Value is get­ting harder to find

The Star Early Edition - - OFFSHORE INVESTMENTS -

FOR those al­ready in­vested off­shore, the good new seems set to con­tinue. As at 10 days ago, the MSCI World In­dex had over the prior pe­riod of one month gained 7.8 per­cent in dol­lars from its re­cent low (or nine per­cent in rands).

As to whether this can con­tinue: his­tor­i­cally 75 per­cent of the re­turns both on off­shore de­vel­oped mar­kets and the JSE ALSI have come be­tween Novem­ber and April. So this is typ­i­cally a fairly buoy­ant pe­riod.

Anet Ah­ern, CEO of PSG As­set Man­agers, says one of the more sur­pris­ing el­e­ments of this month-long re­cov­ery has been the strength and re­silience of the US econ­omy.

“It shows the US is still rel­e­vant. Many peo­ple thought China would be the main driver of growth, but that is not so. Fur­ther­more, in­ter­na­tional stock val­u­a­tions are cur­rently not un­rea­son­able: a lot of well-es­tab­lished US com­pa­nies are trad­ing at very good prices.”

She says there is also op­por­tu­nity in the EU for early in­vestors: “Stocks tend to re­cover in ad­vance of the econ­omy. We saw that in the US where there has been a five and a half year bull mar­ket but we are only see­ing the econ­omy re­ally re­cover now.

“EU val­u­a­tions were again pun­ished this year, but I sus­pect the worst is over and early in­vestors could ride the same wave as we saw in the US.”

The JSE’s re­cov­ery since its blip in Au­gust and Septem­ber has also been a pleas­ant sur­prise, says Ah­ern. “The prob­lem with the JSE is new money com­ing into eq­uity funds, and we see a lot of this go­ing into al­ready over­priced top 20 stocks.

“I can’t agree with this trend and at PSG we are not fol­low­ing suit as they no longer of­fer value com­pared to mid-cap, small-cap and off­shore stocks,” says Ah­ern.

So far in 2014 the JSE Mid-Cap In­dex has risen 12.5 per­cent, while the JSE Small-Cap In­dex has done 14.6 per­cent, to reach a new record high. It is usual in a bull mar­ket that mid-caps and small-caps out­per­form big caps.

In the PSG port­fo­lio (it has about 25-30 stocks, which have been rel­a­tively sta­ble for sev­eral years) Ah­ern says the best re­turns are com­ing from its off­shore eq­ui­ties fol­lowed by do­mes­tic eq­ui­ties, such as Stein­hoff and Capitec.

She at­tributes the good do­mes­tic eq­uity per­for­mance to the fact it is not po­si­tioned in the top 20 stocks, but in value stocks “of which there are still quite a few”.

“We are not bullish on listed prop­erty and re­main con­cerned about bonds, even though we be­lieve that in­fla­tion is more un­der con­trol than many peo­ple think.

“Cash is not yield­ing much, but we re­main un­der­weight eq­ui­ties and over­weight cash as fire­power for buy­ing op­por­tu­ni­ties as they present them­selves.

“Although many an­a­lysts viewed the re­cent cor­rec­tion as an ideal buy­ing op­por­tu­nity, Ah­ern says PSG was ten­ta­tive in ac­cu­mu­lat­ing – “one or two per­cent rather than 10 per­cent”.

In ex­pla­na­tion, she says: “We’re find­ing it harder to spot new value op­por­tu­ni­ties in the cur­rent mar­ket.”

Many peo­ple are hop­ing for a stronger rand: after all, although the in­ter­na­tional oil price has fallen about 23 per­cent, we’ve scarcely seen any de­cline in the do­mes­tic price.

How­ever, Ah­ern be­lieves they may be dis­ap­pointed: “The dif­fi­culty is that the US econ­omy is re­cov­er­ing strongly and this could re­sult in a strength­en­ing US dol­lar.

“Emerg­ing mar­ket cur­ren­cies tend to suf­fer as a re­sult. Struc­turally, South Africa is run­ning too big a deficit – and this is a ma­jor rea­son why we be­lieve in­vestors should di­ver­sify their wealth off­shore,” she says.

