Investment Forum 2019 – Unlocking the investment code


TVC Advisers at the Investment Forum

We recently attended The Investment Forum on 8/9 April in Cape Town. The event brought together 21 representatives of leading local and international investment managers.  They shared their valuable insights with 1600 attendees over the four days. The subjects ranged from macroeconomic views to individual stock picks and everything in between, including data and technology trends. Below, we provide an overview of some of the most salient points discussed at the various plenary presentations.

Is the world crazier now than in the past?

World Economy Cartoon

The forum’s tagline, “unlocking the investment code”, was a fitting one given how much trepidation and wariness there is about what the rest of 2019, and indeed the years ahead, will hold. There are those, such as Louis Stassen of Coronation who believe that now more than ever, investors need to be more circumspect about investing in risky assets because of the rise in geopolitical uncertainty. But there are also those, such as Prudential’s Marc Beckenstrater, who don’t think the world today is a scarier place than it’s been in the past. “Markets are always uncertain, there’s nothing new here”, he said. “Things are a lot less dangerous today than they were in the 1970s in the UK and during the Cuban Missile Crisis”.

Bargains are not necessarily conspicuous

Beckenstrater is particularly bullish on equities, especially over the long term. Given a substantial equity risk premium, “you are getting phenomenally well paid to have a go at equities”, he said. This is in contrast to bond markets which offer a negative real return over a 10-year period.

But it’s not necessarily obvious where one can find compelling bargains. As Edward Blain of Orbis touched on, global equity markets are not cheap. “The US is more expensive than the others but nowhere is really a standout bargain by itself”, he said. Not even Brexit has pushed British and European stocks to levels that can be considered a good deal. “But even inexpensive markets you can find cheap companies”, he pointed out.  

Stassen agrees with Beckenstrater that equities offer far better value than bonds. In terms of regional preferences, he favours US over European companies. He believes the former are better managed, with superior capital allocation and more of a focus on shareholders. “There’s no doubt that Europe is a lot cheaper than America,” he said. “But one also has to bear in mind that the quality of the indices in Europe is significantly lower than in the US”.

Does the inverted yield curve spell impending doom?

On the topic of the US, one of the popular subjects that have been discussed in the last few months has been the inversion of the US yield curve. Traditionally, the yield curve is upward-sloping reflecting long-term yields that are higher than their short-term counterparts because investors holding long-term debt need to be compensated for the risk of tying their money up for long periods of time. When the yield curve inverts, short-term debt yields more than long-term debt. This is widely considered a harbinger of recession.

Luckily for investors, the presenters at the Investment Forum believe this time things are different. “The US recession risk is totally overplayed, given healthy levels of corporate profitability and the amount of cash companies are holding on balance sheets,” said Azad Zangana of Schroders. He believes a US recession may come to pass if the labour market collapses. There are no signs of this happening at the moment: unemployment is so low that some states have started hiring felons to relieve labour shortages.

Stassen struck a similar tone to Zangana when he said: “We see no sign of a US recession on the horizon”. According to Stassen, almost all previous US recessions were precipitated by a slowdown in capital spending which spilled over to consumption, which we’re not seeing at this stage. Beckenstrater, meanwhile, is highly sceptical of the predictive power of the inverted yield curve. “We are treading on very thin statistical ground; we’ve only had seven of these events,” he said. The lack of pattern as to how long after the yield curve inverts a recession will materialise also means its credibility as a reliable indicator is questionable.

Power shift from West to East

China VS US

Whether the inverted yield curve proves to accurately forecast the next US recession or not, Michael Power of Investec believes one is on the way and not just in the US, but in the West as a whole. He suggests that the world as we know it, the one that’s been dominated by the West, is slowing. He predicts that in the next 18 months Europe will enter recession, with the US following close behind. “We’ve got five to ten years before the US becomes Japan”, he predicted.

Luckily, Asia is marching to a different drumbeat and is able to pick up the slack such that these recessions will be relatively “shallow” and the global growth picture will remain reasonably stable, if not positive, he argued. Fortunately for us, the African continent stands to gain from this power shift from West to East as our cheap labour makes the region an increasingly attractive manufacturing hub. 

“The future is unquestionably Asian”, Power said. He highlighting the better demographic and productivity profile versus the West. He quoted some persuasive forecasts:

  • Nearly 90% of the growth in the world’s middle class will come from Asia Pacific by 2030.
  • The region is also expected to comprise 57% of the world’s consumption by 2030 (from 36% in 2015). 

In particular, he sees the Indian subcontinent, Indochina (the onshore areas of South East Asia) and the Indies (Indonesia and Philippines) as the real driving force behind the rise of Asia’s relevance.

Divided on China

China Inflated

Now might be the right time to enter the Asian equity market if you’re convinced by this argument. It is currently well-priced and has become an easier market to access. Investec’s Philip Saunders said: “Asian assets, particularly the equity market, are as cheap as they’re likely to get; the growth tailwind is likely to remain in place. The opportunity set is starting to look interesting for the first time in a decade or so”.

On the real estate front, Sherry Rexroad from Blackrock has been finding opportunities in Hong Kong, Singapore, Japan, and Australia. Meanwhile, Steven Romick of FPA/Nedgroup Investments spoke of the value he’s come across in Asian internet platforms as did Coronation’s Stassen. Stassen mentioned Chinese internet companies in particular as representing good value. “Companies like excite us”, he said.

