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South African asset prices look attractive

It’s time to secure the diversification free lunch.

The rand, bonds and real assets offer compelling valuations. 

By all means, retirement fund savers should secure the diversification free lunch by investing 30% of their portfolios offshore. But they might want to hedge the currency risk – that is, the risk of the rand appreciating.

Because Regulation 28 of the Pension Funds Act stipulates that retirement funds must invest 70% of their assets locally, South African investors should make use of their offshore allocation simply to secure the diversification benefit.

From an asset allocation point view, the decision to invest offshore is an easy one because it represents an opportunity to diversify. 

However, that does not mean investors should necessarily have an equivalent 30% dollar currency exposure. Instead, they should consider hedging the rand.

Emerging market currencies have been out of favour recently, given the US-China trade war. Locally, we’ve not been very successful in fixing problems, with issues at Eskom, for example, still not resolved. Fiscal slippage is concerning.

Despite these factors, however, I remain slightly optimistic on the rand – mainly because we think it is significantly undervalued. On a purchasing power parity basis, the rand is cheap.

Additionally, real yields on South African assets are very high. For example, the real interest rate differential between South Africa and developed bond markets is historically wide. With the US Federal Reserve prepared for additional interest rate cuts, the differential can be expected to widen further.

At the same time, domestic real yields have risen due to very low inflation. South Africa’s central bank enjoys a high degree of credibility, having been successful so far in keeping inflation at the mid-point of the 3% to 6% target band. 

Prices in fixed interest markets look conservative when compared to global equities where valuations are stretched.

In addition, the global economy is now very late into the economic cycle with more and more indicators signalling that the long-running rally in equity markets is coming to a close. One of these is the inversion of the yield curve in the US, which could be seen as a balancing factor in reaction to structured valuations and the global slowdown. Valuations are driven by very easy global monetary policy, which is not due to change soon. This scenario is expected to continue.

Bonds and equities aside, looking at other asset classes in SA, we are more positive on real assets like property where valuations are very compelling. Dividend yields for listed property stocks, for example, are close to an all-time high.

Bastian Teichgreeber is the head of asset allocation at Prescient Investment Management.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

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The scenario presented here is not an invitation to buy South African assets but to go into cash. Once over-reached global markets revert to mean (read crash) our market will also be hit for six. That will be the time to buy local assets (or overseas assets, for that matter).

“global equities valuations are stretched. In addition, the global economy is now very late into the economic cycle with more and more indicators signalling that the long-running rally in equity markets is coming to a close.”

It’s a bad idea not to invest now, or at least not to have timed steps into the market, if you feel there is a risk that you are paying too much: since I read about the imminent collapse of the financial markets, the market has grown further substantially. To link what @Sensei says later in these comments, the US markets have grown heavily on money supply.
If you’re into speculation you will try and time the market. However, most valuations rise very shortly after low valuations and usually a large rise all happens on the same day…a bit like Russian roulette. If you want to win you got to make sure you stay in the game. When you’re out, you can’t win.

Time in the market. It’s more important than timing the market. But waiting is boring, and gamblers want excitement, although they invariably end up losing a lot of their money.

@Bastian Teichgreeber

Question 1:

“At the same time, domestic real yields have risen due to very low inflation. South Africa’s central bank enjoys a high degree of credibility, having been successful so far in keeping inflation at the mid-point of the 3% to 6% target band.”

Do you really believe the inflation rate of 4.0%?

Over 12 months the petrol price is down (1 Aug 18 – 7 Aug 19):
1 Aug 2018: R15,81 (-R0,09) = -0,569%
1 Aug 2018: R15,49 (-R0,21) = -1,355%

But what has the Crude Oil barrel price 12 months ago?

$69,80 vs $56,16
So a decrease of -19,54% and we saw less than a 2% decrease in the price over 12 months…

Please tell me again how inflation is really 4.0%. As the maths teacher told us in school, please show your working.

Question 2:

As it is evident throughout this whole article, you just narrate, with not one figure shown to justify this (positive) narrative.

“Bonds and equities aside, looking at other asset classes in SA, we are more positive on real assets like property where valuations are very compelling. Dividend yields for listed property stocks, for example, are close to an all-time high.”

