Ninety One, South Africa’s largest asset manager, has positioned its Value Fund to take advantage of the general election producing an outcome favourable to “SA Inc” shares. This is contrary to what the capital markets are expecting.
John Biccard (pictured), the manager of Ninety One’s Value Fund, said current valuations and allocations indicate the market is 80% certain the election will produce a bad outcome. A bad outcome for the capital markets would be support for the ANC falling to about 40% and the party choosing an alliance with the EFF or MK to secure a majority.
“We consider the chances of this happening to be quite low,” he said.
In Ninety One’s view, there is a 50% probability that support for the ANC will fall to only 40% of the vote and a 20% probability that the party will opt for an alliance with the EFF or MK.
“Clearly, these probabilities are subjective, but it is difficult to see probabilities of these two events to be high enough to match the market’s expectations.”
Consequently, the Value Fund’s entire domestic equity positioning is in SA Inc.
“Our favoured stocks in this space are shares trading close to their Covid lows of four years ago. The extent of our conviction is such that our largest holdings that fit this description (Life Healthcare, Netcare, Spar, Reunert, and Absa) make up 27% of our portfolio against an index weight of just 3%,” Biccard said.
According to the Value Fund’s fact sheet to the end of March, the fund was 82.88% allocated to local instruments, with a 63.8% exposure to South African equities.
The fund’s top 10 holdings were: Reunert, 8.2%; Life Healthcare, 5.8%; Pan African Resources, 5.6%; Sappi, 4.9%; Centamin, 3.9%; Anglo American, 3.9%; Greenlight Capital, 3.6%; African Rainbow Minerals, 3.5%; Altron 3.4%; and Dr Martens, 3.3%.
Over the past 10 years, the Value Fund’s has produced an annual return of 7.3%, beating its benchmark by 1.9 percentage points and the average return of the South African equity general sector by 3.7 percentage points.
Two hurdles
Biccard said Ninety One believes the general election and loadshedding are the two obstacles that must be overcome to unlock the value in South African equities.
Domestic equities have experienced a “lost decade”, with the FTSE/JSE All Share Index returning only 2% a year in US dollars compared to the S&P 500’s 12% a year.
The market expects the next 10 years to be at least as bad as the last if the valuation metrics “that matter” are anything to go by – price to earnings ratio (P/E), dividend yield, price to book, and enterprise value to earnings before interest, taxes, depreciation and amortization.
South African equities are currently trading at their largest valuation discount relative to both the MSCI Emerging Markets Index and the MSCI World Index, Biccard said.
Positioning is also at an extremely negative level, with foreign investors selling R710 billion of South African equities over the past seven years, leaving them underweight South African stocks compared to their respective benchmarks.
Local investors have joined the exodus following National Treasury’s decision to allow retirement funds to invest up to 45% offshore, resulting in the average Regulation 28-compliant fund now holding 39% in South African equities versus nearly 70% 18 years ago.
“The net effect is that you can buy a diversified portfolio of South African banks, retailers, and industrial stocks today on a P/E of 9 times with at least a 6% dividend yield, and this is off somewhat depressed earnings because of loadshedding and an economy that is growing at just 1%,” Biccard said.
Since May last year, when the Value Fund increased its holding in SA Inc stocks, Ninety One has maintained that the most significant catalyst to unlocking this value is a reduced level of loadshedding, which would result in higher GDP growth, lower inflation, and increased corporate earnings, amplified by reduced diesel costs and a stronger economy.
“The facts on loadshedding over the past six months indicate that we are on this path,” Biccard said.
The next hurdle is 29 May. Markets don’t like uncertainty, and the current narrative is, “Talk to me after the election.”
“Unfortunately, this is not a strategy that will work. The JSE’s liquidity is especially low now and the outcome will immediately be priced in, which could result in SA Inc stock prices moving substantially – even 15% higher or lower – in the weeks after the election. Positions must be in place prior to May 29,” Biccard said.
