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The truth must out on SA equities

06 November 2023 Gareth Stokes

The value on offer from South African equities is compelling, provided you can stomach the twin risks of fiscal debt and political uncertainty. This was the key message from the 2023 Morningstar Investment Conference SA, held at the Sandton Convention Centre recently. To liven things up, the asset manager invited portfolio managers from three leading brands to an SA Equity Presidential Debate.

Three-way asset manager debate

The format was simple. Debra Slabber, Director: Portfolio Specialist at Morningstar would make a brief opening statement and pose a question, whereafter each of the portfolio managers was given three minutes for his or her response. This process would repeat for three rounds, and then it was up to the audience to vote for their SA Equity President for 2023. The portfolio manager candidates included Andrew Vintcent of Clucas Gray; Nancy Hossack of Foord Asset Management; and Tim Acker of Allan Gray. In keeping to the debate format, this article will share each question and unpack weigh up the experts’ responses to it. 

The first question turned out to be a bit of a mouthful. “South African equities are currently cheap in both absolute and relative terms, and priced to give you a real return in excess of 6% over the next decade … are investors being compensated adequately on a risk adjusted basis for investing in domestic equities, or should they stick to rand hedge shares to avail of the tailwind of the global economy and weak rand,” Slabber asked. PS, the ensuing discussion was entirely focused on South Africa, and did not veer off into the offshore versus onshore arguments that so often feature at such events. 

Caught in a perpetual vortex

With an intimidating three-minute countdown clock looming over proceedings, Vintcent was first up. He said that South Africa was caught up in a perpetual vortex of currency, inflation, interest rates, bond yields and market return. “We are optimistic that we can get better than 6% real in a number of companies; if you look at global and domestic industrials, and some of the financials, we think the dislocation of returns will be quite dramatic,” Vintcent said. “Potential returns from current [earnings] levels are very exciting and SA-facing equities are great for multi-asset portfolios”. The caveat: not all companies will do well, despite being on multi-year low valuations. 

Hossack shortlisted fiscal risk and uncertainty around the 2024 national elections as two big risks facing asset managers, financial advisers and their clients. She raised concerns over whether or not the risks facing domestic investors were adequately priced in, and reminded the audience that government had three options to get out of its fiscal mess: grow out of it;  inflate its way out of it; or go the prescribed asset route. “[Government might] start saying to local allocators of capital that they have to start buying bonds, [that the savings industry] must start funding the fiscal deficit,” she said. PS, this writer prefers the ‘grow out of it; option; but recent news flows suggest the ‘inflate out of it’ response is more likely.

JSE looks more attractive than bonds

Tim Acker noted that investors are being compensated for risk through the 7% real yield on South Africa long-bonds. Despite this, the portfolio manager felt that on a risk-adjusted return bases, the JSE appeared “broadly more attractive” than SA bonds at present. Acker suggested that the list of challenges facing SA-domiciled businesses should force a slight re-think of the equity market valuations, perhaps by dropping the ‘fair’ level for price-to-earnings from the historic 13 times to 11. As for selecting individual shares: “You want to be selective in this environment; yes, the market is cheap – but not all companies will survive the current macro environment”. 

The second question put to the candidates was whether size mattered in assessing and taking advantage of the South African opportunity set. Most FAnews readers will be familiar with the unique challenges facing large asset managers due to the dearth of large firms on the JSE, and the poor liquidity of many tightly held counters. For a more tangible example, consider the difficulty that a R50 billion fund has in entering or exiting a holding in an illiquid share versus a R5 billion fund. The former has to move R500 million; the latter only R50 million. Vintcent opined that smaller managers benefited from a broader opportunity set. Overall, his fund is excited about the returns that could emanate from a bucket of companies, both through re-ratings or being acquired and de-listed. 

Flexibility, nimbleness for the win

Hossack echoed the flexibility and nimbleness comment, saying that it was easier to achieve “differentiated and uncorrelated risk” as a small manager. Acker, who was representing by far the largest fund across the three candidates, admitted that there were some drawbacks to being a big manager, with many small cap funds “not moving the needle” insofar as growth. He was not as concerned about the number of recent JSE de-listings, saying that in most cases these were lower cap opportunities. On the plus side, large managers benefit from larger research teams, lower trading costs and more resources. 

Question three sought to focus candidates on the future, asking each to set aside their concerns over the current macroeconomic outlook and answer: what gets you up in the morning? Vintcent said that the exciting and stimulating environment that active asset managers operated in helped to deflect from the frustrations of local infrastructure decay, loadshedding and politics. As an active manager, he looks forward to seeking out local firms that are able to grow earnings despite the headwinds. “Make your positions count … and seek out good companies that offer good return on equity, and strong balance sheets,” he said. 

One survival tip that might help FAnews readers is to lighten up on your daily deep dive into South African news. The way to deal with anxiety is to think about doing something; humans have adaptivity as our superpower,” Hossack said. Turning to the asset management and financial advice disciplines, she noted flexibility as an excellent counter to anxiety, before warning about the emerging overreliance on structured products. Putting your clients in products that offer fixed entry and exit points and inflexible asset allocations seems a trifle inappropriate given the current market uncertainty. And that left Acker with the final comment.

Active managers excel during uncertainty, volatility

When the market is just going up, you can deliver by just buying the index; in the current environment, active management and portfolio management become important,” Acker said. In his view, the joy of being an active asset manager stems from the value added to clients by the ongoing assessment of the risk versus reward equation. Finally, to allay concerns over the rather dire domestic outlook, he reminded the audience that South Africa was not dissimilar to many countries in the emerging and frontier market opportunity sets. 

Writer’s thoughts:
It is encouraging to see the depth of talent in SA’s portfolio management community. Are you convinced that SA High Equity Multi Asset Fund managers will deliver 6%-plus per annum real returns for your clients over the coming years? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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