‘Bombed out’ SA stocks are a bargain
Truffle Asset Management, the boutique investment firm founded in 2008, says while it can understand investors wanting to take advantage of a recovery in the rand to diversify their wealth offshore, they may be better off buying “bombed out” local stocks that offer better value and return prospects over the next five to seven years.
The Johannesburg-based asset manager, which oversees about R32bn, says SA stocks are still “generally not expensive” despite a rally in the JSE allshare this year that has made it one of 2021’s best performing emerging-market bourses in dollar terms. With the rand trading at near a 16-month high of R14.06/$, after briefly dipping below the R14/$ mark on Monday, many investors may be tempted to use the local currency’s recent strength to expand their offshore portfolios.
“To be externalising money right now from a country risk and diversification point of view is sensible, but the question is where one puts that money — many of these developed markets are expensive, particularly the US,” said Iain Power, chief investment officer at Truffle. “There’s definitely an opportunity for investors to still earn above-average returns from some of the bombed out SA assets, which, along with good value stocks and global emerging markets, are probably more attractive than big US tech stocks that have been the big winners in the last few years.” all-share Power’says s advance much of the this year has been driven by the top-40 index, which is dominated by heavyweights such as Naspers, Prosus and Anglo American, which earn a sizeable portion of their revenue in international markets. However, stalwart, Sa-focused, listed stocks have lagged this recovery due to their reliance on the local economy, which contracted the most in 100 years in 2020 and is still struggling to recover from the impact of Covid-19. Shares such as Pepkor, Cashbuild, Italtile, Astral Foods, AECI and KAP Industrial are “attractively priced” with good earnings prospects over the next three years, said Power. Financial stocks, including Firstrand, Standard Bank, Absa, Liberty and Momentum, are also trading at notable discounts to their intrinsic net asset value, which presents investors with an ideal opportunity to purchase these stocks at attractive valuations.
In the industrial space, Truffle has bought Imperial Holdings, while in the retail arena it rates Woolworths as among the most attractive shares in its sector due to its food business, which Power describes as “best in class”.
The attractive valuations offered by these shares have prompted Truffle to cash out of stocks such as Richemont, while reducing its positions in Anglo American, BHP as well as Naspers and Prosus to put that money to work in comparatively undervalued segments of the market.
“We’ve had big exposure to offshore earners in the top 40 for the past four years and have now taken some profits,” said Power. “We still hold them, we just hold less of them.”
Truffle also sees “a lot of value” in miners of platinum group metals (PGMS) due to demand outstripping supply following years of underinvestment in SA, which is still the world’s biggest producer of the metals. Listed food services group Bidcorp is also a Truffle favourite as it says the counter is likely to benefit due to its exposure to markets such as Australia, New Zealand and the UK, which are far more advanced in their Covid-19 vaccine rollout than SA.
“If you look at the global foodservices sector, Bidcorp trades at quite a big discount relative to that universe so we think there’s some nice value in that name,” said Power, adding that the company is “high quality” that offers very good returns on invested capital.