Asset manager Coronation says its SA equity portfolio is heavily tilted towards global businesses that are not beholden to domestic economic headwinds, warning that the current low valuations might present a value trap for overeager investors looking to buy on the cheap.
Charles de Kock, a portfolio manager at Coronation, said the SA economy was hampered by ageing infrastructure and poor maintenance.
The 38-year investment veteran added that with the inadequate power supply, inefficient rail transport and harbours struggling to move exports, the outlook for growth remained constrained. Shares linked to the local economy therefore had to contend with an extremely difficult environment of low growth and rising costs.
“It is no wonder the performance of ‘SA Inc’ stocks has been poor. Many of these stocks are trading at very low multiples and appear cheap, but we are wary of falling into value traps,” De Kock said.
“The SA equity portion of our portfolios consequently remains tilted heavily in favour of global businesses that are listed on the JSE. Some domestic stocks are gaining market share from competitors and a few others have carved out niches of growth, but one has to be very selective in the local market.”
A value trap occurs when an investor looks at the fundamentals and market price of a stock, and it appears the stock is valued at a discount (cheap to own), but it ends up not being the case. The illusion causes the investor to think that they will be able to invest in the stock and beat the market, but they end up with either a negative or lacklustre return.
Coronation, which has more than R600bn assets under management, has not been shy to take unpopular decisions to protect its portfolio.
The company last year disinvested from the platinum group metals (PGM) sector, questioning the long-term prospects of an industry that employs nearly 200,000 people.
Coronation’s view is the sector has the potential for short-term rallies but it represents a value trap for investors. It estimates that platinum supply will continue to outstrip demand due to a rise in the need for green metals in response to the emergence of battery-electric vehicles.
Coronation’s peer firm Allan Gray last year said the low valuations on the JSE might represent value traps if investors were not careful in how they picked stocks.
Since the end of 2022, the all share index (Alsi) has underperformed the emerging-market universe. Consumer-facing stocks are largely expected to fare better this year as load-shedding wanes and interest rate cuts start later in the year.
Asset management behemoth Ninety One expects retail majors Shoprite and Woolworths to beat earnings forecasts and increase market share, solidifying their already dominant positions. Ninety One expects retail stocks broadly to do better this year as the oil price, which is a drag on consumers’ wallets, is starting to ease.
De Kock said that after ignoring global bond markets for more than a decade due the absence of value, its multi-asset funds had taken meaningful positions in corporate bonds over the past year.
“SA bond yields remain elevated but, sadly, reflect government’s poor fiscal position. Government debt is too high and in a low-growth economy the tax take will unfortunately not rise by enough to counter the spending needs of the government,” he said.
“We hold some government as well as corporate debt in the domestic market, but we are wary not to take duration risk too high. We also hold inflation-linked bonds that we believe can protect our clients from the effects of higher inflation if it occurs.”
De Kock weighed in on the elections, saying the company’s view was that the problems faced by the economy could not be fixed quickly, no matter who formed a government after May’s polls. “Even if the correct decisions are taken and implemented, it will take years to fix the problems in power, rail and water — to name but three of the key problem areas.”
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