There is nothing like being underdogs to bring out the best in us South Africans. From our painful political history to our exploits on the sports fields, it is when we have our backs to the wall and the world has written us off that we seem to relish the opportunity to beat the long odds and deliver the most unlikely of upsets.
Chasing the Sun 2, the TV series on the arduous route to the Rugby World Cup final in Paris, captured the behind-the-scenes trials and tribulations of the Springboks, who were unfancied against our arch-rivals. The 37-year-old Deon Fourie, with an injured shoulder, encapsulated this spirit by being one of the unexpected stars of the final.
In investing, SA assets have been unloved for about 10 years. We have also been playing with an injured shoulder. The chart shows how the JSE all share index (Alsi) underperformed the all bond index for most of the past decade.
Equity investors expect to be compensated for the risk they take and yet for 10 years the JSE has delivered only half a percent more a year than the all bond index, a difference that would be gobbled up by the higher cost of investing in equity products.
At Ashburton Investments, we believe that some of the negative factors that weighed down the JSE will abate. It was almost as if someone had shouted fire in a crowded theatre, with investors heading for the narrow exit door over the past decade. And yet, we believe that most of this pessimism has been priced in.
One of the biggest concerns has been the decline in performance by the major state-owned enterprises. The public psyche has indeed been scarred by load-shedding, especially with energy availability plummeting to 50% last year. However, we are seeing signs of a turnaround, with Eskom chair Mteto Nyati recently announcing a rebound in energy availability to 65%, as winter sets in.
The other major issue that has affected economic growth has been the decline in freight volumes transported by Transnet. The impact on our exports of bulk commodities has been severe and forced a shift in logistics to road transport, which is not fit for purpose. Recent figures show a pleasing turnaround in the trend. Similarly, our ports, plagued by crane breakdowns, have experienced a 25% rise in container volumes over the previous year.
Appetite waning
Long before SA’s sovereign credit rating was downgraded to junk status, foreign investors’ appetite for our bonds was waning. While a decade ago foreign investors were holders of more than 35% of our government bonds, this plummeted to less than 25%. The buyer of last resort has been local retail investors via unit trusts, which increased their local government bond holding from less than 10% to almost 25% of the total outstanding.
A similar trend can be mapped on the JSE, with foreigners net sellers of equities annually from 2015 until now, with net selling of almost R1-trillion over the past decade. There are early signs of the selling abating. We expect foreign investors to wait for the outcome of the elections this year before dipping their toes decisively in the local market.
At the beginning of 2023, regulation 28 of the Pension Funds Act was amended to allow funds catering for retirement savings to increase their offshore exposure from 30% to 45%. Local managers increased their offshore exposure from 30% to more than 40% recently, using the recently approved headroom. This increase in global exposure has come at the expense of local equities, as local managers raised funds to invest offshore. Even the country’s largest asset manager, the Public Investment Corporation, has invested 5% of its funds offshore; the intention is to invest 5% more in opportunities in the rest of Africa.
As shown in the chart, the Alsi derated steadily from a lofty price-earnings ratio 10 years ago, before hitting rock bottom, trading on a low 10 times multiple based on historical earnings last year.
Rather like our Springbok team, our local companies have had their backs to the wall. While we have seen a slew of delistings, most of what remained on our bourse not only survived but thrived. There has been a focus on degearing the balance sheets, investing in self-provision of electricity and geographic diversification.
Industry leaders have become stronger, but that has largely been ignored by investors.
At Ashburton Investments, our equity fund is focused entirely on seeking opportunities in the local market. We now have no offshore allocation. And yet the fund has delivered performance close to the top decile in the past year. We continue chasing the sun.
• Rassou is chief investment officer at Ashburton Investments.
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