As­set Man­ager Re­view

The Star Late Edition - - COMPANIES - An­drew

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 mul­ti­class bal­anced funds? Pi­eter Hugo, MD of PRU­DEN­TIAL UNIT TRUSTS says the com­pany sees lo­cal as­set classes as gen­er­ally more at­trac­tively val­ued than off­shore as­sets.

“More specif­i­cally, we are over­weight SA eq­uity, SA bonds and SA listed prop­erty in our multi-as­set class port­fo­lios, while be­ing neu­tral off­shore eq­uity and un­der­weight off­shore sov­er­eign bonds, SA in­fla­tion-linked bonds and SA cash.

“De­vel­oped eq­uity mar­kets (par­tic­u­larly the US) have ex­pe­ri­enced a strong run in re­cent months and we con­sider them to be at fair value ver­sus their longterm his­tory, while SA eq­ui­ties are rel­a­tively cheap com­pared to their long-term his­tory, in terms of both for­ward P/E and price-to-book value mea­sures.” Lis­ton Mein­t­jes, head of in­vest­ments at SASFIN WEALTH says the best in­vest­ment op­por­tu­ni­ties are in qual­ity com­pa­nies with grow­ing and se­cure earn­ings streams. Within lo­cal SA com­pa­nies those are few and far be­tween.

“Yes, the Re­sources com­pa­nies are re­cov­er­ing but sus­tain­abil­ity of that growth is a big ques­tion and many face ex­ter­nal threats from labour to pol­i­tics. Even the fi­nan­cial sec­tor, where the earn­ings streams ap­pear solid and fore­castable are likely to face pres­sure from gov­ern­ment to pur­sue rad­i­cally trans­for­ma­tive poli­cies.”

Mein­t­jes says multi-na­tional com­pa­nies, es­pe­cially those with large ex­po­sure to the US, and par­tic­u­larly with fast-grow­ing rev­enues are his pick, in­clud­ing some but not all of the FANA stocks (Face­book, Ama­zon, Net­flix and Al­pha­bet).

“In­ter­na­tional Bonds are likely to ex­pe­ri­ence their worst year in many in 2017 as in­ter­est rates rise – as they have al­ready done. That im­pacts our lo­cal bonds but we do have the ad­van­tage of hav­ing started with a large yield gap.

“The listed prop­erty sec­tor comes in two dis­tinct group: those off-shore and lo­cal. While of­fer­ing de­cent yields, the lo­cal group is suf­fer­ing from added sup­ply and the off-shore group, sim­i­larly due to re­cent new list­ings and the like­li­hood of more.

“In pe­ri­ods like this, it ought to be pos­si­ble for ‘al­ter­na­tives’ to out- per­form but that is a very wide group – ho­mo­ge­neous in their heavy fee struc­tures. Not men­tioned in the ques­tion but cash and cash al­ter­na­tives, de­pend­ing on their struc­ture but usu­ally linked to JIBAR, cer­tainly pro­vide de­cent re­turns.

“Yes, it all gets down to the rand. Nearly half the shares by mar­ket cap on the JSE have their price ei­ther di­rectly or in­di­rectly af­fected by the rand – and that does not in­clude the miners. For a change, with prob­lems in a num­ber of emerg­ing mar­ket cur­ren­cies (think Mex­i­can Peso and Turk­ish Lira) the rand has, this last week hit the low­est (strong­est) against the dol­lar since just be­fore Nenegate.”

It is Mein­t­jes’ be­lief that were it not for a limit of 25 per­cent on Off-Shore in­vest­ment, most as­set al­lo­ca­tors would choose to have far more: we there­fore have main­tained a fairly full ex­po­sure to “Global Eq­ui­ties”.

“Short-dated bonds, with credit spreads (un­jus­ti­fi­able on the qual­ity of the is­suers) and high yield­ing cash al­ter­na­tives con­tinue to serve us well. We are over­weight prop­erty but, as men­tioned above, there are two sides of the rand in­volved in ac­tual stock se­lec­tion. The re­sul­tant but also a de­lib­er­ate un­der­weight is SA Eq­uity,” says Mein­t­jes. Nick Curtin, in­sti­tu­tional in­vestor re­la­tion­ship man­ager at FO­ORD says the com­pany re­mains con­cerned about the do­mes­ti­cally fo­cussed com­pa­nies’ abil­ity to grow their earn­ings in what ap­pears to be a struc­turally weak econ­omy. The rat­ing on SA In­cor­po­rated shares in our view does not suf­fi­ciently com­pen­sate for the down­side risks.

