Local is lekker

The benefits of being with decent fund managers came to the fore again in March, as stock picking and sector selection played a huge part in avoiding the losses seen on the All Share Index.

Fund manager at PSG Fund Management Adrian Clayton, reports.

The ALSI lost 1.4% in March, but there was little comfort in most other traditional asset classes, with local bonds delivering a negative -0.2%, and the strong rand ensuring that offshore bonds and equities also came a cropper.

Solace was found in property in March, providing a return of about 0.5%. But all was not lost and the benefits of being in the right place at the right time, was masked by the poor headline index levels on the ALSI.

Exploring the markets in more depth reveals that many of the locally orientated companies enjoyed superb performances in March, with a particularly strong showing coming from financials, delivering returns of 1.2% and banks bolting almost 5%.

This phenomenon of 'local being lekker' was also clearly visible on the small cap index which soared 4.4% in March, the third consecutive month that it has risen by more than 2% and showing gains of over 10% year to date as against 3.7% on the All Share Index.

The big question going forward is the extent to which the local theme will be sustainable?

After two years where resource and dual listed company earnings have been under severe pressure, a large turnaround is now occurring in terms of earnings growth, albeit off a low base.

This will drive down P/E's on these stocks and lift dividend yields. Until now, it was a sitting duck to avoid the dual listed and resource stocks on the basis of the earnings strain.

Whilst an earnings recovery is expected on these companies, it must still be kept in mind that from a historical perspective, P/E's on local stocks are still at healthy discounts to their bigger offshore orientated brothers.

The current P/E on financials for example is a mere 9.7x as against 18.5x for resources, with dividend yields being approximately 4.5% on financials as against 2.5% on resources.

Value investors would be unlikely to be heavily turned on by resources at this stage, but growth managers that tend to focus on earnings momentum would most likely be feeling a light salivation developing on their giles.