Better investment opportunities offshore than on the JSE – Centaur

The strong returns from the JSE over the past year have rewarded managers who have taken a more positive view on local equities. However, Centaur Asset Management CIO Roger Williams believes the best may already be behind us.

‘We are seeing a rerating because of low interest rates, and because you have a base effect coming through,’ Williams said during a BCI webinar on Wednesday. ‘But we don’t see a second leg.’

His view is that while South Africa has enjoyed a number of tailwinds in the short term, the longer-term picture remains underwhelming.

Small steps forward

‘If we think where we were three years ago, I think good policy progress has been made,’ said Williams, who manages the Centaur BCI Flexible fund.

This includes some restraint on public sector wages, reforms in the energy sector, tentative steps on infrastructure spending, and more being done to combat corruption.

‘We’ve also had stimulus in the form of lower interest rates and strong terms of trade. That’s been thanks to the boom in commodities like iron ore and the platinum group metals (PGMs).’

This has boosted confidence among local CEOs and together with a positive base effect, has translated into a strong equity market since the final quarter of 2020.

The foundation is weak

However, Williams is wary about how sustainable this improvement is.

‘Over the medium term, the risk is that the economic foundation is very weak,’ he said.

It is primarily fuelled by high commodity prices, which are notoriously cyclical. He added that economic growth will be strong this year at around 4%, but that is coming off a low base. Growth from 2022 is likely to revert back to between 1% and 2%.

At 1% growth, South Africa’s GDP will still not be back to 2019 levels by 2024.

‘Our view on economic growth is not particularly exciting,’ Williams said. ‘There are still a lot of structural impediments, and I don’t think the government has done enough to make South Africa an attractive place.

‘I also think the foundation is weak because we are reliant on resource prices. We are not even seeing enough from government to take advantage of that. We should be exporting more iron ore, for example, but there is no initiative to increase rail capacity.’

Marginal rerating

So, while valuations on local equities look attractive, Williams feels there is still not enough strength in the local economy to unlock that value.

‘For P/Es [price-to-earnings ratios] on the JSE to be much higher, we need to see higher growth, which we don’t see yet,’ Williams said. ‘There is a marginal rerating story happening, but once that comes through, we think returns won’t be as strong.’

Mel Meltzer, director at Platinum Portfolios, voiced similar sentiments.

‘Locally, we find the environment very difficult to invest in,’ he said. ‘We find it very difficult to find companies that pass muster.

‘The South African stocks we do own are all multinationals,’ he added. ‘Ninety One, for example, is a global fund management house, so it hedges us against risks. But we find SA inc. quite difficult. It’s too transitory. You might buy something today, but you are going to have to sell it in six months’ time. And that’s not our style.’

Meltzer, who manages the Platinum BCI Worldwide Flexible fund, added that this doesn’t mean they shun South African companies. However, the operating environment for them means that opportunities are better internationally.

Pragmatic approach

‘We would buy a company, whether local or offshore, depending on how it goes through our process,’ Meltzer said. ‘For example we’ve looked at Spar, but when we compare it to Walmart, Walmart comes out better.

‘We take no cognisance of where we are investing, or what the asset allocation is. We will buy companies when they trade below fair value and when they make sense to us.

‘Apart from one or two stocks, most the companies we buy are multinationals,’ Meltzer added. ‘We think they have the ability to allocate capital better than we can. These companies earn income in different currencies around the world, so they hedge the portfolio in their diversity.’

Williams believes that returns on the local market are therefore likely to be less broad-based over the coming years.

Quality

‘It’s only the high-quality companies with the right management that we think are going to perform,’ Williams said. ‘Internationally, you are seeing much better growth.

‘So, I would rather pay up for better growth and lower risk. I am not seeing exceptional investment opportunities on the JSE because I am not excited about the outlook. There are certain South African companies that have a niche, where we think they can take market share. But I’m not wildly bullish, despite low valuations.’

Over the five years to the end of July, the Centaur BCI Flexible fund delivered an annualised gain of 10.4% according to Morningstar. This is ahead of the FTSE/JSE All Share index gain of 8.8% per year over this period, and the average return for funds in the Association for Savings and Investment South Africa (Asisa) South Africa multi-asset flexible category of 4.9%.

The Platinum BCI Worldwide Flexible fund produced an annualised returned of 9.2% over the past five years, according to Morningstar. That compares with an average return from funds in the Asisa worldwide multi-asset flexible category of 7.4% per annum.

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.