“Our high­est con­vic­tion long-term in­vest­ment ideas cur­rently are in very spe­cific in­ter­na­tional eq­ui­ties. We are able to buy qual­ity com­pa­nies in ju­ris­dic­tions and sec­tors with struc­tural earn­ings growth tail­winds, at very at­trac­tive val­u­a­tions.

“There are also at­trac­tive yield op­por­tu­ni­ties in the do­mes­tic short-term fixed in­ter­est space where in­fla­tion beat­ing yields with high qual­ity coun­ter­party risk and lit­tle risk to cap­i­tal val­ues can be locked in for the next two to three years. Listed prop­erty dis­tri­bu­tion growth is at risk of stag­na­tion, given the weak con­sumer and stalling eco­nomic ac­tiv­ity. Qual­ity prop­erty REITS re­main ex­pen­sive with ma­te­rial risk of cap­i­tal loss. The Rand re­mains at risk long term.” Mo­hamed Mayet, CEO of SENTIO CAP­I­TAL MAN­AGE­MENT says the ar­rival of Trump in the US and right-wing populism in Europe has cre­ated an en­vi­ron­ment of po­lit­i­cal in­sta­bil­ity and the re­sul­tant lack of pol­icy clar­ity has cre­ated bi­nary risks.

“Does Trump go all the way with trade Pro­tec­tion­ism and Fis­cal spend­ing? What are the re­sponses of China and US trade part­ners on pro­tec­tion­ism? We be­lieve that the ini­tial re­sponse of eq­uity mar­kets to Trumps win was to ‘suck liq­uid­ity’ out of Emerg­ing Mar­kets (in­clud­ing SA) to the US as rhetoric around Trumps fis­cal plans and pro­tec­tion­ism cre­ated a ‘growth eu­pho­ria’ in the US eq­uity mar­ket.

“How­ever, as the real im­pact of ac­tual poli­cies and global risks be­come ap­par­ent, we ex­pect some of this liq­uid­ity to find its way back to Emerg­ing Mar­kets. Last year this time, with the fir­ing of Nene it felt like South Africa was on a clear down­grade slope and with widen­ing CDS spreads it seemed like we could have had a full blown cri­sis (mar­kets priced-in mul­ti­ple down­grades).

“Nev­er­the­less, not only did South African gov­ern­ment and pri­vate in­sti­tu­tions prove their strength, we also had a peer group in equal dis­tress. Brazil, Turkey and Rus­sia were fac­ing head­winds of their own, mak­ing it eas­ier for South Africa to prove its re­silience.

“A sin­gle notch down­grade is not off the cards for this year, how­ever our re­search shows that once a down­grade is priced in 12-18 months ahead, the ac­tual down­grade re­sults in less im­pact. How­ever, a cycli­cal re­cov­ery and some struc­tural re­forms may also help pre­vent a down­grade this year.

“We be­lieve that eq­ui­ties of­fer bet­ter re­turns than other as­set classes, with a pref­er­ence for do­mes­tic eq­uity names and some cycli­cal value names. We be­lieve that bonds are less at­trac­tive than they were last year as growth starts to come through in cor­po­rate earn­ings and the cy­cle looks to up­grades rather than down­grades.

“We also be­lieve that US do­mes­tic names of­fer up­side from the cycli­cal up­swing in lo­cal earn­ings, while Euro­pean names are still not out of the woods yet. We ex­pect global bond yields to con­tinue ris­ing as the end of QE, the Fed hik­ing cy­cle and some growth comes through. Our ex­pec­ta­tion for the Rand is for a more sta­ble “in-range” per­for­mance, bar­ring un­fore­seen po­lit­i­cal shocks,” says Mayet. Izak Oden­daal, in­vest­ment strate­gist at OLD MU­TUAL MULTI-MAN­AGERS says while the com­pany leaves stock pick­ing to its eq­uity man­agers, it be­lieves that the out­look for the do­mes­tic econ­omy has im­proved while pes­simism re­mains high.

