US fund managers keen to purchase SA stocks

Since Cyril Ramaphosa was elected as ANC and SA president, confidence has slowly returned to the economy.

Amid renewed optimism, many US fund managers who missed out on the recovery in Russia, Brazil and Mexico, have been keen to purchase a basket of local stocks linked to the SA growth story.

But investors must also consider valuations. Investec Asset Management’s Louis Niemand says the local market is still fairly expensive, but if Naspers is removed from the equation, the price-earnings (P/E) ratio of the JSE All Share Index drops from around 19 to 16.

Over the last year, the P/E has declined from about 22 to 19, even though the market was up 17%, which means earnings growth outstripped the price increase. Earnings growth was mainly fuelled by Naspers (through Tencent) and resource shares following a commodity price rebound.

“So that is where the earnings growth is coming from. [It has] nothing to do with the SA side of the economy,” says Niemand.

Over the last year, earnings growth of 4% or 5% for local banks was considered “brilliant”, highlighting just how tough the environment was for many SA stocks, he adds.

“Hopefully Tencent can continue to grow earnings. Hopefully commodity prices stay high. We have seen iron ore coming under pressure over the last few weeks and hopefully the SA stocks can join the party.”

The challenge is that rand hedges may come under pressure due to a stronger currency, he says. Global markets have rerated strongly over the last five years.

He says to get a decent return, the bulk of the returns will have to come from earnings growth. The potential for returns coming from further reratings is limited.

As such, investors are weighing their options and asking whether the global rally can continue and if they’re too late to invest in stocks with an SA bias.

Unfortunately, there are no clear answers. “If you ask these questions [of] different people you will get different answers. That’s how markets work,” he says.

Even inside Investec, portfolio managers are fiercely debating whether a defensive or aggressive position (or somewhere in the middle) is the best approach.

Niemand says there’s no certainty. “It looks like global growth can continue, which can continue to provide support to global equities but there’s a number of risks still out there.” These include debt considerations, political uncertainty and a potential trade war.

Locally, there’s still potential for some local banks to rerate from about 13 to 16.

For investors, this uncertainty highlights the need to construct diversified portfolios that would be able to provide fire power if the rally continues, but that would also offer protection should stocks start to slide.