The managers of Amplify’s range of multi-asset funds are all seeing value in South African assets. In a webinar on Friday, they were universally positive on the value available in local equities and fixed income.
While the favourable real yields from government bonds continued to be a key source of return, there were also a number of factors underpinning the outlook for domestic equities. This included stronger-than-expected earnings growth and improvements in the macro-environment.
“I think there have been some very positive developments in South Africa with respect to reform,” said Laurium Capital’s Brian Thomas, who co-manages the Amplify SCI Balanced fund.
“The most pertinent is the allowance of 100mw of private generation capacity. That is significant for the country. And I think there have also been huge strides on the corruption front.”
However, that has been tempered somewhat by the events of [July].
“The negative is that we have seen this wave of unrest, and we don’t know how that will play out,” Thomas said. “It is something we do take very seriously, and it is something we will be watching very closely over the coming quarter and year.”
Truffle Asset Management CIO Iain Power said that the valuations on South African risk assets are a clear positive. As the graph below shows, the MSCI South Africa forward price-to-earnings multiple is more than one standard deviation away from its long-term average.
“So, you can see we are trading at a fairly deep discount,” said Citywire AA-rated Power, who co-manages the Amplify SCI Wealth Protector fund. “That is a function of better-than-expected performance generally from South African companies, but particularly resource companies.”
Record commodity prices had supported record profitability in this sector, but it wasn’t only here that valuations were looking attractive. Power added that banks, insurers, industrial companies and healthcare stocks were all trading at deep discounts to their historical averages.
“What that means is that there is quite a lot of bad news priced into the market,” Power said. “The tragedy of the last few days will no doubt be a dent to both global and local investor confidence, but at least we have valuation on our side. Stocks are not expensively priced, and that is good from a forward-looking and from a return point of view when looking to build portfolios to meet and beat inflation-plus benchmarks.”
Thomas added that it was notable that it wasn’t just investors building stock portfolios that were finding pockets of value on the JSE.
“There has been a spate of M&A activity over the course of the last couple of months,” he said. “It started with Heineken taking a look at Distell, and more recently we saw that Duba Ports World is taking a look at imperial and will probably buy it out at 40% premium. So, where there are undervalued assets, you not only have asset managers finding value, but other market players as well.”
Matrix Fund Managers’ Lourens Pretorius said that his firm’s forecasts for returns from local equities and bonds made the firm constructive on both asset classes as drivers of real returns. However, the country’s recent unrest had led them to be more cautious in the Amplify SCI Defensive Balanced fund and Amplify SCI Absolute fund. In both portfolios, they had pulled back a bit from being fully invested in local risk assets.
“We have decided to reduce our duration by about half a year,” Pretorius said. “That resulted in almost a 10% reduction in our bond allocation. We have also trimmed the equity allocation in the low equity fund by 5% and roughly 7% and 8% in the medium equity fund. That has been a tactical move – a risk-mitigating move.”
He added that Matrix has also significantly increased the funds’ effective offshore exposure, mainly through derivative structures.
“This reflects a risk-mitigating step that we have taken, being concerned about capital outflows and the subsequent impact that it may well have on the currency. We are also concerned about the sustainability of our constructive view on earnings growth in the local domestic sector.
“But we are not married to this tactical risk reduction. If we feel that markets have digested it sufficiently and there were to be sufficient price adjustment, we are in position to be able to reinstate the risk that we have taken off.”
Thomas said that another consideration for local investors is the impact that the fallout from the unrest might have on interest rates.
“We think the Reserve Bank will raise rates by 25 basis points over the next year. The market is pricing in closer to a 1% hike. With what’s gone on with the recent unrest, I think the chances of that 1% hike are very low.”
Patrick Cairns is South Africa Editor at Citywire, which provides insights and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.