As­set Man­ager Re­view

The Star Late Edition - - COMPANIES -

Look­ing at the listed eq­uity mar­kets, in South Africa and in­ter­na­tion­ally, where do you cur­rently see the best op­por­tu­ni­ties for real in­vest­ment re­turns, and why? How do you cur­rently rate the at­trac­tive­ness of other as­set classes such as lo­cal bonds (real and nom­i­nal), the listed prop­erty sec­tor, global bonds, al­ter­na­tives and the Rand? Where are you tak­ing po­si­tions in your multi-class bal­anced funds? Kent Grobbe­laar, head of port­fo­lio man­age­ment at STANLIB MULTI-MAN­AGER says the eq­uity mar­ket could be more ex­cit­ing in 2017 with ex­pected re­turns be­tween 10 per­cent and 15 per­cent.

This is de­rived from earn­ings growth of around 15 per­cent, a div­i­dend yield of 3 per­cent and some mul­ti­ple con­trac­tion. On a risk ad­justed ba­sis, we pre­fer high yield­ing, short-du­ra­tion, in­come ori­en­tated, fixed in­ter­est in­stru­ments – ex­plain that to your granny!

She’s bound to find our one year return ex­pec­ta­tion of around 10 per­cent at­trac­tive for this low risk in­vest­ment.

“Longer du­ra­tion lo­cal bonds and prop­erty are vul­ner­a­ble to an in­ter­nal shock - most likely driven by pol­i­tics – but could also de­liver around 10 per­cent in the ab­sence of any shocks. In a sim­i­lar vein, the rand could do re­ally well or re­ally badly and ac­cord­ingly.

We sug­gest clients build a di­ver­si­fied port­fo­lio of in­vest­ments to mit­i­gate some of this risk.

“From a global per­spec­tive, we’re over­weight in al­ter­na­tives which are un­cor­re­lated to eq­ui­ties and bonds. We be­lieve this pro­vides pr otec­tion in a stagfla­tion­ary en­vi­ron­ment where both eq­ui­ties and bonds nor­mally strug­gle.” Sa­man­tha Har­tard & Chris Fre­und, port­fo­lio man­agers at IN­VESTEC AS­SET MAN­AGE­MENT say in­ter­na­tion­ally they con­sider that Euro­pean and Ja­panese eq­uity mar­kets will de­liver bet­ter re­turns than the US.

Both these mar­kets are cheaper and have more run­way ahead of them in terms of the cur­rent eco­nomic cy­cle. Europe’s ex­is­ten­tial anx­i­eties are un­likely to be as se­vere as feared by some in 2017, not­with­stand­ing the var­i­ous re­gional elec­tions.

South Africa’s eco­nomic growth could well sur­prise on the up­side in 2017, with re­cov­er­ies in the tourism, agri­cul­ture, man­u­fac­tur­ing and min­ing sec­tors.

Fur­ther­more, the SARB is ex­pected to cut in­ter­est rates later in the year which will add tail­wind to lo­cal growth and sup­port do­mes­tic SA shares de­liv­er­ing stronger re­turns this year.

We don’t ex­pect a sov­er­eign bond rat­ing down­grade. With the ob­vi­ous caveat around Pravin Gord­han’s ten­ure, we are not bear­ish on the rand this year as many of the do­mes­tic macros are mov­ing in the right di­rec­tion.

As a re­sult we are rea­son­ably san­guine on bonds, banks, re­tail­ers and do­mes­tic prop­erty shares. Re­source share re­turns this year could well be like a foot­ball match, a game of two halves, with the first half be­ing the stronger pe­riod.

There are al­ways some event risks that could de­rail re­turns, with a Trump in­duced trade war be­ing the ob­vi­ous cur­rent risk. But our sense is that 2017 will wit­ness less seis­mic shocks than 2016, both in SA and glob­ally.

Con­se­quently we have more eq­uity now in our port­fo­lios than we have had for quite a while, as the cur­rent mild val­u­a­tion neg­a­tives are not enough to off­set the im­prov­ing fun­da­men­tal back­drop. Neville Ch­ester, se­nior port- folio man­ager at CORONA­TION FUND MAN­AGERS says the firm cur­rently has a high weight­ing to eq­uity in gen­eral in its port­fo­lios.

