- Some local investment and portfolio managers who didn't favour SA shares for a long time are starting to see opportunities.
- They are buying shares of companies that are taking market share from peers and companies that are not affected much by SA's GDP growth.
- But which assets are they ditching?
With the globe firmly within the peak of the second wave of Covid-19 infections, and a third wave on the cards for South Africa, investors who were bruised in the March 2020 market bloodbath may understandably be jittery again. Whether these subsequent waves bring another market volatility and wipe out the recovery that came later in 2020 is a big question.
Local asset managers do not want to make predictions on that, but one thing they reached a consensus on during one of the first investment outlook conferences for 2021 was that South Africa's recovery is likely to lag behind the rest of the world.
The delays in the procurement of the Covid-19 vaccine, combined with sketch details on when and how will get into people's arms means that South Africa is going to be part of the projected synchronous global recovery by 2022, said Brian Thomas, co-portfolio manager and retail analyst at Laurium Capital during the conference hosted by global video research and learning platform for investment professionals, Asset TV.
But does that mean local asset managers are sitting on cash and taking all the money they can legally take offshore?
Contrary to their lack of confidence on the pace of recovery of South Africa's GDP, portfolio and investment managers from Old Mutual, Nedgroup Investments, Laurium Capital and ABAX Investments are still expecting green shoots from many local stocks.
With global bonds generating near-zero income yields, Peter Brooke, head of MacroSolutions at Old Mutual, said equities will be the major beneficiary of money flowing out of the bond market.
"It's hard not to be bullish on equity," he said.
When it comes to local stocks, Brooke pointed out that while there was a lot of uncertainty about how Covid-19 would affect listed companies, for many, the GDP numbers did not seem that relevant after all.
"What's been good about this results season, is that, actually, a lot of the results have been coming through a little bit better than expected. Better cost cutting, and that's allowing the companies to deliver," he said.
Should you start piling up SA Inc shares now?
Thomas said the key is to realise that the different segments of stocks investors can buy from the JSE are going to be affected differently.
"There is the international component, which has absolutely nothing to do with what is going on in South Africa. And then there's a South African component, which dances to the heartbeat of what is happening South Africa," he explained.
This component of JSE stocks affected by what is happening in South Africa – often referred to as SA Inc – includes companies whose primary business is here in South Africa, such as retailers and financial services firms.
Thomas said Laurium Capital has about 5% to 6% less assets in these SA Inc shares relative to the benchmark.
"The reason is simple. We don't share the view that South Africa is going to be able to keep pace with the rest of the world economy as the as the global economy grows in 2022 [and] 2023," he said.
If you still choose SA Inc, here are the shares portfolio managers are buying
Iain Power, portfolio manager at Truffle Asset Management, part of Nedgroup Investments, said they have held a negative on SA-focused companies for three-and-a-half years now. However, he thinks Covid-19 has made some local companies a good investment.
Truffle Asset Management has been buying local companies that could probably take share from small and medium businesses, including companies that server the low-income market such as Pepkor and Cashbuild, as well as big names that are taking market share such as Woolworths Food.
"But SA Inc is more of a trade than a long-term structural position that you want in your portfolio because one questions the ability of many of these businesses to sustainably grow their earnings, given the big structural headwinds that the country is facing," he said.
Brooke said in 2020, the price of certain local shares dropped too far, and this has opened an opportunity to buy into some promising smaller and medium cap stocks that don't rely on the local GDP growth to recover.
"Think of Rhodes Food Group at R10.90 [as of 28 January]. That's a multiple we haven't seen since listing and it's a business that is taking market share from Tiger Brands," he said.
Which assets are managers ditching?
The managers are expecting negative returns from global cash and global bonds. Old Mutual MacroSolutions is starting to reduce its SA bonds exposure where it was overweight to put the money into SA equities instead.
Power said Truffle is also trying to steer clear from holding any long-duration SA bonds.
"We are fairly cautious about the path that SA is taking and ultimately that's going to manifest in quite a lot of volatility in the bond market," he said.