SA remains ‘an attractive investment destination’ for global investors

Daniel Needham, CIO

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The South African investment community appears overly negative about the local market at the moment, where there is, in fact, ‘a lot to like’ about the country’s trajectory and current asset prices, according to the president and chief investment officer for Morningstar’s Investment Management group, Daniel Needham.

South Africa offers ‘remarkably high’ real cash rates in a world of negative yields, attractive long-term government bond yields, long-term growth in household wealth, reasonably anchored inflation expectations, and low valuation multiplies and double-digit earnings growth excluding Naspers, which taken collectively are an anomaly in global markets.

Speaking at the Morningstar Investment Conferences in Johannesburg and Cape Town last week, Needham said although the markets had been through a challenging five-year period, current asset prices are well set-up for prospective returns, and many South African investment managers he met within South Africa were ‘cautiously optimistic.’

“The capital markets in South Africa look relatively attractive right now. We know there are several issues being dealt with that will take time, but positive change is underway, and from an outsider’s perspective, the market looks good. We don’t like pessimism, but we like the prices that pessimism brings, and we’re seeing pessimism in spades,” Needham told a combined audience of around 1,000 local investment advisers.

Needham’s view was echoed by John Green, co-CEO at Investec Asset Management, who said one of the things that investors valued most in the market was the sophisticated advisory ecosystem.

“We manage roughly R2 trillion of assets for clients around the world, of which about 35% is from South Africa and this year, the South African business has been the best-performing in the world. South Africa is a core part of our business with positive growth prospects,” he said.

Other speakers at the conference included former Morningstar analyst David O’Leary, now founder and principal of Kind Wealth in Toronto, Canada, who said the industry is going through unprecedented change, driven by regulatory, technology and social advances.

The social aspect is driving significant shifts in how people spend and invest their money, with investors increasingly looking for how companies make a positive contribution to society. At the same time, the amount of wealth being controlled by women is growing rapidly and will reach an estimated $70 trillion by 2020, according to O’Leary.

Diana Strandberg, senior vice president and director of international equity at the San Francisco-based Dodge & Cox, talked about the case for Value Investing in a tough market. “This is an incredibly rewarding time to be in value investing. But it’s tough – when the going gets tough, investors are tempted to flee. Don’t flee. Lean further in, or at least stay the course,” she said.

PSG’s CEO, Anet Ahern, said there was ‘a lot of value’ in smaller and mid-cap stocks: “it’s a really good opportunity if you take a longer-term view. Things don’t even have to get better – they just have to get less bad.”

Piet Naude, professor of ethics and a director at the University of Stellenbosch Business School, said the recent meltdown in ethics in South Africa was due to several key factors, including an exaggerated search for social approval; a lack of consequences for actions; governance and culture failures; and people ‘over-estimating their moral character.’

Victoria Reuvers, a senior portfolio manager and director at Morningstar Investment Management South Africa, said there were signs that optimism was starting to return to the market and the asset management industry.

“It’s been an incredibly tough five years (possibly longer) for investors, with a growing belief that the advisory asset management industry had failed investors. This has led to a lot of introspection within the industry, but the conferences showed that we have an investment community that’s committed to delivering real value to investors, even during tough times,” Reuvers said.

Tal Nieburg, managing director of Morningstar South Africa said that Morningstar will always remain passionate about empowering investor success. The Morningstar conference delivers the latest developments in financial advice from the industry’s top local and global minds and is designed to aid South African advisers with insightful market and industry perspectives. “We have already booked next year’s events. Advisers should save the date to attend Morningstar’s industry-leading, independent conference that will be held on 1 September 2020 in Cape Town and 3 September 2020 in Johannesburg,” he said.