in a candy store when opportunities like this arise, and March 2020 was no different,” says Le Roux.
“On a forward-looking basis, PSG still believes that there are fantastic businesses in SA that will continue to do well and are trading well below their intrinsic worth.”
But PSG warns against including too many shares that are sensitive to interest rates in your portfolio. An example of this is owning US technology stocks at all-time highs, which were pushed to these lofty levels due to the lowest interest rates ever.
Retail, resources and more
Baptiste believes there are some remarkable opportunities left on the local front in retailers, resources, and in Naspers and Prosus.
“Naspers is a share that has been deeply out of favour for some time now. Management has been under pressure to close the valuation gap and, recently, you have had a lot of Chinese regulation noise in the mix,” says Baptiste.
It’s no secret that Naspers and Prosus are trading at huge discounts to their underlying asset values, while a quick look at the share price page in the newspaper shows that retail shares are trading at reasonable levels based on dividend yields and price-earnings (PE) ratios. For instance, Woolies is on a PE of below 14 times.
Baptiste does, however, also offer a warning.
She unwrapped the merits of investing in gold as a potential portfolio hedge.
“Gold has historically shown a low correlation to traditional asset classes and can provide downside protection in a scenario where inflation becomes more permanent,” she says.
Freund says that for Ninety One, local banks are the stand-out opportunity from a valuation perspective.
“They are well capitalised and the dividend yields on offer are especially attractive,” he says, referring to SA banks being in a position to increase dividends after building up sizeable reserves when withholding dividends during the year of Covid-19.
A look at banks’ share prices and dividend yields underscores his sentiments. An example is Absa, trading on a PE of 9 times and Standard Bank on 10.7 times.
Neethling says that even if parts of the local market are trading at extremely lofty valuations and, in some cases, near all-time highs, opportunities remain.
“Globally, we have witnessed a large divergence in the performance of equity markets and this is even more visible between developed markets and developing markets,” he says.
In addition to local retailers and banks, the panellists seem optimistic about both local and global financial, energy and brewing companies.