South African equities were likely to move modestly higher although it was tough to find “compelling value”, said Alwyn van der Merwe, Sanlam Private Investments (SPI) director of investments.
Presenting SPI’s quarterly investment briefing in Johannesburg this week Van der Merwe while urging investors to hang on to quality stocks said property needed to remain an important element within investment portfolios.
He said that while there appeared to be a large valuation gap between resource shares and their industrial and financial counterparts, this gap could be sustained if the outlook for global growth continued to look risky.
While analysts expected resource companies’ earnings to slump by around 30% this year, they were looking for top industrial stocks to grow earnings by close to 20% and financial stocks by around 10%. “It is tricky to blend portfolios with resource shares that look cheap and industrial and financial shares that look a lot more expensive.”
Commenting on international investment markets, Pieter Fourie, London-based head of global equities for SPI UK, said the enormous focus on high yielding bonds meant that this asset class was now looking expensive. “We are still seeing the unwinding of the credit bubble from a few years ago. Bonds have done very well at the expense of riskier assets,” said Fourie.
“There has been very little return from international equity markets in the past five years, but a rotation into equities is underway with a strong preference for high quality companies with sustainable earnings yields.”
Among Fourie’s top stock picks are companies such as Google, Yum Brands, Colgate Palmolive, LVMH and Diageo, all of which have major international footprints and strong growth potential. He said Microsoft could be a “fallen angel” that could provide good future returns.
Fourie stressed that SPI’s global equity strategy was to invest in companies with strong balance sheets and low debt to earnings. They also had to have a competent management team the ability to compound returns at superior rates for long periods of time.
He said SPI’s global equity plan was to invest in a concentrated portfolio of high quality companies, operating in industries with high barriers to entry and low capital intensity. SPI’s goal was to actively manage position sizes within a focused universe of stocks.
Underpinning the argument for investors to have offshore exposure, said Van der Merwe and Fourie, was the fact that while the JSE had enjoyed a strong 24% gain in rand terms over the past year, developed markets had achieved returns of 22% and developing markets 17% in dollar terms.
Although market volatility was an understandable concern for investors, Van der Merwe emphasised that it provided opportunities for fund managers to build longer term wealth for their clients. While there had been considerable volatility in world markets over the past three years, this had been highly correlated with change in news flows, he said. Equity markets had closely followed macroeconomics, so it had not really been a stock picker’s market.
Looking ahead, Van der Merwe said the world still had a two-speed global economy with the developed countries – especially in Europe – struggling and developing economies still growing at a reasonable rate.