BROKERS’ NOTES: Buy Santam, sell the Magnificent 7

Rowan Williams, portfolio manager: Nitrogen Fund Managers

Buy: Santam

Santam, part of the broader Sanlam group, is South Africa’s largest listed short-term insurer. It covers risks in motor, building, agriculture and other specialist areas, and has exposure to the fast-growing Indian and Malaysian insurance markets through its investments in Shriram General Insurance and Pacific & Orient respectively. The recently announced first-half FY2024 results were encouraging, with the underwriting margin of 6.5% returning to the 5%-10% target range due to management interventions and as the risk cycle improves, particularly in the motor book. Gross written premiums were up 8% on the prior year and management are confident of continued growth. Investment returns were affected by the strengthening rand but should contribute positively as equity markets remain strong. The group expects the management actions to “create positive momentum into the year’s second half”, auguring well for full-year financial results.

SELL: The Magnificent 7

The Magnificent 7, a basket of megacap stocks — Alphabet, Microsoft, Meta, Nvidia, Apple, Amazon and Tesla — have been the major beneficiaries of the hype about AI and have driven global stock market returns over the past two years. The markets’ reaction to the recent Nvidia results indicates the extremely high expectations that are discounted into the share prices of these stocks, with a high probability of market disappointment when lofty growth expectations are not met. We also expect investment in AI to slow as the competitive race to be first with new services begins to slow. The US Fed has also indicated that it’s likely to begin cutting interest rates in September, which will drive rotation from expensive growth stocks to a broader range of more reasonably valued industrial stocks. Investors can thus benefit by rotating out of these stocks to the broader equity market at this point in the interest rate cycle.