Ninety One, which has about R3-trillion in assets under management (AUM), is boosting the offshore equity exposure in some of its flagship funds as SA’s stagnant economy reduces the appeal of local equities despite their attractive valuations.
While the Cape Town-headquartered fund manager is allocating more capital offshore, it is channelling much of that to emerging markets in Asia as it bets the region will benefit from a consumer-led recovery in China, which has now abandoned its zero Covid-19 policy.
Ninety One is also underweight US equities as it believes the world’s largest economy is heading for a slowdown, making its relatively expensive stocks less appealing on a medium-term investment horizon.
Hannes van den Berg, co-head of SA equity at Ninety One, says the group entered 2023 with offshore equity exposure of just less than 30% in its equity-only and multi-asset funds, but has since increased that to about 37%. It is now looking to raise that even closer closer to 40% in the short to medium term, with 45% being the maximum amount local fund managers can allocate to offshore assets under SA’s pension fund regulations.
“In this fight for capital, SA Inc stocks like banks and retailers have unfortunately turned into a funder for other global stocks. The SA market may be attractively priced but there are reasons for that: the low growth profile and sociopolitical concerns,” van den Berg said in an interview. “We’ve increased our offshore equity allocations across our equity-only and multi-asset products. But we’ve got an underweight equity allocation for the US. We’re more favourable on Asia ex-Japan.
“Everyone thought the China reopening would only happen in the second half of this year but it actually kicked off on the first quarter already, which has led to a consumer-led recovery that we think will benefit the Asia ex-Japan region,” he said. “That’s created an opportunity for emerging market investors.”
Relatively well
The JSE All-Share Index has held up relatively well in the face of an uncertain global backdrop characterised by worldwide inflationary pressures and consequent rate hikes, along with ongoing supply chain constraints and a surge in energy prices in the wake of the war in Ukraine.
However, with load-shedding showing no signs of abating and everyone from the Reserve Bank to the IMF predicting near-zero growth for SA in 2023, there appears to be limited scope for further equity market gains over the next six to 12 months. On top of that, the cumulative 425 basis points in interest rate hikes by Reserve Bank have left SA consumers reeling as they battle with rising costs of living driven by food price inflation, higher energy costs and ongoing administrative price hikes.
“There’s quite a lot of concern about the state of the SA consumer,” said van den Berg.
Prescient Investment Managers, which oversees about R130bn in assets, is another fund manager that is also less sanguine about SA stocks, though it has a “neutral” position locally. That’s despite the JSE All Share Index trading on a comparatively cheap price:earnings ratio of 10.8 times, compared with a long-term average of 15.4 when measured since 1995.
“If we were a purely value-driven investor that only looked at share price valuations we’d be buying SA. But that’s not always a reason to buy — for us there are other factors to consider,” Prescient’s CIO Bastian Teichgreeber told Business Day. “The balancing factor in favour of SA shares is that they are cheap. Unfortunately, SA is characterised by very weak economic fundamentals, poor sentiment and negative financial conditions due to the rising interest rate cycle.”
Teichgreeber says the Reserve Bank may go so far as instituting two more 25 basis-point rate hikes over the next six months after the most recent inflation print came in at 7.1% for March. That was the 11th consecutive month it has remained above the upper limit of the Bank’s 3%-6% target range.
Fundamental approach
Prescient, which favours a systematic investment approach that assesses markets based on their valuation, macro-economic fundamentals, financial conditions and sentiment, is also backing emerging markets on China’s reopening.
“The reason we like emerging market equities is not because they are dirt cheap, which is the consensus, but because of the very strong economic fundamentals and positive sentiment they enjoy thanks to China reopening,” said Teichgreeber. “In the US pretty much every one of the four factors we measure is negative for equities. We’ve got weakening economic fundamentals, tighter financial conditions, softer sentiment and shares are expensive.”
Teichgreeber says Prescient is “strongly negative” on US stocks as their comparatively high valuations aren’t backed up by economic fundamentals. The S&P 500 is trading at an average PE of 18.77 times, compared with the long-term average of 17.5 since 1980.
“Equity valuations in the US are quite expensive with typical forward valuations at more than 18 times earnings,” said van den Berg. “If you look at Asia ex-Japan stocks you’re paying a 10 to 12 times forward PE with much better fundamentals than you get for that price. We’ve got an underweight equity allocation for the US. We’re more favourable on Asia ex-Japan.”
Among the Asian stocks Ninety One has invested in are East Money Information Co, Bank Rakyat Indonesia, Xinyi Solar Holdings, Wuxi Lead Intellengent, Bosideng International, JD.Com, Alibaba and AIA Group. Nevertheless, the firm does have some selective defensive exposure in the rest of the world, such as Rentokil, PepsiCo, Elevance Health, Trane Technologies and Thermo Fischer.
Prescient declined to provide individual stock picks.
“Usually when you enter a global slowdown and an associated risk-off period the dollar is the darling and emerging markets are not in favour. But we’ve looked through this global slowdown and feel we’re finding better opportunities into 2024 in Asia ex-Japan,” said van den Berg.
“The economic fundamentals and the prices you pay for equities in Asia are just very compelling. There is pent-up demand from the consumer in China and we think that will benefit certain sectors such as luxury goods, financial services and retail.”
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