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Local and offshore investment opportunities to keep an eye on in 2022

For this year ‘we wouldn’t expect the same kind of roaring close-to-30% return’: Anchor Capital CEO Peter Armitage

FIFI PETERS: The JSE ended up 27% last year, significantly higher. It also marked its best performance since 2012…. But here to discuss what lies ahead for the local market this year and where the gems are likely to be is Peter Armitage, the CEO of Anchor Capital.

Peter, thanks so much for your time, and happy new year to you. Will the good times continue to roll this year for the JSE?

PETER ARMITAGE: I think 2021 had quite a bit of recovery in it from prices that got quite beleaguered in 2020. So we wouldn’t expect the same kind of roaring close-to-30% return.

But I think … the world is kind of in a value space at the moment; it’s value shares that are working over growth shares, and that favours South Africa. If you look at our resources, you look at our banks, our market as a whole is significantly cheaper than global markets, which have got quite overheated.

So we think you could well have another reasonable year, but not quite to the same extent as 2021.

FIFI PETERS: What were some of the main standouts for you last year, and which of those standouts do you expect to be a recurring theme this year?

PETER ARMITAGE: There were a few shares that did incredibly well, some quite big shares in fact. Investec up over 150%, MTN up 180%, and Thungela, the coal-mining company, up significantly. But generally if you look at all the sectors, it was pretty positive across the board.

It was really just Naspers/Prosus from a big-company perspective that went backwards about 18%.

Looking forward into this year, we still like Afrimat; Transaction Capital has been one of our best shares for years and we think that’ll continue. We like Alviva, we still like Investec – we think that’s got another 10% or 20% in it.

So we could put together a portfolio of quite handsome companies at reasonable prices, and we think that you can still do nicely out of the market over the next year.

FIFI PETERS: Hmm. Globally what are your expectations for offshore investments, because global markets also had a pretty good 2021? There were successive records that did stand out across most markets in 2021. But what is your expectation for the performance this year?

PETER ARMITAGE: I think the risks are getting higher; the risk/reward equation is becoming a little less attractive because markets have run so hard. Inflation is rampant, interest rates are going to pick up. So I think markets as a whole, from a global perspective, could have some quite big headwinds to face.

So you have to be quite selective. There are segments of the market that are still fairly priced. But I think there’s a lot more against the market than there was kind of a year ago.

Obviously, if you’re watching Covid, I think markets have pretty much lived through those. But as we’ve learnt – nobody can tell you where that is heading. So you want to be in quality companies, or only companies that will (grow) independent of the economic cycle, and that’s really the key.

There are companies like Microsoft’s Cloud business. the economic cycle, interest rates etc aren’t really going to change the prospects [for that business], whereas the more consumer-orientated stocks could see a bit of pressure. There’s a huge expenditure relative to 2019 on goods where people haven’t been able to spend money on services like travel and transport and the like.

So you’ll see a switch back from consumer spending into more service-orientated type companies. That’s kind of where we are looking for the value.

FIFI PETERS: Then would you be buying into some of these travel and leisure shares, particularly the ones on the JSE: City Lodge, Sun International and Tsogo Sun?

PETER ARMITAGE: We’ve already seen quite a big jump in a lot of them. Sun International you could buy – we were punting it big time at kind of R15 a share, if you look back it must have been six, nine months ago. It’s now close to R30. We think its fair value is probably in the region of R35 to R40, so there still is some more upside.

Internationally we think a nice portfolio of recovery shares. There are a lot of travel companies still trading well below 2019 levels. If the world normalises there’s every prospect that they can get back to where they were over time.

FIFI PETERS: Staying with what is happening globally, I think what also stood out quite significantly last year was the regulatory changes in China that really hit a lot of companies that have business there, particularly the technology companies – which perhaps speaks to the underperformance of Naspers and Prosus. To what degree are you expecting much of the same in terms of the changing regulatory picture in China, and to what degree could it be hurtful for some of these technology stocks? Or do you reckon the worst is over?

PETER ARMITAGE: You’ve certainly seen prices come down significantly. Alibaba from around $300 to around $120. They’ve taken a big whack. We saw the impact of that through Tencent coming through into Naspers and Prosus, with that down 18% for the year; certainly they’ve been marked down quite significantly.

