The JSE all share index may have defied doomsayers in 2021 by rallying more than 24%, but Sasfin Asset Managers, the boutique money management arm of Sasfin Holdings, says local investors will still find better opportunities in offshore equities.
Chief investment officer Arno Lawrenz, who joined Sasfin Asset Managers in November 2020 after almost five years at FirstRand’s Ashburton Investments, says while the SA market still offers a few “gems”, the country’s inherent socioeconomic risks make investing a sizeable portion of one’s wealth offshore an imperative.
Chief among the risks identified by Lawrenz is a possible deterioration of SA’s fiscal position and the absence of any evidence that the government is willing to shift its policies to create sustainable long-term economic growth.
“Equity investment is all about looking at the underlying long-term earnings potential of the companies you’re investing in,” Lawrenz said. “If you look at the SA environment the degree of confidence you’re able to have in the earnings potential of local companies is simply lower than what you have in a global context.”
That means “SA Inc stocks”, a term used by asset managers to describe businesses that earn much of their revenue from the domestic economy, are likely to offer less long-term growth potential than their international peers. While stocks such as Italtile, Motus Holdings and even Absa or Standard Bank may be well-run businesses that trade on comparatively lower valuations, they are unlikely to offer the long-term investment certainty of Apple or Samsung.
While Lawrenz says there are “pockets of excellence” in the SA equity market, local investors will generally find better long-term growth opportunities outside SA.
“If you can get the same return elsewhere with lower risk ... capital will flow to the lower risk option,” he says.
Asked to provide a handful of preferred offshore stock picks, Lawrenz is reluctant and says exchange traded fund (ETF) exposure is a useful option to access international markets.
However, a quick glance at the latest fund fact sheet of Sasfin’s Global Equity Fund shows its top equity holdings are Microsoft (6.11%), Alphabet (5.66%), LVMH Moet Hennessy Louis Vuitton (4.75%), Visa (4.66%), Amazon.com (4.52%), Roche Holding (4.04%), Home Depot (3.93%), Diageo (3.9%), Samsung (3.72%) and Nvidia (3.65%).
Lawrenz says global economic growth “still has legs” despite a worsening inflation outlook. While he acknowledges central banks such as the US Federal Reserve will have to walk a tricky road to address inflation, he says they are unlikely to want to be seen as either stifling the economic recovery or sinking the stock market.
He also expects China’s economic growth to surprise to the upside in the next 12-18 months and sees Asia as a region that is likely to offer continued longer-term growth opportunities.
But with most SA investors forced to allocate the majority of their retirement savings to local stocks thanks to Regulation 28, Lawrenz says there are still “real gems” to consider. He names MTN as a good buy thanks to the scale of its Nigerian operations and its excellent SA network, which could grow more if spectrum is opened up.
Surprise pick
On the insurance front he picks Discovery thanks to its “highly rated” management and the growth potential offered by its move into banking. He mentions Mediclinic as a healthcare play on the basis that once Covid-19 abates it should experience a surge in patients who were forced to delay treatments due to the pandemic. Its international presence in the Middle East and Switzerland also acts as a handy rand hedge.
His surprise pick is Omnia, a supplier of fertiliser and chemicals, which he describes as an “unsung hero” due to the management’s efforts in strengthening its balance sheet and increasing margins. He also likes Omnia’s exposure to the mining and agriculture sectors, which have benefited from a global recovery that has supported commodity prices.
A belief in the resilience of the global economic recovery is also why Lawrenz says he remains generally bullish on local resources stocks. However, he still thinks SA investors should continue to diversify their portfolios offshore.
“I don’t unequivocally advocate that one should take all your money offshore, but it has to form a reasonably sized segment of any investor’s long-term growth equation given the current economic dynamics at play in SA,” he says.
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