WORDS ON WEALTH
Martin Hesse
In the past few months, South African asset managers have been bullish on local shares compared with overseas ones. This may be too much of a generalisation, considering the differences in views and investment strategies of the many analysts and fund managers in the local investment industry, but there does seem to be an overall shift in interest from offshore to local.
The basic question, when it comes down to it, is: do the (generally) attractive prices of shares on the JSE outweigh the wider risks South Africa faces at present?
Adriaan Pask, chief investment officer at PSG Wealth, in a recent article “Is now the right time to invest in local assets?”, says that if you look at the news headlines, it's easy to become disheartened about investing in South Africa. But he argues that, compared with many developed countries, South Africa’s position may not be as negative as we tend to paint it, and there may be “opportunities in this apparent chaos”.
“Given South Africa’s challenges, investors are looking elsewhere for returns, but things are not necessarily any easier in foreign markets. Developed markets around the world are grappling with rising interest rates and large debt burdens,” Pask says.
He says South Africa’s debt-to-GDP ratio, at around 70%, is still relatively good compared with global debt numbers, which have escalated significantly since Covid. “The United States, for example, is heading towards 140% debt-to-GDP and inflation is hovering around the 8% mark (marginally higher than South Africa, at 7.5% in September).”
And because of a commodity boom over the last few years, our fiscus is in relatively good shape. “Compare this to the US, where the current account has been slipping consistently for a very long time,” Pask says.
He says this means that the gap between South Africa and the US as an investment destination “is less significant than many believe, and from a debt perspective, we're actually in much better shape.
“If we then look at returns, one can really start to see the case for investment locally. It's quite easy to generate a 6% yield on cash investments, and interest rates are still going up. Our bonds are yielding around 10% to 11%, which is extremely attractive. Valuations on our equities are at single-digit levels, and dividend yields are in excess of 4%.
“Importantly, our profit margins are very sound. The earnings yield from South African companies is almost double what you would receive out of the US, on average,” Pask says.
At the recent Morningstar Investment Conference in Cape Town, some of South Africa's top fund managers debated the opportunities and risks in local versus offshore markets in what are admittedly turbulent times for investors.
Sean Neethling, portfolio manager at Morningstar Investment Management SA, who hosted the discussion, notes in a subsequent report, “How do local equities stack up in the current environment?”, that while local valuations are attractive there appears to be uncertainty about the different risks being priced into the market by investors.
Piet Viljoen, executive director and portfolio manager at Counterpoint Asset Management, suggested that local equities are currently pricing in particularly negative outcomes, which could provide scope for a potential uplift should these outcomes turn out to be less dire than expected.
Neethling says the panel agreed that although valuations are compelling, South African companies do face significant headwinds: the current environment has multiple geopolitical, financial and economic risks, which are all contributing to an especially uncertain period for investors.
Gail Daniel, portfolio manager at Ninety One, pointed out that the growth outlook for local equities remained constrained by our economic and political policies. She cited the operating environment for South African companies as a specific concern.
Neethling says the panel was well aware of the relatively wide range of potential outcomes that could play out in the current environment. “As part of the broader emerging market complex, it would be very difficult for South Africa to be insulated from the spillover effects of the multiple global risks evident in markets today,” he says.
Investment managers broadly agree that investors still need to be diversified in offshore markets. In the panel discussion, Evan Walker, portfolio manager at 36ONE said that although South African equities were cheap, he cautioned against being “overweight” in these shares given the size and breadth of the global opportunity set.
PERSONAL FINANCE