This means lo­cally fo­cused com­pa­nies could per­form bet­ter than ex­pected.

“Glob­ally, we’ve long held an over­weight po­si­tion to emerg­ing mar­ket eq­ui­ties where val­u­a­tions are more at­trac­tive. Sev­eral emerg­ing mar­kets were hit by a per­fect storm of fall­ing com­mod­ity prices, tum­bling cur­ren­cies, higher in­ter­est rates, slower growth and cap­i­tal out­flows.

“This cre­ated a val­u­a­tion op­por­tu­nity, but also a macro-tail­wind as these shocks are in the process of un­wind­ing. Within de­vel­oped mar­kets, we note that Euro­pean com­pany prof­its are still be­low pre-2008 lev­els due to the two re­ces­sions.

“This sug­gests that there is sig­nif­i­cant up­side as the econ­omy im­proves, and that cur­rent val­u­a­tions (such as P/E ra­tios) prob­a­bly un­der­es­ti­mate the po­ten­tial.

“Glob­ally we also pre­fer prop­erty to bonds since yields are higher while fun­da­men­tals are still sound.

“Lo­cal bonds are still at­trac­tive, given that long bond yields are high rel­a­tive to where they’ve traded his­tor­i­cally and rel­a­tive to ex­pected in­fla­tion. Our view on lo­cal prop­erty is broadly neu­tral. The sec­tor ap­pears well priced, but faces op­er­a­tion head­winds. It should be noted though that JSE-listed prop­erty has un­der­gone a struc­tural shift in terms of its global ex­po­sure in the past few years. Pa­trice Ras­sou, head of eq­ui­ties at SANLAM IN­VEST­MENTS says SA eq­ui­ties are fairly val­ued, trad­ing on val­u­a­tion mul­ti­ples in line with long-term av­er­ages, while many de­vel­oped mar­kets trade at a large premium with the Dow go­ing past the psy­cho­log­i­cal level of 20 000 – with the long term PE only higher dur­ing the Nas­daq Bub­ble. Do­mes­tic bonds re­main at­trac­tive, es­pe­cially with in­fla­tion ex­pected to roll over this year sup­ported by lower food prices. Global bonds are in the early stages of re­bas­ing as cen­tral banks aban­don their quan­ti­ta­tive eas­ing bi­ases.

“That said, the com­ing year is likely to see many more elec­tion sur­prises in Europe which could send shock waves through our mar­kets and we would be buy­ing some pro­tec­tion against these black swan events!” Dun­cas Ar­tus, port­fo­lio man­ager at AL­LAN GRAY sees the best op­por­tu­ni­ties in the in­di­vid­ual stocks that we are find­ing from a bot­tom-up point of view.

“For ex­am­ple, while we be­lieve that the over­all US eq­uity mar­ket is ex­pen­sive, we are still able to find op­por­tu­ni­ties to pur- chase cheap shares. Glob­ally we be­lieve that cycli­cal stocks are more at­trac­tive than high-qual­ity, sta­ble shares and that emerg­ing mar­kets are of­fer­ing more value than many de­vel­oped mar­kets. We re­main bear­ish on long-term sov­er­eign bonds.

“Lo­cally the eq­uity mar­ket has been trending side­ways since 2014 and it is there­fore not sur­pris­ing that we are find­ing more value to­day than we have for a while. We think our top 10 lo­cal eq­uity po­si­tions of­fer good long-term value in ab­so­lute terms. We are also look­ing at po­ten­tial op­por­tu­ni­ties cre­ated by Brexit and the col­lapse in African as­set prices.

