Q What does 2020 hold for South African investors?
Many of the risks we were concerned about going into 2019 haven’t abated. We didn’t think that the trade war back-and-forth would drag on as long as it has. Deglobalisation is a real risk in the future and rising tensions in the Middle East are also a concern. So, because of these risks, we still think that global equities and local bonds are the best place to be for South African investors, as they provide the most balance. Having said that, we are still optimistic about the opportunity set that could arise in the South African equity market. We just don’t think that stock prices reflect the lack of growth that exists in South Africa right now.
Q Weak global growth could see global equity markets running out of steam, which in turn, would weigh on the local equity market. What do you make of this?
There are risks, but they bring opportunities. You are not going to make money if you are sitting with overpriced assets in your portfolio.
The downward trend in global growth is a key issue and the actions of central banks across the world reflect this concern. The US Federal Reserve is cutting interest rates, which effectively encourages companies to buy assets and to grow their businesses. So, we expect to see balance sheets continuing to expand. Corporate debt has been rising steadily since the Global Financial Crisis, fuelled by low interest rates. And today, levels have more than trebled since 2008. So, the world is a risky place.
Equity markets have also been pummelled by the US-China trade war and we don’t see any resolution in the near term. In fact, someone coined a great term, ‘whiplash diplomacy’, to denote the toing and froing we are seeing between President Trump and the Chinese. We expect more of this ‘whiplash diplomacy’ in 2020. Uncertainty about Brexit has also affected investor sentiment and the latest extension means more volatility until a deal is finalised.
While global risks abound, we face our own challenges in South Africa. Eskom is still a noose around our necks; growth remains anaemic and the South African consumer is still under a lot of pressure. In fact, the one bright spot we see is that the US consumer is still in relatively good health.
Market turbulence is never comfortable, but sell-offs give us the opportunity to build new positions or increase exposure to high-quality assets that have become better priced. So, we are constantly scouring the local and global investment universe for high-quality assets that will provide sustainable returns to our investors. The focus on high-quality means that these assets should still produce sustainable growth – even when equity markets run out of steam.
Q Given the risks and opportunities, how are you positioning your portfolios?
In our view, the best growth opportunities can be found in high-quality global stocks and select equities that we believe are still underpriced relative to the overall market. Given the uncertainty that investors face, we seek exposure to high-quality businesses that are less sensitive to the economy, markets and business cycles. So, we like businesses such as Visa, Nestlé and Verisign.
On the domestic front, we think South African government bonds are the stand-out asset class. There are, of course, risks: the fiscal position is deteriorating, and debt is increasing. However, a lot of this risk is priced into our market – SA bond yields are approximately 9%, versus yields of 6% in other emerging markets.
Even if you consider the costs of hedging out risks (e.g. a government debt default or rand volatility), global investors could still earn a better return from SA bonds than what they’re currently getting from US government bonds. So, from our perspective, it is strange that some investors are comfortable to have exposure to South African banks and retailers, but they are not willing to buy South African government bonds.
While we regard global equities and South African bonds as standout opportunities, we remain optimistic that SA equities will become more attractive in 2020. They provide better value than they did five years ago but, unfortunately, the weaker growth environment is not fully reflected in the prices of SA equities.
The search for yield has driven corporate yields down to levels where we haven’t been able to find new opportunities for the last two years. As investors become more aware of the risks, we trust we will see better pricing in corporate debt in the year ahead.
All investments carry the risk of capital loss.