An investment in local shares and bonds is bound to deliver the best returns over the next 12 to 24 months, while international equities and foreign bonds will probably lag the returns the local bourse and bond market promise.
Anchor Capital CEO and co-chief investment officer Peter Armitage told investors in one of firm’s regular updates on the investment potential of different asset classes, that they can expect the recent volatility in equity and bond markets to continue for the immediate future – but that opportunities abound.
“The opportunity is that great outcomes are possible if it is not as bad as the world is talking,” he says, referring to the seemingly worldwide wave of negativity that has depressed financial markets to bargain levels.
“If you look through the last bit of possible downside, the upward trajectory in 12 months’ time is great.”
Asset manager Anchor’s research into where investors can find the best value now and where to look for the best returns over the next few months found that shares of local companies are likely to outperform those of international companies, simply because local shares are on lower ratings than foreign equities. This is especially true with regards to those ever-popular US technology stocks.
Domestic equities are expected to give a return of around 15%, local bonds just more than 10% and cash only 5%.
Global equities will return only 10%, government bonds 3%, global corporate bonds 4.5% and cash invested offshore a very low 1.5%, according to Anchor.
Armitage says the SA equity market has fallen from already low valuations, pointing out that the surges in the prices of Naspers and Prosus were the only noticeable contributors to returns in the second quarter of 2022.
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He describes the recent announcements by Naspers and Prosus regarding the sale of Tencent shares and using the proceeds to buy back Naspers and Prosus shares as “a game changer”.
When Anchor calculated the numbers for its research, Naspers was trading at a discount of more than 50% to the value of its underlying investments, mainly its investment in Tencent.
“Naspers can sell an asset for R100 and buy it back on the same day for R50,” says Armitage.
Anchor calculates that this could add more than 10% to its net asset value (NAV) every year.
The same goes for Prosus, although the win is not as pronounced, since recent share price movement has reduced the discount to NAV for Prosus to around 41%.
Thus, even after the sharp jump in Naspers and Prosus, local shares are cheap.
“Domestic shares are very, very cheap,” says Armitage, noting that bank shares are trading at attractive prices and that a likely recovery in commodity markets could boost resource stocks.
Anchor expects that banking shares will return around 15% over the next year, while commodity shares could deliver returns in excess of 30%.
Armitage says current share prices of major banks are reminiscent of a “fire sale”, pointing out that the banks achieved high returns on equity and could continue to grow earnings strongly – yet several shares are sitting on low price-earnings ratios of six to seven times, and at the highest dividend yields seen in many years.
Anchor’s head of fixed income and co-chief investment officer Nolan Wapenaar says SA government bonds offer value too.
“Current levels represent a great entry point if you are taking a 12- to 24-month view,” says Wapenaar, although he warns that investors must expect volatility to continue over the next few months, as investment sentiment is bound to change given the current uncertain economic environment.
He points out that yields on government bonds are at elevated levels as investors seem to be factoring in the worst – the R2030 is currently trading at above 11%, the highest in years except for the short spurt in March 2020 when government announced strict Covid-19 lockdown measures.
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In contrast, Anchor comes to the conclusion that international equities are still a bit on the expensive side, while global bonds offer little value too.
During a presentation of the research results, Armitage put up graphs of several of the popular US stocks to show the audience that some of these shares have declined sharply as they re-rated from previously very high ratings to more moderate valuations, but that ratings still seem quite demanding.
Big tech stocks like Apple, Alphabet and Microsoft fell back to pre-Covid-19 levels after the strong boom when investor expectations surged on ‘work, learn and entertain at home’ being seen as the ultimate solution to the world’s problems.
Despite the rather large declines, Anchor’s global equity analyst James Bennett says global information technology shares are not in “deep value territory” – but that investors should not avoid the sector completely.
“Some tech companies have shown a remarkable ability to grow into what seemed like stretched valuations at the time,” he says, hinting that the current lower ratings won’t last forever.
“Tech continues to have a place within a balanced portfolio,” says Bennett.
“Tech spending is increasingly mission-critical for businesses to grow their earnings. The successful application of modern technology is enabling companies to scale much faster than in traditional brick-and-mortar businesses.
“We believe that it would be a mistake to avoid the sector as a whole,” he adds.
“These types of sell-offs typically create excellent buying opportunities in individual stocks and the current pull-back is unlikely to be any different in this regard.”
Prepare for volatility
Anchor warns that investors should be prepared for volatile markets.
“Outside of the risks we flag on a weekly basis impacting the South African economy – such as high unemployment, Eskom, and corruption – the pressing risk for the JSE and portfolio construction is the inherent dependence of the global commodity cycle holding up,” says Armitage.
“The JSE is heavily dependent on the mining exports. Should we see a deterioration of key export commodities, it wouldn’t only impact our assessment of those businesses with direct exposure, but also impact on the currency and inwardly-focused sectors like banks, insurance, retail and general industrials.”
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