In South Africa, 2016 certainly ended on steadier ground than it had started. The local political landscape stabilised; the country managed to avert a downgrade to sub-investment grade status; the domestic inflation outlook improved; and consumer confidence rose to an 18-month high. The rand strengthened by 12.6% against the US dollar over the year, making it the third-strongest emerging market currency and reflecting the gradual improvements the country had made. We have become more constructive on the outlook for SA equities over recent months. There have been a number of developments which we believe should have a positive impact on returns going forward:
While we are more optimistic on the outlook for SA equities in general, we remain very selective in terms of portfolio construction. There are a number of sectors where earnings revisions remain negative and where valuations are excessive.
We have actively increased the Investec Equity Fund’s weighting to resources stocks on the back of a strong recovery in earnings expectations and reasonable valuations. During the year, some of our largest purchases included Sappi as well as diversified mining companies with significant exposure to base metals such as Glencore and South32.
Sappi is benefiting from lower input costs, while graphic paper prices have seen a recovery in the European market. As a result, we believe Sappi will receive further earnings upgrades. With the stock trading at a price to earnings multiple discount to peers, the share meets our philosophy of investing in companies receiving positive earnings revisions while trading at reasonable valuations.
While we favour the diversified miners, we have some exposure to gold shares to mitigate the risk of US dollar weakness, considering the potential reversal of recent strong gains as political uncertainty remains.
On the domestic front, we believe monetary conditions will become more supportive for ‘SA Inc.’ The outlook for South Africa (economically and politically) is tentatively more positive than what it was a year ago. We believe there are investment opportunities among stocks with exposure to these changing fortunes – banks, food producers and select retailers.
The Fund currently has a decent allocation to domestic banks, with holdings in FirstRand, Standard Bank and Investec. We believe valuations are reasonable. While we have not yet seen any significant upward revisions in earnings expectations, an improvement in the domestic inflation and interest rate environment should provide scope for some multiple expansion.
Similar to our view on banks, we have selectively increased our exposure to domestic retailers. We have also become more constructive on the outlook for global cyclicals such as Richemont, where we are seeing a change in trend in terms of earnings expectations. We maintain our high conviction overweight position in Tiger Brands.
In aggregate, corporates around the world have been starved of earnings growth. But many growth indicators have improved of late. While the US is arguably in the ‘late cycle’ phase, growth is slowly picking up across Europe and Japan. China’s credit-induced stimulus strategy, while risky, seems to be working for the time being, which provides some support for commodity prices.
With Donald Trump at the helm of the US, it remains to be seen how international political relations will evolve as they will no doubt impact market movements abroad and locally. Political uncertainty should also rise in the euro zone as France, Germany and the Netherlands hold general elections, while ‘Brexit’ negotiations are set to begin in the first half of the year.
On the domestic front, the risk of a potential downgrade of our local and sovereign credit rating remains. And we will most likely see an increase in political rhetoric as we get closer to the ANC’s national conference at the end of the year.
Against this backdrop, we expect another volatile period for markets. In our view, it will likely be a year for stock-specific investments and, like 2016, we do not expect the market to deliver the returns seen from 2012 to 2015. We believe that maintaining a consistent philosophy of investing in companies receiving positive earnings revisions which are trading at reasonable valuations, should guide us over the coming year.
Collective investment schemes (CIS) are traded at ruling prices and can engage in borrowing, up to 10% of portfolio net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager, Investec Fund Managers SA (RF) (Pty) Ltd (IFMSA) which is registered under the CIS Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. CISs are generally medium to long term investments and the manager gives no guarantee with respect to the capital or the return of the Fund. The value of participatory interests (units) may go down as well as up. Different classes of units apply to the fund and the information presented is for the most expensive class. Fund valuations and transaction cut-off time are 16h00 SA time each business day. These portfolios may be closed in order to be managed in accordance with the mandate. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. Fund prices are published each business day in selected media. Additional information on the Funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. Investec Asset Management (Pty) Ltd (“Investec”) is a member of the Association for Savings and Investment SA (ASISA). The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. IFMSA products are subject to the terms contained in the IFMSA Terms Document, as well as the Minimum Disclosure Document, which is available from our website www.investecassetmanagement.com.
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. Past performance of investments is not necessarily a guide to future performance. This is not a recommendation to buy, sell or hold securities. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management is an authorised Financial Services Provider. Issued by Investec Asset Management, February 2017.