‘Don’t look for themes or sectors – it’s all about stock-picking’

Financial advisers will have to manage investors’ expectations as the local market comes off a stellar 2021 and we enter the unfamiliar waters of higher global interest rates and quantitative tightening.

Moneyweb recently hosted a webinar in which the chief investment officers from four asset management companies gave their take on the investment outlook for this year.

The panel comprised Hlelo Giyose from First Avenue Investment Management, Delphine Govender of Perpetua Investment Managers, Karl Leinberger of Coronation Fund Managers, and Tshepo Modiba of Cannon Asset Managers.

Here are four key take-aways from the webinar:

1. Don’t expect a re-rerun of 2021

Last year was a fantastic year for South African equities, with the market returning more than 20%, its best since 2009. But this return should be seen in context: like 2009, 2021 was recovery year: in 2009 the market was coming off the low of the global financial crisis, last year it was coming off the lows induced by the lockdowns.

Govender noted the recovery in the South African market was not broad-based or sector-specific; the returns were driven by certain shares, such as Sasol, Richemont, MTN and Aspen. This was reflected in the difference between the returns of the FTSE/JSE All Share Index, up 29.4%, while the Swix returned 21%, a result of the different weighting of specific stocks in these two indices.

Giyose said that over the past five to 10 years, US investors have enjoyed “consequence-free returns”, because the US Federal Reserve essentially underwrote risk.

Some of the $40 trillion dished out by the Fed, the European Central Bank and the Bank of Japan went to companies that otherwise wouldn’t have got money from the capital or bond markets. Valuation models became disconnected from the fundamentals.

But the era of “free” or cheap money is coming to an end.

Investors who are heavily leveraged will learn a painful lesson that getting money cheaply and identifying future growth does not always mean you can create wealth, Giyose said.

2. It’s all about stock-picking

A recurring theme echoed by the asset managers was that this year will be one for stock-picking; investors should not be looking for entire sectors to do well.

Over the past decade, a generation of investors have done well because they put money into businesses that were small or non-existent but prospered from the transition to the digital economy, said Leinberger. These investors were not very disciplined when it came to the price they paid; they did not pay much attention to figuring out what these businesses were really worth.

A decade ago, value investors, who scrutinised companies’ financial statements, were preeminent in markets. Then the growth and quality managers came to the fore.

Leinberger does not believe investors should assume that growth managers have had their day and now it’s all about value. There are opportunities for both value and growth.

He said the “speculative froth” at end of last year was dangerous, and the sell-off in global markets is a positive development, not least because the correction presents opportunities for stock pickers.

He said there are many stock-picking opportunities in all sectors domestically and offshore. Coronation is only negative on global bonds. Investors should have a balanced portfolio with exposure across the asset classes.

Govender said there is a significant cohort of investors who have been in the market only for the past 10 or 13 years. For them, “normal” means low inflation, low interest rates and high returns. They don’t understand market cycles, particularly when the market overheats.

However, investors who have been in the market longer than 15 or 20 years know that as the pendulum swings it creates opportunities.

It’s not surprising that many of the worst-performing companies in the past month have been loss-making companies. For many years, because these were the “narrative stocks”, the underlying numbers (company financials) didn’t seem to matter much, as they produced good returns.

But, when it comes to long-term returns, you need to have both the story of what the company is offering and the numbers. We are seeing a normalisation, where both numbers and narrative are equally important in making investment decisions, Govender said.

Modiba said some of the stocks that performed well over the past five or 10 years have rightfully done well, because there has been an overlap between price movement and the fundamentals. However, reversion to the mean is a powerful force in investing, and what worked for a decade may not always work.

There are many opportunities beyond the companies that have historically done well, and investors will benefit from a disciplined investment approach that depends on skill instead of following narratives.

Giyose said returns over the past years have been driven mainly by capital gains. He said investors should be looking at companies that are highly cash-generative that can fund a dividend in addition to funding their operations.

3. Don’t write off South African equities

The constant stream of bad news about South African politics and the economy often keeps investors out the local market, but Leinberger pointed out that journalists are concerned about the economy, while investors should be concerned about the price of individual shares.

He said there is far too much money in South African cash, which is “a big mistake”.

Coronation saw value everywhere in the local market and there were plenty of opportunities, including RMI, Transaction Capital, some of the banks, Tsogo Sun Gaming, Dis-Chem, Anglo American and Exxaro.

Although investors in the local market should not expect a re-run of last year’s returns, there are domestic sectors that will see a “late-stage” recovery, including hospitals and banks, which are attractively priced, Govender said.

South African economic growth will be tepid, so investors should be looking at companies that can deliver despite how the economy is performing, she said.

The shares Govender favoured included Naspers/Prosus, which was “coming into value territory”, hospital groups, such as Life Healthcare and Netcare, Oceana, Massmart and Datatec.

Modiba said the small and mid-cap sector was asserting itself in terms of a price mismatch, and good businesses were available at attractive prices.

Giyose said First Avenue was looking at companies whose share prices are down but have good long-term prospects, including:

  • Anheuser-Busch, which took a hit after acquiring SAB, but offers deleveraging opportunities and the prospect of reinstating a high dividend.
  • BAT, which is ironing out the “wrinkles” from acquiring Reynolds American and is addressing regulatory risks.
  • Naspers/Prosus. Prosus owns some 29% of Tencent, which has about $180 billion in investments on its balance sheet, including Tesla. When Tencent unwinds some those investments, Prosus will get about 29% of the proceeds.

4. Don’t overlook emerging markets

The Chinese market declined 20% in 2021, which brought down the emerging market index. If China had been excluded, the index would have risen about 10%, Govender said.

Emerging markets have had a rough ride over the past five years, and they are cheap, said Leinberger.

There are many good businesses with good prospects that are cheaply priced. He believes investors should have a healthy exposure to them. Once again, it was about selecting specific shares.

Modiba said there was great value in some of the South American markets, where “exciting” companies were trading at discounted levels.

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