5 burning questions in uncertain markets
Investments / 2019.10.03

5 burning questions in uncertain markets

SPW Contributors Sanlam Private Wealth

In the face of unprecedented global and local uncertainty, how can investors remain sanguine about investment prospects both in South Africa and offshore? At the series of client events Sanlam Private Wealth held recently across the country, our Director of Investments, Alwyn van der Merwe, addressed some of the most pertinent investor concerns that emerged at these lively sessions.

How negative could the impact of the US-China trade war be on South Africa in the run-up to the US elections?

It’s very difficult to quantify just how negative the impact is likely to be, but there’s no doubt that the dispute will have adverse consequences. Looking only at the direct implications, it will undoubtedly have a negative effect on the growth rate of the US – it’s likely to shave off between 0.5% and 0.75%. It will also have an impact on the Chinese economy. Since we’re in a mature phase of the global economic cycle, the Chinese economy may slow down faster than anticipated. China is the world’s biggest consumer of commodities, and since South Africa is a net exporter of commodities, it implies that commodity prices will come under pressure. The terms of trade – the difference between the cost of our imports and that of our exports – will be impacted, which won’t be good news for the South African economy.

How is the ongoing Brexit saga likely to affect the investment strategies of Sanlam UK?

The drama around Brexit, and whether or not (and how) the UK leaves the European Union shouldn’t have any impact on our global equity offering, which is managed by our highly experienced, award-winning equity team in London. It’s important to remember that a UK-listed share will only qualify for inclusion in the Sanlam Global Equity Fund if it meets our team’s extremely stringent requirements. Decisions are taken based on valuation and the quality of a business, and cash flow plays an important role. Where a share is listed geographically has virtually no impact on the team’s decisions. Based on our investment criteria, we currently have very little exposure to UK-listed shares in the fund.

Having said this, our UK team may well at some point start looking at some quality companies in the UK, especially if developments around Brexit drive valuations down to a point where they start to look attractive. We may then start to consider some of these for inclusion in the fund.

What’s your view on the possibility of prescribed assets being introduced in South Africa?

Prescribed assets aren’t new in South Africa. In fact, until October 1989 investors were forced to invest around 47% of their retirement fund savings in government bonds. The money is spent on government projects, including state-owned enterprises, that are more often than not sub-optimal from an investment perspective. We don’t believe the introduction of prescribed assets by government is going to happen any time soon. The debate will need to take its course but our view is that it will be aggressively opposed by business and investors, and most importantly, workers and their unions. There might also be constitutional challenges if government tries to push this through. 

When will you start increasing exposure to listed property in clients’ portfolios?

Listed property was the worst performing asset class over the past five years – the entire property landscape is under pressure. However, whereas average yields were around 5% four years ago, they’re now up to 10% in some cases. So, from a valuation perspective, some shares are starting to look interesting to us. We’ll therefore start to evaluate the sector carefully and consider selected buying opportunities – we believe the sector is likely to remain under pressure, however.

It’s important to note that from a macroeconomic perspective, however, many of the listed property companies are facing severe headwinds and may therefore reduce their dividend payouts. So, while historic yields are looking attractive, future dividend payouts may be lower in an extremely tough environment.

Which three shares look interesting right now from a valuation perspective?

Mr Price: In the retail sector, we’ve been looking at Mr Price, which has a really strong balance sheet. The return on equity, which gives one an idea of the quality of the company, is around 35%, which is very high. We’d be comfortable if we could add to Mr Price at a 14 times price-earnings (P/E) multiple.

Bidvest: Another share we’re keeping an eye on is Bidvest. It’s certainly one of the better run companies in South Africa. Its profits have come under pressure as a result of the struggling South African economy, but the group’s plans to internationalise its service division should lessen its exposure to local realities. The share is currently trading at a 14 times forward P/E multiple – with a further decrease in price, we’ll definitely consider a buy.

See the separate article by Odwa Ngwane of the Sanlam Private Wealth investment team on this subject.

Aspen Pharmacare: This share is certainly worth looking at. It does have some balance sheet risk, but Aspen is now trading at a 6.5 times forward P/E multiple compared to 35 times not too long ago. The company should be able to solve its debt problem, and the expected earnings stream and cash generation are likely to relieve financial pressure. The immediate balance sheet risk is likely to remain concerning, however, so while the share looks attractive, we’ll be approaching it with extreme caution.

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