Sell-off opportunity
SHORT TERM: TAKE ADVANTAGE OF ASSETS THAT HAVE BEEN SOLD OFF You don’t have to invest in poor quality JSE companies to find value.
For the year to end October, the FTSE/JSE Shareholder Weighted All Share Index (SWIX) was down 13.6%. Over the last 12 months it was 11.1% lower, including dividends. Investors would’ve been substantially better off in SA government bonds and cash.
Even over three years, the SWIX produced a 1% annual return. Thus, after inflation, performance was negative.
Given the economy’s weakness, political uncertainty and a negative global environment, investors have largely left the JSE.
However, as 27four Investment Managers’ Claire Rentzke says, short-term pull-backs often create long-term opportunities.
“Over the shorter term it has been a scary picture. Markets have been volatile, and investors have been losing money, but we need to be able to look through the noise. Right now we are seeing a lot of fear and we think that presents an opportunity to take advantage of assets that have been sold off.”
Local prospects
27four’s Nadir Thokan says if you compare the JSE to global markets (price-to-book), it’s currently at a 20% discount.
“You can make the argument that the local market is delivering poorer cash generation and therefore it should trade on a discount. But when you start at this discount and have improving return on equity, historically the next 12 months give you a 15% dollar return on average.
“The fact that we are on very depressed multiples tells you that there is not a lot of optimism priced into the market, and not a lot of confidence in terms of what companies are going to be able to deliver. But if companies marginally outperform these very poor expectations, you could see quite a lot happening because their prices are exceedingly depressed.”
“Yes we are in a technical recession, but we have been in an effective recession for the last decade,” Thokan says. “If companies were growing their earnings in the last two years, there’s nothing that would seem to indicate that they would have a more difficult time growing their earnings going forward. Even if earnings stay steady at this rate, equity markets are significantly better valued than they were two years ago.”
What makes the local market additionally attractive, he adds, is the price-to-earnings differential between the most- and least expensive stocks has narrowed significantly to below the long-term average.
This tells you the low-quality and high-quality parts of the market aren’t that different in terms of how expensive they are. “If you are making an equity investment today, you don’t have to invest only in poor quality companies to find value.”
Uncertainty priced in
Thokan believes investors currently place too much emphasis on international markets’ recent returns.
While investors should always diversify and keep a portion of their portfolio invested overseas, they should be careful of underestimating risks elsewhere.