Fear in stock market spurs SA fund manager's quiet picks

Johannesburg - A sharp slide from record levels has created pockets of opportunity in South African equities, according to a $3bn fund manager.

Euphoria over Cyril Ramaphosa’s election as leader of the ruling African National Congress helped drive the benchmark FTSE/JSE Africa All Share Index to all-time highs in January. That was followed by a 9% plunge as the global equities selloff engulfed Johannesburg stocks.

"In an environment of domestic mispricing, with lots of fear, we think there is an opportunity to quietly go about acquiring stocks that we think are good businesses, trading pretty close to bear-market type valuation levels,” Shaun le Roux, who helps oversee R36bn at Cape Town-based PSG Asset Management, said on February 7.

Investor-favourite Ramaphosa’s December 18 election as ANC head set him on course to succeed Jacob Zuma as the country’s president and propelled South African stocks 7% higher to their latest record close on January 25. The rand has been the best-performing currency in the world against the dollar since Ramaphosa’s win, a boost to locally focused “South Africa Inc” companies.

“A lot of people, both foreigners and domestic, effectively had a short rand position that they then had to struggle to cover,” Le Roux said.

“A lot of things have repriced aggressively, particularly stocks that are perceived to be rand- and domestic economy-sensitive; retailers, some of the banks. Even after that there are still some good opportunities.”

'Uncrowded' assets

Hotel operator Tsogo Sun [JSE:TSH], electronics group Reunert [JSE:RLO] and explosives and chemicals maker AECI [JSE:AFE] are among stocks PSG holds because they fit its description of “uncrowded” assets, where prices and expectations were low. “There’s generally going to be less competition in those places,” said Greg Hopkins, the asset manager’s chief investment officer.

Sentiment toward South Africa-focused shares may improve as Zuma’s expected departure sparks optimism that new leadership will follow more pragmatic and predictable economic policies. Business confidence rose to the highest level since October 2015 last month.

“If the good news persists and continues from here, we think many South African assets could still do well,” Le Roux said. “A really good opportunity is some mid- and small-caps that have been left behind. We see that as the most fertile ground for hunting at the moment. There are still good opportunities and we’ll certainly wait patiently for prices to reach fair value.”

Here are some further views from PSG and other investors

PSG’s Le Roux on Johannesburg-listed health-care stocks and the balance between “rand-hedges” that benefit in the local currency and domestically focused shares:

“Health-care stocks are victims of some very poorly timed and miscalculated foreign acquisitions. They rushed to take money offshore and shareholders have not been well-served by the acquisitions they’ve made and the chickens are coming home to roost.

“I don’t think there’s been one good offshore acquisition in that sector and there’ve been a lot.

"They’re very good businesses, they’ve got strong pricing power, they generate cash. We would prefer if that cash would come back to shareholders, rather than be wasted in offshore markets.

“In an environment where it looks to us [that] the average South African investor is still positioned for rand weakness, we could be looking at one of those long periods where it’s very uncomfortable to own rand hedges and to be underweight domestic assets.”

Simon Raubenheimer, who helps oversee about $45bn as a money manager at Allan Gray in Cape Town:

The market reacted “extremely aggressively” to political changes and has priced in a lot of the good news. “We do find examples of stocks that we are pretty optimistic about, especially on a relative basis, but you’ve got to dig pretty deep to find these opportunities.”

Shares that “fell through the cracks” of the December-January rally and offer value include Investec, which he said has lagged other South African banks.

Health-care stocks are looking relatively cheap in historical terms and compared with the market. Sasol [JSE:SOL], Old Mutual [JSE:OML] and British American Tobacco [JSE:BTI] are among others becoming attractive.

Soledad Lopez, an emerging market strategist at UBS Group in New York:

The bank upgraded South Africa to “most preferred” in its dedicated emerging-market portfolio in January, with the expectation of a lower risk premium after the ANC leadership elections.

“We see a higher probability of higher growth and an improvement in business and consumer confidence that will be supportive of financial markets. Structural reforms and fiscal discipline will be needed, but sentiment will likely improve in the coming months.”

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