Peter Armitage, the CEO of Anchor Capital, yesterday highlighted the unique investment opportunities South Africa offers, distinguishing it from global markets.
With emerging markets representing 15% of global equity markets, and South Africa accounting for 3.5% of that share, Armitage said the country had a niche appeal for global investors seeking more exotic opportunities.
Looking at the current investment climate, he said interest rates now look like they would stay a little bit higher and the interest rate cutting cycle won't be as deep.
He said that all of the factors that normally support the strengthening of a currency are there. S&P Global had recently upgraded South Africa’s rating outlook to positive from stable, which was the first directional positive movement South Africa has had in many years.
However, he cautioned that the current investment negatives were driven by Donald Trump, who recently won the US election to become its next president.
“If he's going to cut taxes to 15% and push expenditure then the theory goes that that results in inflation not coming down as fast and interest rates staying higher for a bit longer,” he said.
However, if the US rates did not come down fast, investors would be in less of a hurry to take more risk and put it into more “exotic currencies and regimes like South Africa” Armitage said.
But Peter Little, the head of Global Multi-Asset Class Investments at Anchor Capital, said he believed Trump’s win was not as negative for monetary policy as the market is pricing it.
“I think those tariffs will come, but probably not as heavy as he promises. If his first go-around has anything to go by, he comes out really hard and the backs off. Maybe we’re a little bit pessimistic about rate cuts now, but things will improve, which will be rand positive, ” Little said, adding that, “I’d place my defence being short the Trump trade. Everything that’s moved so aggressively—I think some of that will dissipate, but it’ll take a while. Trump only gets into office on the 20th of January, and then there’s a whole lot of rigmarole. I think we’ll start to see changes towards the second quarter of next year.”
Adding to unpacking US developments, Mike Gresty, a fund manager at Anchor Capital, said, “On the international side, the mix of the US market, in particular, has changed. We call it ‘the tail wagging the dog,’ because those larger companies—let’s say the top eight—have become such dominant drivers of the S&P 500.
“In the first half of the year, this made it really difficult for active asset managers because the index was performing exceptionally well, but it was all concentrated in a few stocks. The second half of the year has been much better, which makes me more optimistic, as we’ve seen market performance broadening out,” he added.
Gresty said the picture of the market being expensive was distorted by the influence of these very big companies, which have seen significant re-rating. However, the average company’s valuation “is only marginally above the historical average”.
“There’s a lot happening with smaller, less-discussed companies that is very interesting. Seeing performance broaden beyond companies like Nvidia, Microsoft, and Apple is encouraging. Long may it continue, as it’s been a lonely battle for active asset managers to demonstrate value in the face of indices outperforming due to these concentrated gains,” he added.
Gresty’s bigger picture:
– Valuations: The average company is not as expensive as the market-weighted picture suggests.
– Interest Rates: While rates aren’t coming down as quickly as many hoped, global inflation seems to be under control.
– Economic Strength: The US economy, in particular, is in good shape.
“These factors create a set-up for healthy equity returns. While we may not see another year of 20%-plus returns in the US, I expect decent performance,” he said.
Gresty pointed out that all the current worries—whether about Trump, global conflicts, or other risks—kept the market from not being overly complacent.
“On the flip side, if we focus on the positives—lower interest rates, decent economic growth, earnings growth, and potential tax cuts—there’s a lot to like about the global market picture. Earnings drive prices, and I’m reasonably constructive overall. Acknowledging that valuations aren’t cheap, I still see a lot of opportunity," he said.
But he danger to this picture, Armitage said, was that he believed markets were entering a phase of “joyous complacency”.
“For instance, I saw yesterday that Mike Wilson, the chief equity strategist at Morgan Stanley, had an S&P 500 target of 3 500 this time last year. The index is now sitting at 5 800, and his target for next year has shifted to 6 500.”
“The key question,” Armitage asked, “Is: what could go wrong?"
Gresty sounded more optomistic, saying the probability of unexpected shocks is always there, but investors may overestimate it given recent history such as Covid-19 and the Ukraine war.
“One shouldn’t base investment decisions entirely on that expectation,” he said.
South African stocks
On the local front, Gresty said the South African market has seen strong equity performance, buoyed by positive developments such as less load-shedding, stabilising interest rates and a stronger rand. There was a shift towards domestic equities anticipating an improving consumer environment.
“However, I’m cautious because, while the macro story looks good, companies are not yet reporting tangible improvements on the ground. This upcoming period, through Christmas and beyond, will be crucial to confirm if the recovery is materialsing,” he added.
Local equity value:
Stephan Erasmus, an investment manager at Anchor Capital, talking on quality local value companies argued that some have decent ROCE (Return on Capital Employed) and balance sheets.
Erasmus’s top picks:
Southern Sun: While it had a couple of tailwinds, he said what would benefit it was that inbound tourism has picked up, with new flight routes being added to Johannesburg International Airport. They have a strong location advantage, with several hotels in Cape Town. Looking ahead, G20 next year, which is held in South Africa could also benefit the South African economy—if managed correctly, which would benefit this group
“People are even discussing how difficult it is to find venues in Johannesburg for hosting conferences, which could be a positive indicator for Southern Sun,” he said.
Famous Brands: “From a consumer perspective, we also like Famous Brands and some property stocks geared toward consumer activity. They have decent balance sheets and respectable ROCE. However, even for companies like Famous Brands, there's still no clear evidence of significant improvement on the ground.” He said, for example, Spur - a company with a similar profile - has reported the same trend: a consumer base that hasn't yet "turned on the taps".
Raubex: Raubex recently posted strong results. Erasmus pointed out that Raubex has diversified its business from being heavily reliant on South African National Roads Agency Limited work and now has a solid mix of private-sector projects. The company also has a promising outlook in the water infrastructure space—an area where with increasing opportunities.
“Raubex’s order book currently sits at R24.5 billion, down slightly from R25.5bn. Management has indicated the potential for an additional R6bn to R8bn in near-term orders. Adding this to the current base makes for a substantial pipeline. The company has a decent balance sheet and appears well-run, making it an appealing option in South Africa’s “green space”, Erasmus said.
Lastly, Erasmus noted the recent placement of Boxer by Pick n Pay, which is raising around R8bn. “It seems the market could absorb up to R10bn. Several asset managers, even smaller ones, could potentially take up 10% of that issuance themselves,” Erasmus said.
M&A opportunities:
Seleho Tsatsi, an investment analyst at Anchor Capital, discussed potential M&A opportunities, particularly in the mining sector.
Tsatsi pointed to Anglo American’s transformation and the likelihood of BHP revisiting its interest in acquiring Anglo’s copper assets. BHP is expected to return at the end of November to negotiate a deal before Anglo’s transformation is completed.
“Anglo wants to transform by the end of next year to make itself less attractive to BHP,” he said.
On the local stock market, Tsatsi pointed to pharmaceutical firms Dis-Chem and Clicks as interesting investment opportunities. Although these stocks are not cheap, with price-to-earnings (P/E) ratios of 24 for Dis-Chem and 28 for Clicks, both companies have strong growth potential.
Tsatsi said Clicks plans to expand from 900 to 1 200 stores over the next five to six years, while Dis-Chem plans more aggressive expansion. While Dis-Chem’s margins are lower than Clicks, there is room for improvement as the company shows operating leverage in recent periods.
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