“Post the strong run in global mar­kets af­ter the sur­prise elec­tion of Don­ald Trump as US pres­i­dent, we have started re­duc­ing this over­weight po­si­tion as val­u­a­tions are no longer as at­trac­tive.

“In our South African eq­uity port­fo­lio we are fairly bal­anced in our ex­po­sure be­tween pure do­mes­tic South African busi­nesses and those that have op­er­a­tions pre­dom­i­nantly out­side of the coun­try.

“Dur­ing the past two years we have seen a sig­nif­i­cant de-rat­ing of many South African stocks to the point that they of­fer de­cent up­side and at­trac­tive div­i­dend yields.

“Given the low base as a start­ing point, and the po­ten­tial for a return to eco­nomic growth in SA, there is a good case to be made for in­vest­ing in these com­pa­nies.

“We also have a fairly high ex­po­sure to the do­mes­tic listed prop­erty sec­tor. Our ex­po­sure here is pri­mar­ily to the good-qual­ity mid­cap names still of­fer­ing re­turns in ex­cess of 8%, as well as the A-share units in prop­erty com­pa­nies where dis­tri­bu­tion growth of the max­i­mum of in­fla­tion or 5% is guar­an­teed.

“In­fla­tion-linked bonds look very ex­pen­sive cur­rently, with break-even yields well above the SA Re­serve Bank’s in­fla­tion tar­get lev­els. Nom­i­nal bonds are look­ing more at­trac­tive and we have in­creased our ex­po­sure here.

“How­ever, we are still very neg­a­tive on global de­vel­oped mar­ket bonds de­spite the sell-off we have seen thus far. Given that there are still plenty of op­por­tu­ni­ties in mar­kets off­shore, we have kept our off­shore weight­ing around 25%.

“As we have re­duced the eq­uity com­po­nent we have iden­ti­fied at­trac­tive in­vest­ments in other emerg­ing mar­ket bonds, as well as spe­cific prop­erty in­vest­ments in Euro­pean and emerg­ing mar­kets.” Peter Brooke, head of MacroSo­lu­tions bou­tique at OLD MU­TUAL IN­VEST­MENT GROUP says: “Our fo­cus is on build­ing in­te­grated so­lu­tions so we pre­fer tak­ing our eq­uity or risk ex­po­sure in over­seas mar­kets and hav­ing more fixed in­come ex­po­sure in South Africa”.

“This is mainly driven by the ex­pec­ta­tion of neg­a­tive real re­turns in off­shore bond mar­kets com­pared to rea­son­able real re­turns in South Africa. Within our off­shore eq­uity ex­po­sure we have an over­weight to more value-ori­en­tated shares and an un­der­weight to higher qual­ity, growth-ori­en­tated shares. This is driven by the com­bi­na­tion of bet­ter val­u­a­tions and an im­prove­ment in the global econ­omy.

“Last year, we were over­weight cash based on our ex­pec­ta­tion of low re­turns. How­ever, we have in­vested some of this into lo­cal shares and prop­erty.

“Listed prop­erty in South Africa is par­tic­u­larly in­ter­est­ing cur­rently, as there are some de­cent yields in lo­cally ori­en­tated shares; while we are con­cerned about those com­pa­nies which have in­vested over­seas and will now suf­fer from higher in­ter­est rates and a stronger rand.

“This is why build­ing an in­te­grated port­fo­lio is so im­por­tant com­pared to al­lo­cat­ing to a generic as­set class,” says Brooke. Bas­tian Te­ich­gree­ber, port­fo­lio man­ager & an­a­lyst at PRE­SCIENT IN­VEST­MENT MAN­AGE­MENT says look­ing at eq­ui­ties glob­ally it is dif­fi­cult to as­sess what the as­set class holds for 2017.

“To high­light some neg­a­tive as­pects first, it is easy to see that eq­ui­ties trade ex­pen­sive on dif- fer­ent val­u­a­tion met­rics – be it off­shore or lo­cally. Next to that, these stretched val­u­a­tions are ob­served dur­ing a pe­riod of high un­cer­tainty, el­e­vated po­lit­i­cal risk and mon­e­tary tight­en­ing.

