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Extremely cheap’ SA equities are getting cheaper

MOMENTUM Investments believes South African equities are trading over one standard deviation cheaper relative to their average historical valuation.

Momentum Investments portfolio manager Ronnie Bornman believes South African equities are ‘extremely cheap’ and have gotten cheaper.

‘No matter which way you look at it, South African equities or extremely cheap. They have been cheap for some time, and unfortunately, they have been getting cheaper throughout the first couple of months of this year,’ he added during a multi-asset roundtable.

Hollard Investments CIO Ashveena Teeluckdharry-Khusial chaired the event, and Citywire South Africa hosted it in Cape Town on 19 March.

‘Relative to history, we are probably trading over one standard deviation cheap relative to history. Those hundreds of connectors are cheap relative to emerging markets, and emerging markets among themselves are cheap relative to developed markets,’ Bornman said.

‘A lot has been said about slowing growth in China and the impact that’s had on South Africa as a commodity exporter,’ he added.

Bornman said platinum group metals (PGMs) have also come under pressure.

‘We have scored some own goals. The energy prices and road and rail transport are adding to the costs for some of these commodity suppliers. What is behind all of this and what’s driving this is the low growth in SA. But 1% growth is not exciting to anyone, and you can’t grow in that sort of environment,’ he added.

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‘I think African businesses are facing the local economy head-on, a little bit more exposed from that perspective,’ Bornman (pictured below) said.

He said some South African stocks, including the local banks, were doing well.

‘Banks are trading at single-digit P/Es, but their balance sheets are extremely strong. South Africa is a good dividend payer – relatively better than many of its emerging market peers and better than the developed market world,’ Bornman said.

‘South Africa is very under-owned in the emerging market space. Foreigners have been selling our equities effectively since Nenegate,’ he added.

The increase in Regulation 28’s offshore limit to 45% has also resulted in asset managers taking money offshore.

Teeluckdharry-Khusial said PSG’s multi-asset portfolio has a 44% allocation to SA equities.

PSG Asset Management head of equities Justin Floor said the asset manager had become more optimistic about local equities in the last year.

Floor broke the local market into three main areas: domestically exposed SA Inc shares, non-resource rand hedges, and local resources shares.

‘We are seeing opportunities in all three. The most intriguing one is probably the resources segment,’ Citywire A-rated Floor added.

‘The Transnet issues have made the [share prices] more favourable. The market prices are extrapolating, and Transnet is getting worse,’ he added.

Energy constraints

‘The energy constraints are going to look better, but they are not going to go away,’ Floor said.

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‘Consumers are in better shape. The companies have lower diesel costs. They spend less capex because they’ve already spent on diesel, generators and solar. We like the retailers,’ he added.

Floor (pictured below) said the critical risk was identifying companies that would win in the prevailing environment.

‘An active approach is particularly valuable in South Africa right now. That’s just a concentrated market. You’re going to have these winners and losers to give a shot and an interesting case study to explore, but that’s endemic; it’s going to continue. Watch out. There are value traps on balance, and there are fantastic opportunities.’