Friday, January 21

Are local stocks still offering value?

The question of whether value can still be found on the JSE, with the All Share Index (Alsi) at all-time highs, sparked an interesting discussion among fund managers at a recent investment conference hosted by Morningstar Investment Management SA.

The short answer is that there are still some sectors that offer opportunities.

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Sean Neethling, a portfolio manager at Morningstar, noted that the past 20 months have been unprecedented in financial markets, with most experiencing a strong sell-off at some point, only to rebound to all-time highs.

“Just when you think you know what will happen next, the ball game changes. It’s no wonder that investors often don’t know where to go and sometimes seek safety in cash-like instruments, ”he says.

The JSE’s performance proves their point. In March 2020, the Alsi plunged around 30% in a few days to a low of 40,000 points. It rallied to a high of 73,000 points last week, rewarding brave investors with a gain of more than 80%.

Read: JSE exceeds 70,000 points – highest level ever

Alternatively, performance can be measured from the beginning of the year. Since January, the JSE has made 22% more than satisfactory gains.

Will the local continue to be lekker?

However, Neethling says local investors now face a challenge: “Going forward, will local remain lekker or should investors venture further into offshore stocks?”

He says that during a panel discussion on the potential of local stocks, he was reminded how volatile and uncertain equity markets can be, and how the best opportunities can often be found in less popular and less loved parts of the market. .

It was easier when the entire market was unpopular for a few days in March 2020, but more difficult with the entire market seemingly very popular right now.

Neethling lists some basic fundamentals currently influencing markets: economic growth is slowing, inflation is rising worldwide, interest rates will rise, and geopolitics will remain a problem.

“Let’s face it, it was mathematically impossible for growth to continue the way it did,” he says, adding that rising interest rates shouldn’t “upset the apple cart” as long as the monetary authorities raise interest rates by one. sensible and structured way. .

“The tension between the United States and China continues, the tension in Afghanistan claimed its fair share of airtime and we continue to witness social unrest and unrest around the world,” he says.

Furthermore, isolation and social imbalances persist, and governments are criticized for how they are handling the pandemic, Neethling says. “People are sick and tired of rules and regulations that don’t seem to move the needle.”

Read: New wave of delisting to hit JSE

In all, the outlook for the markets has looked better.

However, the panelists at the Morningstar conference did not back down.

Tempting but stormy

Chris Freund, a fund manager at Global Asset Managers Ninety One, says stocks are highly likely to outperform other asset classes, with periodic reversals to “test their mettle” from time to time.

Chantelle Baptiste, an analyst and portfolio manager at Fairtree Asset Management, and Shaun le Roux, a fund manager at PSG Asset Management, share the same opinion.

The latter says that from time to time something strange happens where everything goes on sale, as in 2003, 2009 and 2020, to name a few examples.

“We act like kids in a candy store when opportunities like this arise, and March 2020 was no different,” says Le Roux.

“Looking to the future, PSG still believes that there are fantastic businesses in South Africa that will continue to do well and are trading well below their intrinsic value.”

But PSG cautions against including too many interest rate sensitive stocks in its portfolio. An example of this is owning record highs US tech stocks, which were pushed to these high levels due to the lowest interest rates ever.

Retail, resources and more

Baptiste believes there are some notable opportunities left on the home front in retailers, resources, and Naspers and Prosus.

“Naspers is a stock that has been deeply out of favor for some time. Management has been under pressure to close the valuation gap and recently there has been a lot of Chinese regulatory noise in the mix, ”says Baptiste.


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It’s no secret that Naspers and Prosus trade at deep discounts on the values ​​of their underlying assets, while a quick glance at the stock price page in the newspaper shows that retail stocks are trading at reasonable levels based on prices. dividend yields and price earnings (PE). ratios. For example, Woolies has an EP of less than 14 times.

A hedge?

However, Baptiste also offers a warning.

He developed the merits of investing in gold as a possible portfolio hedge.

“Historically, gold has shown a low correlation with traditional asset classes and can provide downward protection in a scenario where inflation becomes more permanent,” he says.


Freund says that for Ninety One, local banks are the standout opportunity from a valuation perspective.

“They are well capitalized and the dividend yields on offer are especially attractive,” he says, referring to South African banks being in a position to increase dividends after accumulating considerable reserves by withholding dividends during the Covid-19 year.

Read / listen: Denker Capital’s Kokkie Kooyman discusses how SA’s top banks performed in 2021

A look at bank stock prices and dividend yields underscores their sentiments. An example is Absa, trading with a PE of 9 times and Standard Bank with 10.7 times.

Neethling says that even if parts of the local market are trading at extremely high valuations and, in some cases, near all-time highs, the opportunities still exist.

“Globally, we have witnessed a great divergence in the performance of equity markets and this is even more visible between developed markets and developing markets,” he says.

In addition to local banks and retailers, panelists seem optimistic about both local and global financial, energy and beer companies.

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