SA assets still present opportunities for investors despite the country’s energy crisis because many companies have for years learnt to operate in a low-growth and business-unfriendly environment, analysts say.
The SA Reserve Bank estimates that recent high-level rolling power outages will deduct as much as two percentage points from economic growth in 2023.
On Tuesday, the IMF revised its global economic growth forecast upwards for the year, in line with improving sentiment over the 2023 economic outlook. However, for SA, its economic outlook has dimmed as power outages worsen.
For local businesses, the most difficult thing to quantify is the investment that does not take place and jobs that are not created due to persistent load-shedding because firms lose confidence in the future, said Izak Odendaal, an investment strategist at Old Mutual Wealth.
“However, one benefit of 15 years of load-shedding is that many businesses are now used to operating in this difficult environment,” said Odendaal.
Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, said it has to be borne in mind that SA’s financial markets are largely dependent on the prevailing sentiment and trends in world markets, which is particularly the case for the equity market.
“Only 30%-40% of the aggregated operating performance of all the companies on the JSE comes from SA and is therefore linked to the performance of the economy.
“In essence, a large part of the SA equity market is not a pure reflection of the SA economy. Only for the companies that solely or predominantly operate in SA would local economic realities matter,” said Van Papendorp.
“And many of these companies have for years had to operate in a low-growth and business-unfriendly environment and have learnt to work around these negativities.”
JSE record
The JSE reached a record high in January as investors priced in slower interest rate hikes from the US Federal Reserve amid evidence of softening inflation in that country and the opening of the Chinese economy after severe Covid-related lockdowns. China is SA’s biggest trading partner for commodities, which will boost the local and global economy.
Chantal Marx, head of investment research at FNB Wealth and Investments, said the reason SA assets still look attractive is the price, and she sees value in both stocks and bonds in the long term.
According to Marx, growth is going to be hard to come by and “this is why we are more likely to back defensive stocks right now”.
In terms of stock and sector specifics, Marx said they are still positive on financials, particularly the banks, while defensive retail stocks such as Shoprite and Mr Price are preferred.
Among the defensive industrials, Marx favours Bidvest. In healthcare, she fancies Life Healthcare will come out on top. “Some of the unloved rand hedges also have a pretty decent cash return profile — Mondi and British American Tobacco.”
For PSG Asset Management, a sweet spot has been the mid-cap sector which, according to Dirk Jooste, a PSG Asset Management fund manager, has been largely ignored when looking at analyst coverage and representation in mainstream portfolios. “Companies like the JSE, AECI and Sun International present a good opportunity,” said Jooste.
With global sentiment improving compared with much of 2022, more risky asset classes — such as equities and bonds in emerging markets like SA — are set to benefit significantly, as has been the case with the JSE trading around records highs of above 80,000 points so far in the new year.
“The cheap valuations of SA equities and bonds, both relative to their respective histories as well as relative to international equities and bonds, provide a major fillip for the returns of these SA assets,” said Van Papendorp. “This, for instance, caused a strong performance from SA equities and bonds in the last four months.
“The excellent value currently available in SA equities should be beneficial to the asset class during times of possible declines in international equity markets, but even more so during subsequent recoveries when global risk appetite rises again,” he said.
Odendaal said SA bonds and equities remain cheap, precisely because the market is discounting load-shedding and the other problems we are all too familiar with. “To unlock this value does not require that everything suddenly becomes well, simply that reality turns out to be somewhat less bad than feared and already priced in.
“There is still merit in a diversified approach that includes lots of rand-hedge and global exposure, but also makes full use of local opportunities,” said Odendaal.
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