“We don’t have a strong view on lo­cal bonds as we be­lieve they are trad­ing close to fair value, es­pe­cially given the po­ten­tial po­lit­i­cal risks that are in­her­ent in South Africa at the mo­ment. We re­main un­der­weight the listed prop­erty sec­tor as a whole, but are find­ing se­lec­tive op­por­tu­ni­ties at- trac­tive. The rand has strength­ened sig­nif­i­cantly over the last year and we think it is an op­por­tune time to in­crease our off­shore ex­po­sure.” Anet Ah­ern, chief ex­ec­u­tive of­fi­cer at PSG AS­SET MAN­AGE­MENT says at the be­gin­ning of 2017 the com­pany is still ex­cited about the port­fo­lios it is able to con­struct from a bot­tom up ba­sis, but is more cau­tious about the up­side in these op­por­tu­ni­ties than it was at the be­gin­ning of last year. This is due to the fact that some more cycli­cal shares have al­ready shown quite strong share price moves.

“Cur­rently, we find com­pelling value in nu­mer­ous global com­pa­nies across var­i­ous sec­tors, but out­side of the much-loved con­sumer non-cycli­cals.

“In the do­mes­tic mar­ket we are find­ing value in nu­mer­ous fi­nan­cial com­pa­nies where the mar­ket is un­der-ap­pre­ci­at­ing the in­trin­sic qual­ity. We are also find­ing do­mes­tic in­dus­trial com­pa­nies (op­er­at­ing in var­i­ous sec­tors of the econ­omy) at com­pelling prices.

“We be­lieve real re­turns will be driven both by these care­fully se­lected com­pa­nies’ abil­i­ties to grow their prof­its as well as repric­ing to­wards in­trin­sic value. We are find­ing at­trac­tive real re­turns across the South African NCD and gov­ern­ment bond curves and are lock­ing these re­turns in for our clients. We cur­rently don’t have any ex­po­sure to do­mes­tic nor off­shore prop­erty as our bot­tom-up process sug­gests that these com­pa­nies are trad­ing above in­trin­sic value.

“Very im­por­tantly, we hold large amounts of cash which buf­fers draw­downs and en­ables as to pounce when at­trac­tive real re­turns pop up. This is a key in­gre­di­ent to gen­er­at­ing high risk ad­justed re­turns.”

Ah­ern says at the start of 2016, the com­pany felt that cycli­cal stocks were priced too cheaply and that lo­cal in­fla­tion fore­casts and fears were too pes­simistic. We also be­lieved that the pop­u­lar, shares per­ceived as be­ing ‘safe’ were over­priced in our mar­ket (some widely-held rand hedges were among these).

“At that time, we also be­lieved we could find par­tic­u­larly good op­por­tu­ni­ties within the ma­te­ri­als, global fi­nan­cial, SA bank­ing and do­mes­tic in­dus­tri­als. We took ad­van­tage of these views at the time by em­pha­sis­ing in­vest­ment in e.g. longer dated money mar­ket in­stru­ments, long bonds, and se­lected eq­ui­ties in sec­tors such as fi­nan­cial and ‘ SA Inc.’ type com­pa­nies, re­source shares and global fi­nan­cials.

“These views paid off for us, and we will re­main fo­cused on find­ing in­vest­ment op­por­tu­ni­ties in line with our long-term in­vest­ment phi­los­o­phy in 2017 and be­yond,” says Ah­ern. Mark Ap­ple­ton head of multi as­set and strat­egy (SA) at ASH­BUR­TON IN­VEST­MENTS thinks that the lo­cal eq­uity mar­ket will gen­er­ate bet­ter in­vest­ment re­turns in 2017 com­pared to 2016.

“A slightly brighter eco­nomic out­look, higher com­mod­ity prices and a bet­ter earn­ings growth tra­jec­tory (earn­ings pro­jec­tions no longer be­ing re­vised lower) are a pos­i­tive un­der­pin. In ad­di­tion it is our view that with in­fla­tion likely hav­ing peaked and headed down, in­ter­est rate hikes are no longer on the cards which re­moves a head­wind from an eq­uity val­u­a­tion per­spec­tive. In the global con­text, we have be­come cau­tiously op­ti­mistic on the eq­uity front (the Euro­pean eq­uity mar­ket looks par­tic­u­larly ap­peal­ing) although we recog­nise that there are many pit­falls in­clud­ing pro­tec­tion­ism and the threat to global trade..

