PSG backs SA Inc stocks to outperform global peers
Valuation gap between the expensive and cheap parts of markets has reached dot-com levels, says asset manager
SA Inc stocks could deliver super returns to investors relative to their global counterparts, says PSG Asset Management, which argues that the valuation gap between the expensive and cheap parts of global markets has reached levels last seen in the dot-com era in early 2000.
PSG fund managers Shaun le Roux and Justin Floor have identified potential opportunities among so-called SA Inc stocks — those that generate the bulk of their revenue from SA — which have largely done poorly on the JSE over the past five years in a low-growth environment, which has been worsened by the Covid-19 pandemic.
The positive outlook on SA stocks is in contrast to perceptions of the local equity market by foreign investors, who have sold a net R85bn worth of local shares so far in 2021 after net outflows of R83bn in 2020.
“Just like in 2003, the SA market is blessed with quality businesses trading at deeply discounted valuations, as the global economy emerges from a deep recession,” Le Roux and Floor wrote in a note.
“Domestic investors have fled underperforming local equities in favour of income funds and high-flying global investments, while foreign investors have materially reduced exposure to SA equities over a number of years. The latter was partly due to SA’s lower weighting within emerging market indices and to poor sentiment towards “higher-risk” emerging markets.
“Against this backdrop, we think it highly likely that certain SA companies will grow profits substantially over the next few years. If domestic stocks rerate at the same time that they grow profits — which they usually do — total returns could be remarkable, even before considering the very attractive 2021 dividend yields on offer,” the note reads.
Banking stocks are trading just below their highest level since January 2020, having gained 22% since the start of this year, while a gauge of general retailers shot up 42% over the same period to reach 2019 levels in August, before pulling back slightly.
Listed property, which was badly hit by the fallout of Covid-19, has gained 18% so far in 2021, outperforming the JSE all share, which is up 8.2% over the same period.
SA Inc stocks do not necessarily move the all share index, which is largely dominated by multinational companies such as luxury goods group Richemont, British American Tobacco and Naspers, as well as a number of big miners, which continue to be volatile in line with commodity prices after shooting the lights out in the first half 2020.
Sanlam Private Wealth portfolio manager Gregory Katzenellenbogen said SA’s economic recovery depends largely on the rollout of the Covid-19 vaccine, which has been slow.
“Not all SA Inc stocks will recover strongly but some will as consumers become more confident that the economy will fully reopen. The retail sector should do well. The secret to a strong recovery will be whether SA can recover many of the jobs lost during the pandemic. The tragic thing is that not all of them will be,” Katzenellenbogen said.
The SA economy lost a net 1.4-million jobs in 2020 as lockdown restrictions affected businesses negatively.
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