SA’s high-quality equities attractive to top investors

Investors in developed markets are paying a high price for high earnings, which is not sustainable. Earnings growth, which is the change in an entity’s reported net income over a period of time, is starting to slow down and multiples are going to be lower.

This is what Matrix Fund Managers’ portfolio manager Leon Michaelides told investors at the Amplify Investment Partners One Movement event earlier this month (watch a recording of the event below). Matrix Fund Managers is a company which specialises in asset management.

Michaelides, who is also co-manager on the Amplify Sanlam Collective Investments (SCI) Defensive Balanced Fund and Amplify SCI Absolute Fund, said Matrix prefers emerging markets trading on multiples that are less demanding.

These include markets with decent earnings growth prospects, where economies are ahead of the curve as far as tightening and withdrawal of stimulus.

Within emerging markets, Matrix has a preference for SA.

On the other hand, the US is expensively valued, said Matthew de Wet, investment manager at Abax Investments, which manages the Amplify SCI Flexible Equity Fund.

“We have been pretty excited about the SA market generally in the past couple of years and we still see value. There are a number of high-quality and attractively valued mid-size businesses which are off the radars of many large asset managers, and a few with extremely good growth prospects,” he said.

Equities continue to provide superior returns to other asset classes. Based on a 60-year history, equities have provided a far bigger return than bonds, which have only just beaten inflation, said Brian Thomas, portfolio manager at Laurium Capital and co-manager on the Amplify SCI Balanced Fund.

While equity returns over the past five years, except last year, have been pedestrian, Laurium is a firm believer in the equity risk premium — with the difference between the returns on equities relative to bonds over time of about 8%.

At the moment, Laurium is overweight SA fixed income and SA equities.

At a macro level, inflation should moderate in the US and SA over the course of the year, while remaining “sticky” early on, said Matrix Fund Managers’ economist and macro strategist, Carmen Nel.

The debate is how quickly it moderates, and for SA, the big question is what happens to the oil price as the country doesn’t have a lot of pricing power in the economy — where exogenous factors influence inflation. Nel expected four to five interest rate hikes in the US in 2022, and possibly more in 2023.

Terebinth Capital’s chief investment officer and co-manager of the Amplify SCI Strategic Income Fund, Erik Nel, expected 2022 to be about co-ordinated policy exit.

Describing the environment at present as tricky and tactical, Nel said the complexity with the outlook on inflation globally was geopolitics. Oil prices are important in SA, and the strength of the rand is helping. However, if it weakens, it can create problems.

What this means for the yield curve, he said, is that it may, optically, seem steep. He went on to ask how much of that steepness was a function of SA’s creditworthiness.

Nel said the good news, such as revenue windfalls, was in the price, and SA would have to do the right things for further flattening to take place.

This article was paid for by Sanlam Investments.