How do local equities stack up in the current environment?

Sean Neethling, Portfolio Manager at Morningstar Investment Management SA

To say that 2022 has been volatile would probably be somewhat of an understatement. South African equities can no longer be discussed without the impact of global events.

The global tide of easy money has turned, and the inevitable spillover to the local market is becoming more apparent. Foreign investors remain net sellers of local equities and the investable universe continues to shrink through companies delisting from the JSE. Recent changes to Regulation 28 have also widened the opportunity set for fund managers looking to ramp up global exposure. How do local equities stack up in the current environment? Where are the pockets of opportunity and how do investors balance risk and reward in these turbulent markets?

At this year’s Morningstar Investment Conference, hosted in Cape Town on 19 October, I had a panel discussion with Gail Daniel (Portfolio Manager, Ninety One), Piet Viljoen (Executive Director & Portfolio Manager, Counterpoint Asset Management) and Evan Walker (Portfolio Manager, 36ONE) to tackle these questions.

So, how do local equities stack up?

As was highlighted by the speakers, this year has been especially turbulent with virtually no place to hide. We have seen broad declines in both equity and bond markets being driven by multiple headwinds. While local valuations are attractive there appears to be greater uncertainty around the different risks that are being discounted by the market. Piet Viljoen, however, suggested that South African 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. The panel agreed that from a valuation perspective, on an absolute and relative basis, South African equities are cheap. This can be seen in the graph below showing the South African Shiller Cyclically Adjusted Price to Earnings ratio (CAPE).

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