“On the fixed in­ter­est front while we are wary of de­vel­oped mar­ket sov­er­eign bonds, we are con­struc­tive on in­vest­ment grade and var­i­ous emerg­ing mar­ket bonds. Lo­cally we re­gard Gov­ern­ment bonds as of­fer­ing fair value (and real re­turns) es­pe­cially given our de­clin­ing in­fla­tion rate view. Listed prop­erty re­turns should be sim­i­lar to money mar­ket re­turns with rental es­ca­la­tion rates in ex­cess of in­fla­tion be­ing po­ten­tially off­set by down­ward rent re­ver­sions and va­cancy ex­pe­ri­ences.

“Our rand ex­change rate view is more pos­i­tive than it has been for some time although we still an­tic­i­pate some grad­ual de­pre­ci­a­tion in line with in­fla­tion dif­fer­en­tials be­tween SA and its trad­ing part­ners.” You are in­vited to make one fore­cast for the com­ing year (or two) that you con­sider to be likely, and one fore­cast that you con­sider to be highly un­likely. Next year we will as­sess the out­comes! Peter Brooke, Head of MacroSo­lu­tions bou­tique at OLD MU­TUAL IN­VEST­MENT GROUP says the com­pany has a very strong macro fo­cus in its phi­los­o­phy, but thinks that fore­cast­ing is fun­da­men­tally flawed.

“In­stead, we see the world in terms of themes and risks. One of our themes is that SA sta­bilises, which means that 2017 is a bet­ter year de­spite all the pes­simism. We also be­lieve that in­ter­est rates will fall in South Africa, which should sur­prise the con­sen­sus. Guess­ing how much they fall is not as im­por­tant as real­is­ing that cash will be less at­trac­tive as an as­set class.

“A sur­prise is that re­tail shares do bet­ter de­spite fac­ing a very hos­tile op­er­at­ing en­vi­ron­ment.” Neville Ch­ester, se­nior port­fo­lio man­ager at CORONA­TION FUND MAN­AGERS says it is likely that global bond mar­kets will con­tinue to nor­malise and in­ter­est rates will gen­er­ally rise in the de­vel­oped world.

He con­tends that we will see far fewer gov­ern­ment bonds with zero or neg­a­tive yields. (Im­por­tantly, pro­tec­tion­ism like we see grow­ing glob­ally is very in­fla­tion­ary).

“It is un­likely that the UK an­nounces that Brexit has just been an elab­o­rate spoof con­cocted by John Cleese and that it’s go­ing to stay in the Euro­pean Union af­ter all. The joke is on you,” says Ch­ester. Dr. Fer­nando Dur­rell, head of mul­ti­as­set at VUNANI FUND MAN­AGERS says a likely fore­cast is that a well-di­ver­si­fied port­fo­lio will be su­pe­rior on a risk-ad­justed ba­sis rel­a­tive to any one as­set class.

An un­likely fore­cast is that Ja­pan will be able to en­gi­neer it­self out of its de­fla­tion­ary quag­mire. Pa­trice Ras­sou, head of eq­ui­ties at SANLAM IN­VEST­MENTS fore­casts that the Rand ends the year at R11 to the US dol­lar af­ter the green­back goes into free fall due to Trump push­ing though large cor­po­rate tax cuts and in­fra­struc­ture plans and an­tag­o­nises most of his bond buy­ers glob­ally with fi­nan­cial mar­kets pan­ick­ing about a larger than ini­tially ex­pected US fis­cal deficit and jin­go­ism.

“On the other hand, South Africa be­comes the dar­ling of emerg­ing mar­kets af­ter a peace­ful suc­ces­sion at the helm of the ANC and the po­lit­i­cal risk gets priced out – re­mem­ber­ing that the bond mar­ket has only clawed back to pre-Nene-gate level last year and still hangs above the el­e­vated lev­els reached post Marikana!

