The managers of Amplify’s line of multi-asset funds all see value in South African assets. In a webinar on Friday, they were universally positive about the available value in local stocks and fixed income.
While favorable real yields on government bonds continued to be a key source of performance, a number of factors also underpinned the outlook for domestic equities. This included stronger than expected earnings growth and improvements in the macro environment.
“I think there have been some very positive developments in South Africa with regards to reform,” said Brian Thomas of Laurium Capital, who co-manages the Amplify SCI Balanced fund.
“The most relevant is the allocation of 100 MW of private production capacity. It is important for the country. And I think there has also been huge progress on the corruption front. ”
However, this was somewhat tempered by the events of [July].
“The downside is we’ve seen this wave of unrest, and we don’t know how it’s going to play out,” Thomas said. “This is something we take very seriously, and it is something that we will be watching very closely in the quarter and year ahead.”
Truffle Asset Management’s IT director, Iain Power, said South African risk asset valuations were clearly positive. As shown in the graph below, the MSCI South Africa futures price / earnings multiple is more than one standard deviation from its long-term average.
“So you can see we’re trading at a pretty big discount,” said AA-rated Power by Citywire, which co-manages the Amplify SCI Wealth Protector fund. “This is a function of the better than expected performance of South African companies in general, but resource companies in particular. ”
Record commodity prices had supported record profitability in this sector, but it wasn’t just here that valuations looked attractive. Power added that banks, insurers, industrial companies and healthcare stocks are all trading at steep discounts from their historical averages.
“What this means is that there is a lot of bad news out there,” Power said. “The tragedy of the last few days will undoubtedly shake the confidence of global and local investors, but at least we have valuation on our side. from a performance perspective when looking to build portfolios to meet and beat more inflation benchmarks.
Thomas added that it was notable that it’s not just investors who build equity portfolios who find pockets of value on the JSE.
“There has been a wave of M&A activity over the past two months,” he said. “It started with Heineken taking a look at Distell, and more recently we’ve seen Duba Ports World take a look at Imperial and will probably buy it at 40% premium. So, there where there are undervalued assets, you not only have asset managers finding value, but also other market players. ”
Lourens Pretorius, of Matrix Fund Managers, said her company’s forecast for local stock and bond returns makes it constructive on both asset classes as drivers of real returns. However, recent turmoil in the country has caused them to be more cautious about the Amplify SCI Defensive Balanced and Amplify SCI Absolute funds. In both portfolios, they had withdrawn somewhat from being fully invested in local risky assets.
“We have decided to reduce our duration by about six months,” said Pretorius. “This resulted in a reduction of almost 10% in our bond allocation. We also reduced the equity allocation in the low rate equity fund by 5% and by around 7% and 8% in the medium term equity fund. It was a tactical measure – a risk mitigation measure. ”
He added that Matrix has also significantly increased the funds’ effective offshore exposure, mainly through derivative structures.
“This reflects a risk mitigation action we have taken, being concerned about capital outflows and the subsequent impact this may well have on the currency. We are also concerned about the sustainability of our constructive vision of profit growth in the local domestic sector.
“But we are not married to this tactical risk reduction. If we feel that the markets have digested it enough and that there should be a sufficient price adjustment, we are able to be able to re-enter the risk that we took.
Thomas said another consideration for local investors is the impact the fallout from the unrest could have on interest rates.
“We believe the Reserve Bank will increase rates by 25 basis points over the next year. The market is pricing closer to a 1% rise. With what happened with the recent unrest, I think the chances of that 1% increase are very low. ”
Patrick Cairns is Editor-in-Chief for South Africa at Citywire, which provides insight and information to professional investors around the world.
This article first appeared on Citywire South Africa here, and republished with permission.