Category Investments

SA Inc. is financially healthy and primed for growth if GNU delivers sustainably

11 July 2024 Stonehage Fleming Global Equity Management - South Africa Director JP du Plessis

Stability and delivery by the Government of National Unity (GNU), against an encouraging inflation backdrop and likely near-term interest rate cuts, could provide the long-awaited boon to the economy and JSE. It could unlock corporate South Africa investment (and job creation).

The optimism evident after the formation of the GNU and cabinet announcement resulted in the JSE All Share Index returning 4.1% in June. Most significantly, the domestically focused JSE-listed companies were the biggest beneficiaries of the political events, with the JSE Financial Index returning 13.2% for the month. Core bank holdings in the Stonehage Fleming Equity Prescient Fund, Capitec and Firstrand, rallied strongly, rising 23.4% and 18.3%, respectively . Domestic-focused Bidvest (+15.8%) and Clicks (+17.1%) were other notable monthly performers.

The outlook for SA equity returns

Improved investor sentiment has provided a short-term boon for the JSE. Future stability in the GNU and better delivery from the new administration will now be vital in stimulating investment and economic growth, thereby providing a more favourable medium- to longer-term operating environment for domestically focused companies.

The current economic cycle would provide further support, with inflation now seemingly well anchored within the SARB’s target range, near-term interest rate cuts increasingly likely, and key parastatals (Eskom and Transnet) performing better.

After navigating the pandemic and subsequent recovery (albeit muted), many local corporations, listed and unlisted, find themselves in a healthy financial position and yearn for an environment conducive to investment and growth. While it is too soon to speak of an inflection point, corporate confidence levels have already improved. Management teams of domestic-focused JSE-listed companies reporting results after the GNU formation have expressed cause for optimism in their outlook statements. In addition, ABSA’s June Purchasers Managers’ Index (PMI) indicated that business has not been this optimistic about the near-term outlook since 2022.

Following a period of depressed sentiment and muted returns for the JSE, notwithstanding the recent rerating in domestically focussed listed companies, many still trade below long-term average valuation multiples. All considered, our confidence in an attractive return outlook for our best-in-class JSE-listed companies and strategy has grown, with our portfolio-weighted medium-term return outlook for the Stonehage Fleming Equity Prescient Fund currently well above longer-term average JSE returns.

Source: Factset, 30 June 2024

Taking advantage of the more favourable investment outlook

The Stonehage Fleming Equity Prescient Fund is well-positioned to capitalise on recent events and their potential to provide a positive catalyst for SA Incorporated stocks (and the JSE). On a see-through basis, more than half (approx 56%) of the Fund’s revenue is derived domestically.

The Fund holds 20-30 (currently 23) of the highest-quality JSE-listed companies. These holdings include the best-in-class, predominantly domestic-focused companies that stand to benefit from an improved domestic environment, including Capitec, Firstrand, Bidvest, PSG Financial Services, Shoprite and quality global companies such as Richemont and Bidcorp.

We haven’t made any material changes in positioning in response to recent political events with our focus remaining on identifying companies (offshore or domestically focused) with sustainable growth prospects, quality management teams, and healthy fundamentals and investing in them for the long term.

However, should the domestic environment continue to improve, sustainably boosting South Africa’s growth outlook, we may well take advantage of potential opportunities by increasing the Fund’s exposure to companies that generate the bulk of their revenues in South Africa and align with our investment approach.

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