“Mark Zucker­berg will use his stated aim to visit every state in the US this year to start cam­paign­ing to be the next Pres­i­dent of the US – af­ter all, is pre­sid­ing over 325 mil­lion souls so dif­fi­cult af­ter con­trol­ling 1,8 bil­lion via one app? So maybe af­ter all, we will in fu­ture be read­ing pres­i­den­tial de­crees via Face­book in­stead of @ POTUS Twit­ter han­dle.” Sa­man­tha Har­tard & Chris Fre­und, port­fo­lio man­agers at IN­VESTEC AS­SET MAN­AGE­MENT firmly ex­pect that the av­er­age SA bal­anced fund return in 2017 will ex­ceed the ap­prox­i­mately 4 per­cent return de­liv­ered in 2016. They say it is un­likely Mex­ico will pay for the wall. Jay Vo­macka, se­nior port­fo­lio man­ager at AEON IN­VEST­MENT MAN­AGE­MENT says a likely fore­cast is that Don­ald Trump will be more ruth­less on im­port tar­iffs and trade bar­ri­ers than most ex­pect, hav­ing a highly in­fla­tion­ary im­pact on the US con­sumer, scar­ing the mar­ket as par­tic­i­pants will ex­pect an in­creas­ing tra­jec­tory in FED rate hikes.

He says highly un­likely any war would break out in 2017 as a re­sult of the ten­sion in Asia be­tween China, Korea, and Ja­pan as in­creas­ing as glob­al­i­sa­tion takes its toll on growth and equal­ity. How­ever, this is a po­ten­tially big topic and de­vel­op­ments should be an­a­lysed. Izak Oden­daal, in­vest­ment strate­gist at OLD MU­TUAL MULTI-MAN­AGERS says a likely fore­cast is that fore­casts will mostly be wrong this year, while an un­likely fore­cast is that fore­casts will mostly be right this year. Dun­cas Ar­tus, port­fo­lio man­ager at AL­LAN GRAY be­lieves that global eq­uity mar­kets will not con­tinue to per­form as strongly as they have re­cently and that there is a small prob­a­bil­ity that long-term in­ter­est rates retest their all-time lows on con­cerns over ex­cess global debt.

Vint­cent, eq­uity and bal­anced fund port­fo­lio man­ager at CLUCASGRAY AS­SET MAN­AGE­MENT says what is likely to oc­cur is that the Rand touches R11/$ dur­ing 2017. What is un­likely to oc­cur is Julius Malema join­ing Cyril Ramaphosa’s cabi­net. Kent Grobbe­laar, head of Port­fo­lio Man­age­men­tatSTANLIBMULTI-MAN­AGER be­lieves there is a chance of a re­ces­sion in the US over the next 24 months. Over the last cen­tury, there has been a 100 per­cent prob­a­bil­ity of a re­ces­sion in the year fol­low­ing a two-term change in pres­i­dency. The cat­a­lyst this time could be a de­cline in trade in­ten­sity - his­tor­i­cally when the sum of im­ports and ex­ports in GDP roll over, re­ces­sions have fol­lowed.

Con­versely, he thinks it is un­likely cen­tral banks are go­ing to be suc­cess­ful in their at­tempts to scale back QE. The ob­jec­tive of QE was to de­crease risk pre­mi­ums. There­fore mar­kets will surely test cen­tral banks if they step back. Pass­ing the ba­ton from cen­tral bank mon­e­tary stim­u­lus to politi­cian’s fis­cal stim­u­lus is not go­ing to be easy. Put dif­fer­ently, we don’t ex­pect the Mex­i­cans will pay for the wall,” says Grobbe­laar. Anet Ah­ern, chief ex­ec­u­tive of­fi­cer at PSG AS­SET MAN­AGE­MENT says the mar­ket is likely to con­tinue be­ing volatile and pep­pered with po­lit­i­cal sur­prises and con­cerns. For this rea­son, hold­ing cash in a multi-as­set fund is a great way to buf­fer against volatil­ity and pro­vide funds to take ad­van­tage to buy when oth­ers are pan­ick­ing. Mo­hamed Mayet, CEO of SENTIO CAP­I­TAL MAN­AGE­MENT says likely fore­casts are: 1) A US vs Asia trade-war re­sults in re­aligned trade blocs and im­pacts on US growth and trade. 2) Europe es­capes and up­sets the right wing growth as France, Ger­many, Italy and Nether­lands vote for pro EU gov­ern­ments.

Un­likely fore­casts are: 1) Trump rec­om­mends the in­clu­sion of Rus­sia as a NATO mem­ber. 2) Co­me­dian Trevor Noah is asked to be­come White House Press Sec­re­tary.

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