‘If you are a differentiated stock picker, this is as good as it gets’

Despite the market rally over the past 18 months, a number of local asset managers continue to see further upside on the JSE.

Speaking at the Morningstar Investment Conference last week, PSG Asset Management’s Shaun Le Roux said that the opportunity in SA Inc stocks remains particularly compelling.

‘The SA Inc story is an interesting one,’ said Le Roux, who co-manages the PSG Equity fund and PSG Flexible fund. ‘It’s almost like there’s this idea that there is a stock out there with this label “SA Inc” and you can buy and sell it. But it’s way more complicated than that.

‘There are many fantastic businesses in South Africa, and every now and then, they go on sale. It happened in 2003, in 2009 and in March last year. Everything was on sale.’

Even with the JSE having now climbed to above pre-pandemic levels, Le Roux believes that the opportunity is still highly attractive.

‘We’ve had a massive recovery, but the simple fact is that most stocks on the JSE have been in these long, protracted bear markets. The macro hasn’t been supportive, but these companies have done okay. We think they do very well from here and they are dirt cheap. If you are a differentiated stock picker, this is as good as it gets.’

The number of private buyouts of listed companies supports his view.

‘We are frustrated when the likes of Imperial get taken off our hands at what we think is a crazy price,’ Le Roux said. ‘But we think that’s indicative of the abundant value available on the JSE.’

Fairtree’s Chantelle Baptiste said that the firm had also positioned more into SA Inc counters in the second half of last year as they recognised value in this space. However, some of that has now been shifted to what they see as more attractive opportunities in more globalised businesses.

‘There is a lot of opportunity on the JSE because our listed space is so externalised,’ said Baptiste, who manages the BCI Select Equity fund. ‘A heap of companies with an asset base here are selling in hard currency or are listed here with most of their operations outside of South Africa.

‘We [the Fairtree Equity Prescient fund] have been 100% invested in South African equities since inception nearly 10 years ago, and we haven’t run out of ideas or opportunities. We do see some opportunities in SA Inc, but right now, we think there is a little more upside in resources, as well as Naspers/Prosus.’

While the past 12 months have been difficult for these two counters due to the complicated deal structure that the market didn’t like and the regulatory uncertainty in China, Baptise believes that the de-rating in share prices has only created a more attractive entry point. Fairtree has, therefore, been adding to its position in Naspers, even though the stock is already its largest holding, at more than 9% of the portfolio.

‘Unfortunately, when you are 100% invested, if you want to buy something, you have to sell something. We’ve been funding a little more Naspers/Prosus and mining exposure from selling down some SA Inc positions like Woolworths and Bidvest,’ she said.

‘Amazing opportunity’ in banks

Chris Freund, co-manager of the Ninety One Equity fund, said that the big opportunity they are seeing on the JSE is in the financials sector.

‘I think there is still outrageously good value to be had in SA Inc, and banks especially,’ he said. ‘I think you can close your eyes and buy any of the big four commercial banks, or even Investec or Capitec. When you come back in 24 months, if you include your dividend return of 5% that many of these companies are going to give you, you will have made a lot more than inflation. We’re expecting a 10-15% per annum return.

‘South Africa is normalising. I think there is amazing opportunity to be had in the South African banking sector still.’

For Le Roux, there is, however, the need to be wary of what he believes is a changing global picture as economies normalise and moderate inflation seems increasingly likely. This will impact equity markets that have, for a long time, thrived on low interest rates.

‘We are staying away from anything that is geared into that long-duration, low-interest-rate, global situation,’ Le Roux said. ‘The anomaly is that we have stocks on this country on more than 30 times earnings, but there are other companies at well under 10 times where we expect profits to grow faster over the next few years.

‘We are avoiding those highly-priced parts of the market where people are overpaying for long-term growth.’

For its part, Fairtree is mitigating against potentially higher inflation by holding gold.

‘People might think it’s an old-school mentality, but it is an anti-fragility mechanism,’ Baptiste said. ‘It’s just keeping an eye on what is going to happen to global inflation, and how that can knock the equity market. You do need to protect because you don’t know what’s going to happen tomorrow.’

Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.