Whither local equities when the world is your oyster?
Going offshore is a no-brainer, but there are still some opportunities back home.
After a highly volatile year, investors are looking far and wide for better returns. With global equities at our disposal, and a high number of JSE delistings over the last years, investment managers at a recent Morningstar Investment conference debated the pockets of opportunity available.
Evan Walker, a portfolio manager at 36ONE, points out that many investors tend to forget they can invest in several JSE-listed companies that earn in dollars.
“You can buy Richemont, BAT, BHP Billiton and Bidcorp just to start with. While it’s true that Capitec has been a disruptor in the banking sector, other South African banks aren’t just sitting around moaning, they are continually reinventing their business,” says Walker. “So, though the South African environment is tough, there is good visibility of earnings and cheap businesses available. Banks, for example, are likely to grow 10 to 15% in two years.”
Walker says investors should be careful when it comes to including stocks such as Shoprite and Pepkor in their portfolios, as these stocks are very reliant on the South African GDP.
“There is some concern about load shedding and its effect on the market, and how that reflects on GDP growth a year or two from now.”
South Africa’s GDP contracted 0.7% in the second quarter compared with downwardly revised growth of 1.7% in the previous three months, according to Stats SA.
South Africa endured its worst month of rolling blackouts in September. Eskom data indicates 572 of September’s 720 hours were directly affected. Analysis by Eskom shows that, besides 2021, more power cuts were experienced in September 2022 than in any year since load shedding began in 2007.
According to consultancy AmaranthCX, South Africa had 332 listed companies at the start of the year, across the JSE and three other stock exchanges in the country that host primary listings. By July, 18 companies had delisted, 14 were in the process of delisting and a further 16 had been suspended from trading. However, Piet Viljoen, executive director and portfolio manager at Counterpoint Asset Management, points out that delistings are part of the capital cycle.
“When capital is scarce and expensive, companies delist. Business managers know when their business is undervalued. When that happens, you get a lot of delistings which is what’s happening now in South Africa; but, less than 10 years ago, we had a high number of listings. Corporates knew the shares were over-optimistic about the future and the capital cycle favoured raising capital at expensive prices. Today we see the opposite. The market is over-discounting a negative environment,” he says.
National Treasury’s changes to Regulation 28, which is intended to protect retirement fund savings by limiting exposure to any one asset class, mean asset managers can invest as much as 45% offshore. Walker says in this environment it would be ludicrous to keep all your money in South African equities.
“The international market is huge and those stocks are getting cheaper by the day, so you’ve got to take advantage of the next cycle of high rates and low equity prices to put more money to work offshore,” he says.
An offshore business that is a personal favourite is Estée Lauder. “I bought it at $60 and sold it at $250 and it went to $350,” explains Walker. “It’s back to $200 and, when it goes to $150 we’ll look at buying it again. These are great long-term structural businesses you want to own. But, right now, the starting prices are just too high for the risks in the next year to 18 months,” he says.
Local stocks such as Naspers, with its link to Tencent, can give investors exposure to the Chinese market.
“There’s no doubt that Tencent is a great business but it’s pretty mature and all the regulations are a concern when you hear talk about common prosperity every second day,” notes Walker. “The concerns have heightened and, at the same time, Naspers seems to realise it has spent too much on other investments and is starting to buy back its shares. There is capital available to do other things to unlock value. Our view on Naspers has moved from negative to positive during the Covid years to negative and now to not so negative again,” he says.