The bloodletting that’s gripping commodity markets is giving Shaun le Roux the courage to bet that Anglo American Plc and Glencore Plc will emerge as winners.
“When there’s this much distress, you’re going to get mispricing,” said Le Roux, whose 2.4 billion-rand ($190 million) PSG Equity Fund beat 97 percent of its peers with returns of 23 percent over the past three years, according to data compiled by Bloomberg. “We’re focusing on stronger players within the sector that we’re confident are going to make it, and that are very cheap.”
The wager reflects confidence the biggest raw materials companies are better equipped to ride out a selloff that’s driven commodities to their weakest levels in 13 years amid concern about China’s slowing economy, the strengthening dollar and gluts in everything from oil to metals and crops. The Johannesburg Stock Exchange’s FTSE/JSE Africa Mining Index has dropped 13 percent this year, reaching a 6 1/2-year low last week, with all but one of its 17 companies declining.
Excess supplies and lower prices will help shake out high- cost producers, said Le Roux, whose fund is among the 25 billion rand overseen by PSG Asset Management.
“A lot of players will be under water and the natural conclusion is that in the medium- to longer-term prices will be higher,” he said by phone from Cape Town on Tuesday. “Prices will ultimately settle at a level where supply and demand are in balance.”
Glencore, the London-based commodity trader that operates coal and ferrochrome mines in South Africa, and Anglo, which owns platinum, iron-ore and coal operations in the country, are among stocks that will survive, Le Roux said.
“They have relatively low-cost operations that generate cash even in tough times,” he said. “We’re comfortable that they’re very cheap relative to a conservative value of their assets.”
Glencore’s Johannesburg-listed stock slumped 26 percent this year to a record low Tuesday, before rebounding on Wednesday as rising oil prices helped to stabilize commodity markets. The shares are trading at 14 times estimated earnings, compared with 16 for the benchmark FTSE/JSE Africa All Share Index. The securities rose 3 percent to 40.67 rand by 3:36 p.m. in Johannesburg on Wednesday.
Anglo fell to a six-year low on Monday to trade at 11 times earnings. The ratio between Anglo’s share price and the index jumped to a record on Tuesday as the benchmark gauge rallied to its highest since July 23. The stock gained 4.4 percent to 157.60 rand on Wednesday.
For investors like Nick Piquito of African Alliance Asset Management, there are better returns to be had by avoiding commodity producers.
“There are far more interesting opportunities,” Johannesburg-based Piquito, who helps oversee about $1.3 billion as chief investment officer at African Alliance, said by phone on July 30.
These include Datatec Ltd., a Johannesburg-based computer- networking company, which gained 30 percent this year, Oceana Group Ltd., South Africa’s largest fishing company, which is down 3.1 percent, and JSE Ltd., operator of the Johannesburg stock and bond exchanges, which rallied 23 percent.
“There’s no doubt that if you look at outright valuations, you can make the case that resources, in particular, are very attractively priced,” he said. “Our sense on resources at this point in time is that it’s like attempting to catch a falling knife.”
Industrials, such as Steinhoff International Holdings Ltd. and Imperial Holdings Ltd., make up 40 percent of Le Roux’s fund, which also holds international securities such as U.S. investment bank JPMorgan Chase & Co., Markel Corp., a U.S.-based insurer, and Brookfield Asset Management Inc., Canada’s largest alternative asset manager.
Resource companies, including Anglo American Platinum Ltd., the world’s largest producer of the metal, account for 18 percent of Le Roux’s fund, according to a fund factsheet dated June 30. Glencore is its largest single holding, while the fund also owns BHP Billiton Plc, the world’s largest mining company, and Sasol Ltd., the biggest producer of motor fuel from coal.
The increased intensity of the selloff has been encouraging, Le Roux said.
“It’s an environment in which the strong are likely to get stronger,” he said. “We continue to selectively add to the companies that we like as the margin of safety widens.”