PSG favours de­vel­oped mar­ket stocks over emerg­ing mar­ket ones, pri­mar­ily be­cause de­vel­oped mar­ket val­u­a­tions are good and many com­pa­nies have ex­cel- lent his­to­ries of clean cor­po­rate data, some­times as long as 30 years, “which is not al­ways the case with cor­po­rates in emerg­ing mar­kets”.

For those con­tem­plat­ing in­vest­ing their year-end bonuses, Ah­ern of­fers ad­vice on where to put it: “If you won’t need to touch that cap­i­tal for 5-7 years, then I would def­i­nitely sug­gest eq­ui­ties. If you have any con­cerns at all, I’d rec­om­mend you opt for a bal­anced fund.”

She points to a re­cent trend of in­vestors fol­low­ing that ad­vice. In the last As­so­ci­a­tion for Sav­ings and In­vest­ment South Africa (ASISA) quar­terly re­port, there was a no­tice­able shift in vol­umes into gen­eral eq­uity funds.

“The main vol­ume by a fac­tor of three or four times re­mains into bal­anced funds, but there is a sys­tem­atic in­crease of cap­i­tal flows into gen­eral eq­uity funds.

“I don’t think you could go wrong in­vest­ing into gen­eral eq­ui­ties, even at this stage of the bull mar­ket, but I would be con­cerned at in­vestors choos­ing large cap stocks.

“They’re stretched, and it would re­quire some deeper anal­y­sis of in­di­vid­ual stocks if your ad­viser is rec­om­mend­ing such stocks, she says.

For in­stance, the av­er­age price to earn­ings ra­tio (P/E) of 12.5 times for do­mes­tic eq­ui­ties in PSG’s port­fo­lio is almost 6 points lower than the JSE’s av­er­age P/E of 18.

“How­ever, in­vestors do face a dilemma. Stock mar­kets have gone up and the rand down. At th­ese lev­els in­vestors need to closely as­sess their ap­petite for vo­latil­ity.

“We still rec­om­mend in­vestors in­vest­ing in eq­ui­ties, but only in ac­cor­dance with how much risk you can stom­ach,” says Ah­ern.

Sumesh Chetty, port­fo­lio man­ager, In­vestec As­set Man­age­ment, agrees in prin­ci­ple with Ah­ern, say­ing: “South African eq­uity val­u­a­tions have been stretched while the un­der­ly­ing econ­omy re­mains rather lack­lus­tre.

“This is why we con­tinue to use our full off­shore al­lo­ca­tion, as we see the best op­por­tu­ni­ties in high-qual­ity, de­vel­oped mar­ket eq­ui­ties.

“How­ever, one has to bear in mind that the as­set class is not ho­moge­nous, so care­ful anal­y­sis is re­quired to seek out those busi­nesses that will be able to de­liver real growth.

“For ex­am­ple, in the Op­por­tu­nity Fund, we are ret­i­cent to invest in some of the more cap­i­tal­in­ten­sive parts of the mar­ket and we are also not in­ter­ested in highly lever­aged com­pa­nies. In­stead, we have ma­te­rial ex­po­sure to con­sumer sta­ples and we are see­ing some at­trac­tive op­por­tu­ni­ties in the tech­nol­ogy area.”

Chetty adds: “Th­ese are com­pa­nies with good business mod­els we be­lieve the mar­ket has un­der­priced. One of our pre­ferred con­sumer sta­ples is the global food pro­ducer Nes­tle.

“The company’s prod­ucts are en­trenched in the minds of con­sumers and it has re­turned more than 103 bil­lion Swiss francs in div­i­dends and share buy­backs since 2001.

“In the tech­nol­ogy space Mi­crosoft is one of our favoured stocks – the soft­ware de­vel­oped by the company is fully en­trenched in cor­po­rates around the world and not wholly sub­sti­tutable.

“This does not mean there is no more value left in the South African mar­ket – in­vestors would do well to look to those com­pa­nies with large ex­po­sure to off­shore mar­kets, such as Bri­tish Amer­i­can To­bacco Stein­hoff and Richemont,” says Chetty.

Anet Ah­ern,

CEO of PSG As­set Man­agers.

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