By Vernon Wessels
The investment case for SA Inc shares has brightened — and not just because they’ve been in the dark for so long.
Relentless selling by foreign investors, coupled with the loosening of rules in 2022 that allowed pension funds to hike their offshore investments, contributed to South African shares underperforming global stocks over the past five years.
Investors, of course, had solid reasons for selling local assets: power shortages, crumbling infrastructure that choked rail and ports, corruption, and a collapse in government services have weighed on the economy, with growth averaging 0.8% since 2012. And that’s before riots in July 2021 that left 354 dead.
All this bad news led people to believe the worst, says John Biccard, who runs the R5.6bn Ninety One Value Fund.
“People have over-factored for the negatives,” Biccard tells Todays Trustee from New York, where he has lived for the past two years. “Following a narrative is the most dangerous thing to do when looking at a stock because it means everyone agrees with you. And when everyone agrees, it’s clearly all in the price.”
Biccard is a value investor, who buys out-of-favour shares trading below their intrinsic value, in the hope that the price will rise.
A year ago, Biccard loaded up on South African shares and encouraged others to do the same, even as the rand plummeted to near historic lows. Few followed his advice, too preoccupied with the rampant loadshedding of the time.
But since then, a basket of 27 South African-focused stocks, including banks, retailers and industrials, has rallied 40%, compared with a gain of less than 2% for the FTSE/JSE All-Share Index.
The Ninety One Value Fund’s domestic equity positioning, excluding its 35% offshore allocation and 10% in gold shares, focuses purely on SA Inc stocks. This is concentrated in shares trading near their Covid lows, such as Life Healthcare, Netcare, Spar, Reunert, and Absa.
So far, Biccard’s bets have paid off. The fund returned 14.3% in the year through April, outperforming the sector’s 2.9% return. The average dividend yields of those shares of 5%-6% is also higher than the 3.8% of JSE’s top 40. Absa, for example, trades at a 10% dividend yield and a 20% discount to its liquidation value, says Biccard.
While investors are wary of what could happen in the May 29 election, Biccard says the vote could be a catalyst that ultimately boosts the share prices of medium-sized companies listed on the JSE.
As it is, investment markets appear to be factoring in a benign outcome for the election. In May, the JSE’s all-share index rallied to a 15-month high, while bonds attracted a record amount of cash in April. The rand also strengthened by more than 6% against the dollar over the past month.
Experts believe the tide may have turned on South Africa’s economy.
Peter Armitage, CEO of Anchor Capital, expects the JSE to return 18% in dollar terms by the end of the second quarter next year, compared with 7% for global equities and 5% for bonds. This is largely because SA equities have taken a beating in recent years — the MSCI SA Index has underperformed the MSCI All World Index by 40% since 2022.
Yet it was this steep underperformance which saw South Africa fund managers accelerate their shift offshore in 2022 and 2023, assisted by a change in the law which allowed them to increase their overseas exposure from 30% to 45% of their assets.
The effect was profound. According to Alexforbes’ Global Manager Watch Survey for 2023, local fund managers’ allocation to international assets — including equities, bonds, property and cash — rose to 34% of their portfolios, from 25% in 2018. Conversely, their allocation to South African equities fell to 39%, from 46% in 2018.
It put more pressure on the JSE, which had already endured a decade in which foreign investors sold more than R700bn in shares.
Armitage believes the move offshore by local investors will start to abate. Most investors, he says, would prefer to stick with South African stocks they know well.
Of the 45 fund managers surveyed for the 2023 Alexforbes Global Manager Watch Survey, 22 had more than 35% invested overseas, and 11 had more than a 40% offshore allocation.
A resurgence in South Africa’s economy, as Eskom gets a handle on loadshedding, could do much to reverse this, as would a “middle-of-the-road” outcome for the elections, in which the ANC isn’t forced into economically-destructive pacts with parties like the EFF.
Armitage stresses, however, that more concrete pro-economic growth reforms are needed before Anchor were to take a more bullish view of South African equities over the longer-term.
“South African companies are priced for such a poor election outcome and the sentiment has been very negative,” he said. “So just a reasonable election outcome, and reasonable sentiment, can see things bounce back quite a lot.”
