Old Mutual Investment Group (OMIG) believes they are starting to see some value come through in South African equities.
This is despite the upcoming general elections in May. Some may say that this is surprising considering the amount of market uncertainty surrounding the elections, but Meryl Pick, OMIG Head of Equities Research, believes that the best approach against this backdrop is diversification and, currently, local appears lekker.
“We do not seek to position our portfolios around the May 2024 elections given that the outcome is so uncertain; instead, we favour a diversified approach that includes some exposure to gold as well as defensive rand-hedge shares like British American Tobacco and Anheuser-Busch InBev,” says Pick.
However, she is starting to see green shoots when it comes to some local sectors. The tilt towards South Africa Inc includes a rise in exposures to domestic banks and clothing retailers, driven by the belief that the country has reached peak interest rates, and a reduced level of load shedding.
"We have been incrementally tilting our portfolio back to SA Inc as we anticipate a better year ahead, primarily due to the reduced level of load shedding being factored into our projections. This should mitigate some of the commodity inflation pressures in areas such as food, oil, and energy. As a result, conditions are improving slightly for consumers and potentially enhancing growth prospects,” explains Pick.
OMIG is upbeat about prospects for leading domestic construction companies too. According to Pick, the construction sector has been hollowed out by a decade or longer of slow infrastructure spend, leaving the likes of Raubex Group and Wilson Bayly Holmes Ovcon as the only players with balance sheets strong enough for big projects. The uptick in state infrastructure spend plus private sector spending on renewables is good news for the sector, Pick says.
“Regardless of the economic backdrop, there are always returns to be had in the South Africa Inc space,” Pick adds. “To succeed, equity fund managers must seek out companies that will deliver regardless of the macroeconomic or political backdrop; and we do this by focusing on companies that are innovative, are growing their market share and are potential buy-out targets”.
This is not to say that her team is not still seeing opportunity in global markets. Geographic and asset class diversification and the careful screening of opportunities within these areas remains the best defence against the economic and political uncertainties that surround South Africa’s 2024 National Elections, set for 29 May 2024, says Pick.
Pre-election analysis and opinion has been narrowly focused on whether the ruling African National Congress (ANC) will see its national support fall below the important 50%-mark, and if it does, by how much.
“The polling data from various sources points to ANC support falling below this level,” Pick says. “However, national election results can surprise depending on a range of variables including the turnout on election day and the veracity of campaigning”.
The base case seems to be that the ANC will fall just below the critical 50% support level and partner with a like-minded small party to remain in power, though analysts will not dismiss the possibility of an ANC-EFF (Economic Freedom Front) coalition if the ruling party’s support falls too far. Pick says this is a bear case scenario that would likely send the country in a more populist direction.
That said a peaceful sensible outcome will be good for multi-asset funds, Pick adds.
“There is so much negativity priced into the rand and bond yields – sentiment is low, offshore investors have run away and we have fallen out of many global indices; if we hold a peaceful election that delivers either a small ANC majority or coalitions between the ANC and other small parties or the ANC and a moderate opposition we could see a significant rally in local-facing equities, and bonds,” Pick says.
“Considering these numerous scenarios and unknown variables, diversification is indeed our strongest defence against such uncertainty,” Pick concludes.
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