Sanlam favours global equities over ‘pricey’ locals

DOMESTIC equities and global bonds are out of favour, while international listed property and global equities are favourites for Sanlam Investment Management, which this week spelt out its take on market opportunities.

Philip Liebenberg, head of absolute return, said global equities were not necessarily cheap, but the JSE was trading on an overall price:earnings ratio of 17.5 times.

In Sanlam’s eyes, that was “100% too expensive”.

Patrice Rassou, head of equities, said cheaply raised foreign capital had been flowing into the JSE, which meant foreign investors were less keenly focused on price and were still making acceptable returns over the price of the capital invested. There was more foreign money in the JSE than ever before.

However, these short-term flows of “hot money” caused “extreme volatility on the way in and the way out”.

Liebenberg said historical PE ratings over 60 years suggested equity investments on the JSE would bring 5% real returns for the next five years. “We like European equities, so we’re overweight on Europe.”

Given that the eurozone is lagging the US in earnings recovery, the team are betting on buying in low and reaping the turnaround as consumer spending recovers and industrial output picks up.

Sanlam Investment Management still has sizeable holdings of domestic businesses, especially those with an international flavour.

Rassou, explaining Naspers as the Sanlam Investment Management General Equity Fund’s top holding, with a 9.69% weighting, said mobile internet, especially in emerging markets, was a game-changer.

“It’s taken on average 20 years for a Fortune 500 company to reach a billion-dollar market cap, yet Google did it in eight years, Facebook in five, Tesla in four and the new technology companies are doing it within a year. Tencent was worth R3billion to Naspers in 2005 and the stake is now worth R800billion. That’s creation of value for you.”

Rassou’s second-largest holding is Steinhoff International. “The Conforama acquisition is really what changed the company around. With the Pepkor acquisition, that will add to the potential for earnings.”

He expects Steinhoff to diversify away from pure furniture into clothing at the bottom of the market in the constrained consumer environment.

Rassou said he held no Sanlam shares, but his third-largest holding was Old Mutual — he was banking on another turnaround and better allocation of capital in the future.

Savvy capital deployment also explains his liking for resources shares such as Northam Platinum, which he said had done a sterling job of shoring up its balance sheet through a BEE

We like European equities, we’re overweight on Europe

deal that provided the company with the R4-billion in cash it used to buy assets at the bottom of the cycle.

Rassou holds no Capitec shares, saying the bank may make further headway into other product classes in the sector but was priced for this and more.

He likes Woolworths’ David Jones deal, which created a dominant southern hemisphere retail player, and he had increased his holding in British American Tobacco and Barclays Africa.

He sold down slightly on MTN and Anglo American recently, although the general equity fund remains overweight on resources.

One domestic asset class that has proved worthwhile for the Sanlam team is domestic bonds, which are yielding 7.85% for 10year sovereign bonds.

Sanlam is lengthening domestic bond duration in its portfolios while investors in developed markets are being forced to rethink their risk profiles, with sovereign bonds in Germany, for example, offering 0% returns.