While many investors are running offshore, convinced that South Africa and its markets are simply too risky, PSG Asset Management isn’t one of them. On the contrary, the investment team believes that currently, South Africa is a “standout opportunity for investors.”
In its latest quarterly commentary, the manager once again referenced Warren Buffet, who said: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
2018 was a tough year for most investors. After a ‘Ramaphoric’ start, the JSE experienced its worst year since the global financial crisis. Market sentiment swayed as South Africa’s economic reality set in and, compounded by investor aversion towards emerging markets in general, the FTSE/JSE All Share Index ended the year 9% down in rand terms.
The rand, having rallied to R11.50 against the US dollar, was trading at R14.35 at year end. Generally, developed markets also disappointed, and while the US largely managed to buck this trend, ongoing uncertainty about trade relations with China and a series of interest rate hikes by the US Federal Reserve spurred market jitters. The S&P 500 closed the year on $2 506.85, down from $2 673.61 on 1 January 2018, after a sharp sell-off in the final quarter.
“While they may feel uncomfortable or even frightening, times like these – clouded by fear and uncertainty – tend to present the best investment opportunities,” said Shaun le Roux, a fund manager at PSG Asset Management.
While rolling five-year returns of the FTSE/JSE All Share Index to December 2018 were only poorer on four occasions over the past 40 years, three-year annualised returns following previous low points averaged around 24%.
“Furthermore, the domestic-facing companies our portfolios currently hold are, on average, trading at price-earnings ratios of 8 to 9 times. This has created the opportunity for strong potential returns in future. Similarly, we continue to find value in selected global counters,” le Roux said.
“While overall market valuations remain elevated when compared to history despite recent declines, there continue to be pockets characterised by fear and uncertainty. Here, low prices and low expectations have resulted in quality assets trading at wide margins of safety.”
PSG continues to focus on above-average quality businesses trading at wide margins of safety, and preferably on low levels of earnings. This combination increases the likelihood of favourable returns over the long run. “We believe that current market conditions are likely to support above-average long-term returns,” le Roux concluded.