Asset Manager Review
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.”