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The SA unit of M&G, the UK fund manager overseeing more than $390bn in assets, sees opportunities in investing in the country’s industrial and financial companies as earnings growth may surprise.

Some of these companies have recovered faster from Covid-19 than many in the market expected, said Kaitlin Byrne, a Cape Town-based equities fund manager at the firm. They offer an alternative for investors to the Johannesburg market’s large resources segment, she said in an interview.

“People have underestimated the ability of earnings” to rebound, said Byrne. “Given the valuations we are seeing, it is more difficult deciding which stocks to exclude from our portfolios than finding good ideas.”

The economy is back at the size it was before the pandemic struck, after expanding 1.9% in the three months to end-March, a potential boost for the financial sector. While the country’s main stock index slipped 10% in the first half, that was a better performance than the benchmark for emerging market shares, which slumped twice as much.

Still, there are domestic threats to the outlook for stocks, beyond global concerns of a potential recession. Record rolling power blackouts imposed by struggling state-owned utility Eskom threaten to disrupt the economic rebound, while the gloomiest consumer mood in decades may curb household spending.

TFG, the owner of Foschini and Jet, is an example of a company that has bounced back from Covid-19 better than expected. Sentiment around the Cape Town-based retailer just after Covid-19 signalled “a very slow trajectory, but earnings came back a lot faster than the market had priced in”, Byrne said. The company swung from a loss to a profit when it reported full-year earnings on June 10. 

In the case of luxury retailer Richemont, down almost 30% in Johannesburg trading in 2022, the market attached low multiples to its jewellery businesses and weakness in its shares provided an opportunity to acquire “very strong brands at cheap valuations”, she said. 

Mobile phone giant MTN was valued by some purely on its SA operations, with a larger-than-justified discount on its businesses elsewhere because of regulatory and other risks, Byrne said. MTN’s attractiveness is increased by its businesses in Nigeria — its largest market — and Ghana, which are growing above 20% annually, she said.

Banks have outperformed the broader market, with an index for the sector rising about 7% this year, as prospects of an economic recovery and higher rates buoy sentiment.

M&G’s Equity Fund, managed by Chris Wood and Yusuf Mowlana, includes three banks among its 10 largest holdings, data on the firm’s website show: Standard Bank, Absa and Investec.

Johannesburg’s benchmark FTSE/JSE Africa All Share index climbed 2.5% by 3.31pm on Monday, the sharpest gain for a week, snapping three days of declines.

Bloomberg News. More stories like this are available on bloomberg.com


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