Still positive about ‘cheap’ domestic stocks – PSG Asset Management

(Extracts from PSG Asset Management Quarterly Commentary to 30 September 2018)

Emerging markets have underperformed dramatically in 2018, weighed down by rising US interest rates, escalating trade wars and turmoil in countries like Turkey and Argentina. This backdrop has seen the rand depreciate significantly and the FTSE/JSE All Share Index fall by 3.8% as at the end of September.

Investor confidence in South Africa matches the gloomy economic backdrop and many domestic assets are trading at or near multi-year lows.

“The general outlook may be gloomy, but the combination of low levels of earnings and bear market valuations means we are likely to derive excellent long-term returns from our exposure to cheap domestic stocks,” says Shaun le Roux, fund manager of the PSG Equity Fund.

“The prevailing fear in local markets has afforded us the opportunity to buy higher-quality stocks at wide discounts to what we think they are worth.”

In the last quarter, the PSG Equity Fund has continued to add to its Old Mutual position after the unbundling of Quilter, partly funded by a selling of Nedbank. “We perceive significant positive asymmetry at current share prices,” says le Roux. “We see very limited downside and healthy upside.”

“We continue to avoid stocks that we perceive to be overpriced, or where we consider risk to be too high,” says le Roux. “This has served clients well in recent years.
“While investing offers no guaranteed fail-safe, we believe that our insistence on a margin of safety places the odds in our clients’ favour,” says le Roux.