Moves to find value in unloved areas
• Gold, China and the energy sector offer opportunities for investors, writes Lynette Dicey
Asset managers face a complex global landscape in 2024, with investment outcomes closely linked to multiple global and regionspecific factors.
Challenges range from stubborn inflation and higherfor-longer interest rates to potential market volatility from an election super cycle, with more than 80 countries set to hold national elections this year, which takes place against a backdrop of elevated geopolitical risks, particularly amid rising conflict in the Middle East.
“A wide range of political outcomes and a continuation of the ‘West versus the rest’ theme in geopolitics threatens to cause further disruption,” says Linda Eedes, Investment Executive at Foord Asset Management.
Despite the risks and challenges, Eedes believes that the global opportunity set has broadened over the past year, with better return prospects available across a wider array of asset classes.
“We believe Chinese consumer-related equities offer the best growth opportunities. Chinese stock market valuations are trading at 25-year lows, taking us back to the height of the Asian Financial Crisis. In contrast, today’s macroeconomic headwinds in China are not nearly so poor as those facing the region in 1997.”
According to Eedes, these valuations present a compelling entry point for long-term, valueoriented investors who can see through the anti-China sentiment and the ‘not investible’ narrative, which oversimplifies a complex reality, and focus instead on the growth opportunities.
From a global perspective, PSG Asset Management is taking a different position compared to many of its peers by shifting focus outside the expensive US market, says Chief Investment Officer John
Gilchrist.
“Applying our bottom-up, stock-specific research analysis that considers prevailing macroeconomic factors reveals unappreciated quality in various unloved areas of the market across the UK, EU, Hong Kong and various emerging markets,” says Gilchrist.
PSG is taking a more cautious approach to global bonds as a traditional safehaven asset in multi-asset portfolios, despite the recent rise in US 10-year bond yields, due to developed market fiscal concerns and a bottom-up analysis that suggests inflation will remain elevated for longer than expected.
Instead, Gilchrist favours exposure to the energy sector as both a good inflationary and political hedge.
“We believe that the sector can offer safe-haven characteristics given current ratings and market positioning. It is also worth noting that the sector has performed better than many market participants would assume in previous recessions and market drawdowns. From a bottom-up research-driven perspective, we also see fundamental opportunities in this area of the market, with significant constraints on supply in the coming years.”
Gold is another prudent option. Eedes affirms that gold has retained its allure as a timeless safe-haven asset, offering investors a hedge against volatility, US dollar underperformance and geopolitical and systemic risks.
“Recently, prospects for a regional escalation of the IsraelHamas war have reaffirmed gold’s role as a reliable diversifier. Its steady performance and store of value during challenging times make it a meaningful addition to any well-diversified portfolio, especially if we head into a global recession.”
Gilchrist adds that the weaponisation of US bonds amid the Russia-Ukraine war has driven central banks to hold more gold for diversification.
“Even small moves in central bank holdings can make a big difference to the gold price, and we expect this trend to continue. The fiscal situation in the US and any weakness in the dollar could add additional tailwinds for this asset.”
From an emerging market perspective, Gilchrist believes SA is an unloved area of the market that warrants greater scrutiny.
While the IMF recently lowered SA’s GDP forecast for 2024 to 0.9%, Gilchrist favours select undervalued local equities that offer growth opportunities.
“While many SA Inc shares are unloved and cheap, we are not taking a binary approach. In our PSG Balanced Fund, for example, the portfolio has a 50/50 split between local and offshore assets. While we remain cognisant of the domestic risks, we believe this is the right balance for our multi-asset funds from a potential return and risk management perspective.”
Gilchrist explains that PSG considers per-share growth when analysing the market to find unloved companies that continue finding ways to deliver earnings growth in a struggling economy.
“There are many SA Inc companies trading at low priceto-earnings multiples and generating significant free cash flow. When companies use this free cash flow to buy back shares cheaply, rather than only paying dividends, it can materially increase per share growth.”
According to Gilchrist, the key is picking the right companies that can keep growing in a tough economic climate through exposure to growing sectors of the economy with smart acquisitions, organically growing market share, and/or controlling costs.
“We also see opportunities in tourism and retailers, which should benefit once the interest rate cycle turns and start to reap the rewards from investments made in solar to uncouple from Eskom. The resultant cost savings should support additional growth.”
Eedes highlights South African government bonds maturing in 10 years, which are trading at yields above 11% — the highest in two decades.
“These investments offer attractive real above-inflation returns and a margin of safety, even if yields rise further owing to rising inflation expectations, as bond prices fall when yields rise,” she says.