“Be­fore one moves to a strict un­der­weight, how­ever, it is worth high­light­ing some of the pos­i­tives as well: We face less aus­ter­ity in Europe and a po­ten­tial fis­cal stim­u­lus in the US.

“The macroe­co­nomic en­vi­ron­ment is im­prov­ing and the earn­ings re­ces­sion has ended. At Pre­scient we there­fore don’t rely on fore­cast­ing. We rather pre­fer to have a bal­anced stance and trust in a smart as­set al­lo­ca­tion process.

“Bonds face the risk of a ris­ing in­ter­est rate en­vi­ron­ment in the US – and there­fore glob­ally. If Pres­i­dent Trump fol­lows through on his prom­ises of large fis­cal spend­ing and tax cuts, in­ter­est rates might well move higher. If, how­ever, he cre­ates an in­creased risk aware­ness for global mar­kets, yields might once again move lower.

“At Pre­scient, our core phi­los­o­phy is to pre­serve cap­i­tal and to man­age rel­a­tive and ab­so­lute down­side risk. We cur­rently don’t see value in global bonds since we con­sider the risks to out­weigh the op­por­tu­ni­ties.

“Lo­cal bonds are more at­trac­tively priced, how­ever, they also face po­lit­i­cal risks in ad­di­tion. In­come as­sets are most at­trac­tively priced in the cur­rent en­vi­ron­ment,” says Te­ich­gree­ber.

He says the Rand re­mains no to­ri­ously un­der­val­ued from a pur­chas­ing power point of view. Even af­ter ex­pe­ri­enc­ing a strong rally in 2016, it ap­pears cheap.

“We do, how­ever, have to ac­knowl­edge that the risk of a po­ten­tial down­grade con­tin­ues to in­crease, po­lit­i­cal risks loom larger and that a tight­en­ing in­ter­est rate dif­fer­en­tial might re­duce the ap­peal of the carry trade.

“We are there­fore cau­tious on the Rand and pre­fer to have a pos­i­tive US Dol­lar ex­po­sure,” says Te­ich­gree­ber. Ju­naid Bray, head of eq­ui­ties at ARGON AS­SET MAN­AGE­MENT says as bot­tom-up stock pick­ers, the com­pany bases in­vest­ment de­ci­sions on up­side to es­ti­mated in­trin­sic value.

We see bet­ter op­por­tu­ni­ties in fi­nan­cials, par­tic­u­larly the banks, and some of the glob­ally di­ver­si­fied in­dus­tri­als such as Bri­tish Amer­i­can Tobacco, Stein­hoff and Mondi, which we think of­fer rel­a­tively bet­ter value than some of the lo­cally listed in­dus­tri­als. David Crosoer, head of re­search and in­vest­ments at PPS IN­VEST­MENTS says it is pos­si­ble to gen­er­ate real re­turns to­day, but in­vestors must take a care­ful look at their time hori­zon to de­ter­mine what ex­po­sure is ap­pro­pri­ate.

“Our bal­anced funds take at least a five-year in­vest­ment view and con­se­quently con­tinue to have a bias to­ward s eq­ui­ties in gen­eral and in­ter­na­tional eq­ui­ties in par­tic­u­lar to gen­er­ate real re­turns.

“Within eq­ui­ties, we con­tinue to see more op­por­tu­ni­ties for ac­tive man­agers to gen­er­ate re­turns than sim­ply in­vest­ing in broader mar­ket ag­gre­gates.

“Not­with­stand­ing this, longer-dated nom­i­nal bonds still of­fer in­vestors in South Africa a pos­i­tive real return, and our port­fo­lios con­se­quently also have ex­po­sure to both longer and shorter-dated nom­i­nal bonds which our man­agers pre­fer rel­a­tive to prop­erty and in­fla­tion-linked bonds.

“Global bonds re­main ex­pen­sive although global in­fla­tion-linked bonds could of­fer some pro­tec­tion in an un­cer­tain en­vi­ron­ment.”

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