SA’s largest asset manager, Ninety One, says the market’s view that SA equites are headed for another “lost decade” is too negative.
SA equites saw foreign investors dump more than R700bn in SA equities in the past seven years.
Domestic investors increased their holdings in offshore equities after an amendment to regulation 28.
John Biccard, portfolio manager at Ninety One Value Fund, said the JSE all share index returned just 2% a year in dollars over the past decade, a far cry from the S&P 500’s 12% annual return.
The period, described by many pundits as a “lost decade” for SA equities, was likely to repeat itself in the next decade, according to market sentiment. Regarding the valuation of SA shares, the market expected the next decade to be at least as poor as the previous one, he said.
“SA equities trade at the largest valuation discount yet relative to the MSCI emerging markets index and the MSCI world index, and this is with respect to all the valuation metrics that matter: price to earnings ratio (PE), dividend yield, EV/ebitda and price to book,” Biccard said.
“Positioning is also at an extremely negative level, with foreign investors voting with their feet and selling R710bn worth of SA equities over the past seven years, leaving them underweight on SA stocks when viewed against their respective benchmarks.
“Local investors have joined the exodus after the National Treasury’s decision to allow local pension funds to invest up to 45% offshore, resulting in the average regulation 28-compliant fund now holding just 39% in SA equities versus nearly 70% 18 years ago.”
In 2022, an amendment to regulation 28 of the Pension Funds Act allowed pension funds to increase offshore allocations from 30% of assets to 45%. This has led to substantial outflows of investment from SA and lowered JSE liquidity.
Biccard said that since May 2023, the Ninety One Value Fund had increased its holding in SA Inc stocks.
The asset manager has taken and overweight position in selected SA equities, specifically the SA Inc stocks [27% vs the 3% benchmark weighting in these stocks].
“We have consistently maintained that the most significant catalyst would be a reduced level of load-shedding, which in turn would result in higher GDP growth in SA, lower inflation and increased corporate earnings, amplified by reduced diesel costs and a stronger economy,” Biccard said.
Though improvements in load-shedding over the past few months bode well for SA’s markets, the next hurdle is the election later this month, he said, adding that market participants have adopted an attitude of “talk to me after the election” due to uncertainty over the outcome.
“Valuation and positioning indicate that the market is not optimistic regarding the outcome of the election, and our view is that the extreme levels of both mean that the market is 80% sure of a bad outcome.
“What would constitute a bad outcome for the capital markets? Simply put, it would be ANC support falling to about 40% and the party then choosing an EFF or MK alliance to secure a majority,” he said.
“We consider the chances of this happening to be quite low. The ANC will need to get only 40% of the vote (50% probability in our view) and thereafter they would need to choose EFF/MK as their partner (20% probability in our view). We therefore see the probability of a bad outcome as only 10% (that is, 50% times 20%), a stark contrast to what the market appears to be pricing in.”
According to data from asset management firm Stanlib, foreign investors have withdrawn about R1-trillion from SA’s equity and bond markets over the past 10 years.
Foreign investment was negative in 2023, with offshore investors withdrawing about $7.2bn from the equities market.
Old Mutual chair Trevor Manuel said in April that the more than R1-trillion withdrawn from SA Inc in the past decade points to an uncertain regulatory environment and lax implementation, which have hurt the country’s competitiveness. He said this money was being redirected to competing markets that appeared to be on a more sound governance and regulatory footing.
Updated: May 7 2024
The previous headline and article incorrectly said Ninety One was predicting another “lost decade” for SA equites. The asset manager instead believes the prevailing market sentiment of another lost decade is too negative.
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