The asset management company founded by the Stellenbosch-based Mouton family says investors will be better off investing in select mid-sized SA companies than in overpriced large cap stocks.
Giving his 2019 outlook for the equity market, Greg Hopkins, chief investment officer of PSG Asset Management, said some mid-sized industrial companies, in particular, are trading at a big discount to their earnings, presenting an opportunity for canny investors. While many large blue-chip companies are trading at about 16 times their earnings, the asset manager said domestic stocks in its portfolio have an average price-to-earnings ratio of 8 to 9 times.
“Where we are finding opportunities, it’s in industrials and in financials. These type of companies are often less crowded. Foreigners and most portfolio investors, when looking for exposure in SA, go mainly for retailers and some of the large banks. As a result, the liquidity premium for investing in large caps has not been this high in years,” said Hopkins.
PSG was among the few asset managers that punted the so-called “SA Inc” stocks in 2018, the year in which the JSE delivered the worst returns in a decade. Instead of being cautious about local equities, PSG invested in what it called “neglected gems” — companies with local operations whose shares traded far below their earnings.
Annualised returns in the PSG Equity Fund, which invested 72.1% in domestic equity, were down 8.75% in 2018 after fees, better than the JSE all-share index which closed the year down 11.37%.
PSG’s bet on local equities should have been dented by stocks such as Tongaat Hulett, whose share price lost 49.8% in value last year. AECI and Super Group, also saw their shares lose more than 17% of their value. The PSG Equity Fund holds less than 5% of each of these shares.
However, Hopkins said its optimism about SA Inc was based rather on the long-term potential of the shares they hold. Some of the less popular stocks the company has invested in include Hudaco Industries, which has delivered compounded returns of more than 20% on an annualised five-year return basis.
PSG also has a few large companies in its portfolio that it believes offer good value. These include Old Mutual and Absa. “The average company in the JSE all-share index is trading about 16 to 17 times its earnings. Old Mutual is trading at less than half of that,” said Hopkins.
Jean Pierre Verster, portfolio manager at Fairtree Capital, however, said he is generally cautious about SA-focused companies. “I am cautious on these companies given their current valuation levels and their exposure to the SA economy. Most local companies seem to be under significant pressure in this difficult operating environment.”
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