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 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.