SA is a ‘standout opportunity’ for investors
ALTHOUGH many investors are running offshore, convinced that South Africa and its markets are simply too risky, PSG Asset Management isn’t one of them. On the contrary, the investment team believes South Africa is a “standout opportunity for investors”.
In its latest quarterly commentary, the manager once again referenced Warren Buffett, who said: “Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
Last year was tough for most investors. After a “Ramaphoric” start, the JSE experienced its worst year since the global financial crisis. Market sentiment swayed as South Africa’s economic reality set in and, compounded by investor aversion towards emerging markets in general, the FTSE/JSE All Share Index (Alsi) ended the year 9 percent down in rand terms.
The rand, having rallied to R11.50 against the US dollar, was trading at R14.35 at the end of the year.
Generally, developed markets also disappointed and, while the US largely managed to buck this trend, ongoing uncertainty about trade relations with China and a series of interest rate hikes by the US Federal Reserve spurred market jitters. The Standard & Poor’s 500 Index closed the year on $2 506.85, down from $2 673.61 on January 1, 2018, after a sharp sell-off in the final quarter.
“While they may feel uncomfortable or even frightening, times like these – clouded by fear and uncertainty – tend to present the best investment opportunities,” said Shaun le Roux, a fund manager at PSG Asset Management.
Although rolling five-year returns of the Alsi to December 2018 were only poorer on four occasions over the past 40 years, three-year annualised returns following previous low points averaged about 24 percent.
“Furthermore, the domestic-facing companies our portfolios hold are, on average, trading at price-earnings ratios of eight to nine times. This has created the opportunity for strong potential returns in future.
“Similarly, we continue to find value in selected global counters,” Le Roux said.
“While overall market valuations remain elevated when compared to history, despite recent declines there continue to be pockets characterised by fear and uncertainty. Here, low prices and low expectations have resulted in quality assets trading at wide margins of safety.”
PSG continues to focus on above-average quality businesses trading at wide margins of safety, and preferably on low levels of earnings. This combination increases the likelihood of favourable returns over the long run.