The thing about Chinese regulation and the reason that the shares have been hit so hard is the complete lack of certainty; nobody can tell you what’s happening next. Most pundits are of the view that most of the regulation and the things that they wanted to do have already flowed through the system. So we think in an offshore portfolio or particularly in a tech portfolio you do want to own some of those shares because – if we can just go six months without any big changes in regulation – these are strong companies, these are companies that are typically growing their turnovers at 20/25%-plus. So it is growth businesses at very attractive multiples.

So the risks are much higher than buying into American-equivalent companies; the American-equivalent companies have typically got more than 100% higher valuations. So some exposure to the optionality that those provide makes a lot of common sense.

FIFI PETERS: You mentioned the companies that you are liking and you continue to like in the form of Afrimat and Transaction Capital and even Investec. But which companies are you not liking, which are you not likely to even put in your portfolio for 2022?

PETER ARMITAGE: We are typically long-term investors and we like to buy good quality-compounding high-return businesses. There’d be companies which we typically don’t own over time. We haven’t had big money in the insurers, and some of the property companies we think will sustain pressure. There are some attractive ones with lots of different exposures.

We are watching the stuff that’s getting overvalued. There’ve been quite a few good companies that we sold out of over the last month or two after giving fantastic performances. In fact we are out of MTN now, and that was one of our biggest shares during the course of last year. It went … bottomed at R44 and we’d been getting out at R170. People forget MTN gets a Nigeria shock every few years, and if that is going to happen …. the Chinese regulation story.

So there are companies that we like, but we feel the prices are more than reflecting the risk-reward equation of the shares.

FIFI PETERS: What’s your take on Bitcoin? It hasn’t been a great start for Bitcoin, or the cryptocurrency space at large. But last year there were growing conversations and calls about the fact that it wouldn’t be a bad idea for fund managers to put a portion of investments into the crypto space. Just your take on Bitcoin and the factors that are likely to drive the crypto space this year?

PETER ARMITAGE: I think South African asset managers can’t really get involved – or wealth managers. We can’t put people’s money into Bitcoin; it’s unregulated. It’s not a space where the rules will be made clear.

Bitcoin is interesting. You’ve got something that didn’t exist 10 years ago, and is now suddenly a whole new asset class. The fundamental value – nobody can tell you what it is. So we are not inherently comfortable with it as a big part of a portfolio. For clients who want some exposure, a few percentages to get the optionality that no doubt exists if you look at what’s happened over the course of the last few years [that’s fine]. But we’d go into it with eyes open and with some caution. It’s something I think you could research for a year and probably still not understand fully exactly where it’s going or be able to predict with any certainty.

This year it’s down about 15% and nobody can really tell you why. It’s not something which has cash generation or a dividend or an underlying asset value that one can point at. So it fits very much in the speculative category.

FIFI PETERS: Okay. Let’s talk about ‘real currency’ as it were, or physical currency like the rand, which is having a much better start to 2022 than it finished last year, being on the back foot or weaker against the US dollar. Just your outlook and expectations for the rand and how it might influence the kind of companies and the proportion of your portfolio that is more local and that which is more offshore.

PETER ARMITAGE: If you just take a step back, the rand is actually probably around the same level as it was at five or six years ago. So it’s been a fairly strong currency. This year it has been one of the strongest in emerging markets. With US interest rates going up; you could see a little bit of dollar strength as opposed to rand weakness, which still equates to a weaker rand.

Our fundamental value for the rand is in the R14.50 to R15/dollar type of level.

There are a lot of things, though, that you can’t predict which impact the currency. It tends to move R2 to R2.50 a year. So trying to forecast really at a point in time is a little fruitless. All being equal, we’d expect a stronger rand – but probably not dramatically so.

You must remember that currencies’ economic theory should move by the differential in inflation. You’ve got US inflation sitting at 7% and South Africa at 5.5%. So, according to economic theory, the rand should be strengthening against the dollar if that’s your driver, although we do expect that to reverse back over the course of the next years, back to US inflation of probably 2% and South Africa’s inflation back to around 5%.

FIFI PETERS: All right. Peter, thanks so much for your time in joining us to give us insight into how you’re thinking about the markets for this year, and where the opportunities lie. That was Peter Armitage, CEO at Anchor Capital.

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