Great! You’re positive on real assets like property. You say valuations are compelling. How so? What figures are showing you this compelling valuations?

You then only say that “dividend yields for listed property stocks, for example, are close to an all-time high”.

Would you be so kind as to provide us with some examples of these? How do these compare to the rest of the investments options out there in the whole wide world?

Conclusion:

I don’t see why you even bothered to write this piece as it says a whole lot of nothing.

“Bastian Teichgreeber is the head of asset allocation at Prescient Investment Management.”

@WheelerDealer

And your point is what exactly?

I can’t or am not allowed to address him in the comments below the article that he wrote?

@Bastian Teichgreeber

I ask the exact same question as Andre Basson in his piece that was published on Thursday.

The JSE is cheap … so what?

https://www.moneyweb.co.za/financial-advisor-views/the-jse-is-cheap-so-what/

The JSE is cheap, but who says it can’t get cheaper? Who says it can’t go down more? Who says South Africa’s economy and currency can’t mirror countries such as Argentina, Venezuela or Zimbabwe?

Who says the JSE is cheap now and it can double in 10 years? Who says it can’t mirror the economy of the US, UK, Singapore or China?

Please provide us with some metrics that substantiate your narrative.
It’s easy to say something without any proof, I would say it’s in line with art or poetry, an expression of who knows what. Artistic freedom.

The economy unfortunately makes use of mathematics.

Vanguard did some excellent research on the topic of value. They came to the “shocking” conclusion that there is an extremely low correlation between the usual value metrics and growth in future share prices. The biggest correlation with future share price appreciation was the current level of the balance sheet of the Reserve Bank. This proves what Austrian Theory economist have been telling us all the time – the movement of the financial markets depends on the money-supply.

Therefore, the only value metric that is worth ananything is the level of the market relative to the change in the money supply. This explains why the USA market is expensive and getting more expenspensive by the day, while SA is cheap and getting cheaper by the day.

Oi Sensei,

correlation is not causation., p value corr is a dangerous metric to substantiate a conclusion.

Perhaps just an hint that there MIGHT be a link between variables.

One does not need extensive research to deduce increasing money supply, inflation, will inevitably support prices..

@Sensei

Thank you, I see I’ve got some more reading to do tonight.
I’ll go look for the Vanguard research, did they publish a report on it?
Will definitely go read up some more on the Austrian Theory economist as well.

The day I stop learning or want to learn, I’m already dead.

What happens to the R 100,000,000,000 in bonds that they MUST sell, when we go to junk????????How does that affect investors?

Another day, another local fund manager begging SA investors not to withdraw more money from the local market.
Where were you smart guys when analysts such as Magnus Heystek tried to warn about the financial tsunami heading your way? Did anyone bother to tell their clients to move to cash or even better, offshore? No, because that is not how the asset management business works.
It works as follows: first you lure potential investors into the market with projections of wonderful future returns. When these returns do not eventuate you try and convince investors (a) not to market time and (b) to hold on for the long time and (c) that cash is trash.
The past 5 years have been the worst period ever for JSE equity investments yet I cannot find any fund manager who five years ago warned investors about such an eventuality.
Either you are not allowed to make such forecasts or you didn’t read the signs correctly. So why should your (and every other major fund manager) get it right this time?

JSE still looks very expensive relative to all my perceived risks.

If I were to start discounting some of my perceptions and beliefs there is a clear case for investment but quite frankly there are too many big questions around the future of SA to justify investing clients money.

All of these positive articles these days are starting to sound more and more shrill or failing to address the real issues at hand. It reminds me of the media just prior to the 2007/8 crash in the US. Positive news abounded, many ignored the warnings and yet in hindsight there were obvious signals everywhere.

Another poster addressed the inflation problem, quite simply the numbers (even with a generous fudge factor) just don’t add up, with a little digging this can be found almost everywhere.

Too many articles in Moneyweb are not well researched and thought through. Is Moneyweb so desperate that they have to publish contributions that are nothing more than a load of hogwash?!

The high real yield story is a fallacy.

9% return – 4% inflation – avg 6% rand depreciation leaves you in the red each year.

Better off buying offshore negative yielding bonds.

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