Prudential Investment Managers, which recently announced it would rebrand to M&G Investments Southern Africa to bring it in line with its UK parent’s name, says it has “overweight” holdings of Standard Bank, Absa and Investec in its flagship equity fund though it does not hold FirstRand, Nedbank or Capitec.
The asset manager also says it regards SA’s stock market as relatively cheaper than global markets despite the JSE all share index trading at close to a record high above 68,000 points. As a result, Prudential has reduced the offshore allocation in its flagship equity from almost a quarter of its holdings in early 2020 to just 12% to take advantage of what it believes are better priced opportunities on the local bourse.
“Our biggest overweight holding in terms of a single sector is the banks because of the valuation on offer,” Chris Wood, co-portfolio manager of the Prudential Equity Fund, told Business Day. “We’ve got equal overweights in Standard Bank and Absa, with a slightly larger position in Investec. Those are our three primary exposures to the banking sector. We don’t hold any Nedbank, Capitec or FirstRand. We find the alternative opportunities offer better return prospects.”
SA banking stocks suffered precipitous falls in March 2020 as it became apparent the country would not escape the ravages of Covid-19 despite early signs that it might have contained the pandemic. When the country was placed under a hard lockdown towards the end of the first quarter of 2020 as Covid-19 infections began spiking, banking stocks fell significantly on concern that the resulting economic malaise would cause a bad-debt avalanche.
The Reserve Bank also ordered retail banks to suspend dividend payments and raise additional bad-debt provisions in 2020 to shore up their balance sheets, further hitting the investment prospects of the sector. Yet despite SA’s 6.4% economic contraction and loss of more than a million jobs in 2020, the local banking sector has largely recovered.
“The fears around the credit cycle and bad debts have not been nearly as onerous as everyone thought,” says Wood. “We’ve seen a near reversal of the provision raising that took place in 2020 so there’s a release of that on to balance sheets while dividends have also resumed.”
While Prudential says its most favoured SA bank holding is Investec followed by Standard Bank, which is seen widely as one of the sector’s blue-chip stalwarts thanks to it being Africa’s biggest lender by assets, it is not overly perturbed by boardroom shenanigans that have plagued Absa. While the asset manager acknowledges that the former Barclays-owned lender is one of the “unloved” members of the domestic banking sector, it says its investment decision has not been overly affected by “noise” such as CEO Daniel Mminele’s much-publicised departure in April.
“Executive change is something that we do consider,” says Yusuf Mowlana, who co-manages Prudential Equity Fund along with Wood. “Thankfully at Absa they did replace the CEO with an internal candidate, which is always much better than an external candidate when it comes to business continuity.”
Mowlana and Wood also stress that Prudential typically makes investment decisions for three- to five-year periods, meaning it wouldn’t normally abandon an investment based on one item of bad news such as Sipho Pityana’s recent claim that the Prudential Authority blocked his nomination to become Absa chair. While Pityana is taking legal action against the regulator, Mowlana says it is premature to comment on the matter from an investment perspective.
Still, he and Wood are happy to explain why they don’t hold FirstRand, Nedbank or Capitec. On the former, the view is simply that Standard Bank is a better blue-chip cornerstone of the Prudential Equity Fund’s bank holdings thanks to scale and extensive on-the-ground presence across Africa. Similarly, Nedbank is seen as just as “unloved” as Absa, though Prudential feels Absa is a better bet.
“We don’t own Nedbank because we own Absa, that’s the simple answer,” says Wood. “We see them as comparable counters, but one of the concerns around Nedbank has been its potential overexposure to the SA property market, which is possibly more challenged than the Absa client base.”
Wood says Prudential has “always struggled” with Capitec thanks to its lofty valuation, which in market capitalisation terms renders it roughly the size of Absa and Nedbank combined. While the Capitec share delivered over the years, Wood is circumspect about how much longer that can continue.
“The market is imputing that Capitec will continue to deliver on growth expectations, but we feel that sooner or later size and scale catches up with you,” he says.
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