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Can we repeat these staggering returns in 2022?

02 March 2022 Gareth Stokes

There are few more bullish on South Africa’s economic prospects than the diehard long-only, regulation 28 compliant, value-focused multi-asset fund managers. Those who are blessed with this rather long-winded title have no choice but to remain upbeat, because talking the country down would be akin the proverbial turkey voting for Thanksgiving. You are no doubt familiar with this saying, dear reader, which should conjure up images of crowds of your peers blindly supporting a policy without a thought for the inevitable poor outcomes.

Going ‘all in’ on SA Inc

So, you will struggle to find a long-only fund manager getting all doom and gloom about the National Budget or SONA 2022 or the country’s soaring debt and staggering unemployment rate. Their role is to filter out the political noise while finding the highest yielding opportunities in the local bond, cash, equity and property asset classes that their funds are mandated to invest in. 

“We still see many good opportunities for excellent investment returns across most South African asset classes over the medium term,” said Leonard Kru?ger, Equity and Multi-Asset Portfolio Manager at M&G Investments, proving this writer’s opening thesis. “Even though our asset valuations rose last year, this was off a very cheap base and those gains lagged many other markets in terms of both their absolute level and re-rating.” he said. This remark, made early during the fund manager’s ‘Can SA assets deliver in 2022?’ presentation, is a study in contradiction. 

It juxtaposes the positive “we back the country to deliver excellent returns” with the negative “domestic assets lagged many other markets through 2021”. In other words, last year was good despite being bad? Pieter Hugo, Chief Client and Distribution Officer at M&G Investments explained the positive outlook. “Clients typically ask why we are so positive on South Africa … we are not political analysts, but investment managers who look at the valuations of the assets we invest in”. It turns out that equity valuations are part of a complex decision making process that includes an objective assessment of potential returns within the country’s risk profile. 

A great year for SA multi-asset funds

“SA risk assets performed well over the past year, delivering very handsome inflation-beating returns for all multi-asset funds,” said Kru?ger. And the most recent 12-month outperformance illustrates why investors should take a longer term view on their investments. Following a stellar 2021, SA equities have delivered close to 11% per annum over three years, well ahead of inflation. This paints a much improved picture than at the end of 2020, when investors were faced with rather lacklustre three-year numbers. 

Domestic equities shot the lights out last year, with a wide dispersion between the best- and worst-performing stocks. This, according to Kru?ger, was the perfect opportunity for active managers to show their mettle by being overweight in the right companies. Shares like MTN Group, Investec, Richemont and Sasol were well ahead of perennial favourites Naspers and Prosus through 2021, and were all overweight positions in M&G’s local funds. “Last year was one of the most successful ones in the history of M&G in terms of our ability to pick the right stocks and get the timing correct, thus adding meaningful outperformance across our equity and multi-asset space,” he said. The asset manager delivered 7.8% alpha, described as return in excess of its benchmark, from its Balanced Fund which had an average weighting of 47% to equities. 

It looks like 2022 will be another good year for South Africa equities. According to Kru?ger, the return prospects for global equities are “significantly less attractive” than those on offer from local equities. He shared some of the thinking around the fund manager’s overweight positions, starting with Sasol. “The benefit from higher oil prices and chemical prices to Sasol is very substantial; so, the pain that you and I might feel at the pump with higher petrol prices or diesel prices is a direct and opposite benefit to the likes of Sasol,” he said. And that means Sasol will produce earnings significantly above its ‘normal’ level. 

As for Naspers / Prosus, the asset manager concluded that the counter  trades at a substantial discount to its peers and the rest of the internet market. As such, they are more comfortable to own Naspers than any of the large US internet names that trade at three times Naspers’ PE multiple. Absa, Investec and Standard Bank are also popular given the benefits that accrue to banking shares during an interest rate hiking cycle. 

The bonds versus cash debate

There total return on nominal and inflation-linked bonds through 2021 was widely divergent and impacted by type of bond and bond duration. Longer dated bonds such as the R2048 and the inflation linker 2050 delivered significantly higher returns than bonds on the short end of the curve. “This benefited our multi asset portfolios where our positioning was in favour of these longer durations,” noted Kru?ger. 

From a fixed income perspective, the multi manager favours bonds over cash, remaining overweight bonds of longer duration. The reason: you get a meaningfully higher return from bonds versus putting your money in cash! “We are using our local cash to fund these duration assets and we are being paid handsomely to take on this duration risk … we see very little need to take on additional credit risk in our portfolios”. There was little appetite for domestic property, with good reason. Although the sector rebounded somewhat in 2021 it was unable to shake off the impact of lockdown and pandemic on occupancies and rental income. As a consequence M&G Investments holds little exposure to this asset class in its local multi-asset funds. 

Nothing certain, except high inflation

Nothing is certain in the world of financial markets. “There are lots of news flows at the moment about global inflation, the corresponding rise in global interest rates and how those increases might impact on equity valuations and performance as we go forward, not to mention the many geopolitical tensions,” said Hugo. He commented that 2021 was a great year for multi asset funds, having delivered the best returns in absolute terms in more than a decade. And 2022 promises to consolidate on this performance. 

The coming year presents many known and unknown risks and areas of concern, with much of the market’s allure stemming from the attractive valuations on select companies. “We think South Africa is relatively well-positioned given our starting valuations, and there is the potential for the country to do better than what people expect,” concluded Kru?ger, wrapping up an extremely bullish 2022 outlook presentation. If Kru?ger proves correct, then you will have to look far and wide to find better 12-month return prospects than those on offer from SA long-duration nominal bonds and select SA equities. 

Writer’s thoughts:
South African equities have been out of favour for some time, with a segment of the local investment management community preferring an ‘everything offshore’ approach to client’s discretionary investments. In fact, one might argue the only reason to have been invested in the JSE recently would be to satisfy the local component mandated in Regulation 28… Are you prepared to go ‘all in’ on South Africa when the outlook warrants it? Or do you think it remains safer offshore? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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