By contrast, Schroder’s Zangana sounded a note of caution about investing in China. “Do you really want to invest in a heavily manipulated market like China?” he asked. “There are a number of state-owned companies that have underperformed for many, many years because the government doesn’t care about profits or shareholders”. His advice: “You need to dig deep, find a privately-run company, make your money and get out”.

Karl Leinberger of Coronation is similarly wary of China due to its imbalanced and highly leveraged economy. He is also concerned about the premier’s apparent lack of regard for reform. “We look at a portfolio’s entire exposure to China and cap it at appropriate levels”, he said.

Is the domestic market cheap enough?

SA Junk-status

Of course, it’s not just China that divides opinion. On our home turf, there is far from a consensus on whether the South African market is cheap enough to compensate investors for the structural economic risks we are all too familiar with.

“The domestic market is reasonably cheap, but not cheap enough for the growth we’re facing in South Africa”, said Rezco’s Rob Spanjaard.

Leinberger is also not convinced. “If we can meaningfully pull ourselves back from the abyss, there are incredibly cheap domestic stocks out there”, he said. “But the risk of the structural challenges outweighing the case for any cyclical recovery at the moment has left us with very low exposure in our portfolios to domestic, economically-sensitive assets”. He mentioned retailers in particular as being at the coalface of the weak economic environment.

Clyde Rossouw of Investec favours local bonds over local equities. “We have a low weight to South African shares, partly because of their valuations but also because of the high level of uncertainty about these business’s growth potential”, he said. Instead, his preference is for domestic bonds and offshore equities. Domestic bonds offer compelling real returns. Offshore equities are good diversifiers owing to their low correlation to domestic assets, low volatility, and their excess return potential.

Other managers are more constructive on the domestic market. “We’re getting to the point where South African valuations are starting to look interesting; price-to-book and price-to-earnings ratios are in the lowest quartile of their historical trading ranges”, said Johnny Lambridis of Prudential.

“Everyone hates SA Inc.,” said Gavin Wood of Kagiso. “This is the type of environment in which good long-term returns are made. We find the domestic South African market reasonably fairly priced and the global market overpriced”. He believes smaller companies (those with a market capitalisation of less than R20 billion) currently represent the best value opportunities in the local equity market, particularly given their cash flow to share price metrics.

However, Jacques Plaut of Allan Gray (who favours large-caps) cautioned: “You can hang yourself with small shares; the intrinsic value can change very quickly, and governance is often not that great”.

Governance grief

Unknown Stocks

This is not to say that governance is always better at larger companies; South Africa has seen its fair share of “landmines” in recent times where share prices have collapsed, frequently because of unsatisfactory governance practices. Both Plaut and Wood believe that asset managers have let shareholders down in this regard.     

“Asset managers need to be more sceptical around the common attributes of these so-called landmines”, Wood said. “These include charismatic management that charms the board (and investors and auditors), poor disclosure, difficult-to-understand financials, an acquisitive growth strategy, and a rising share price”. This is a heady mix that asset managers often fall prey to, but they need to be performing more responsible due diligence, according to Wood. “As asset managers, we’re paid to do our due diligence and we should do it properly,” he said.  

Stock specifics

BAT Puffed Out

Looking at some of the individual stocks that the managers have been buying recently, a common purchase across both Allan Gray and PSG has been British American Tobacco. Interestingly, both Plaut and Shaun le Roux (PSG) are lukewarm on its potential. Plaut admitted that he’d “sell it tomorrow”. Le Roux confessed they are “reluctant buyers”.

Aspen is a more divisive stock though. Kagiso holds this stock, but not PSG. Kagiso believes the beleaguered pharmaceutical giant to be cheap enough to compensate for the risks associated with it. PSG disagrees and believes the risks around the structure of its balance sheet and an aggressive management team are too great.

Lower rates could move markets

But it’s not all doom and gloom in South Africa. For Investec’s Rossouw, the biggest opportunity for the market is the potential for a reduction in local interest rates. “While our forecast is for no change to interest rates going forward, I’m convinced that if we make it past the elections, there’s enough evidence to suggest that rates should be a lot lower and this will be a very powerful catalyst”, he said. Households are hoarding cash. Lower rates could incentivise people to move their cash into higher-yielding assets. This will benefit financial markets.

Can SA come right?

SA Going into 2019

On the economic front, Kevin Lings of STANLIB also delivered a potentially upbeat message. He believes the country can pull itself out of the doldrums if we get even just one of the following three things right:

  1. Improve the ease of doing business
  2. Boost private sector housing development.
  3. Increase tourism. 

Deteriorating performance on each of these measures has contributed to our economic woes. An improvement in any factor will help lift business confidence and, in turn, economic growth. “If you want to grow this economy, just make business happy – they will do the rest,” he said.

Fixating on figures

Big Data

No investment conference would be complete without some time dedicated to the threats and opportunities posed by the current rapid technological advancement. Keeping on top of developments in the field is not an easy task, but it’s one that managers and investors can’t afford to disregard.

For Goldman Sachs’s Javier Rodriguez, harnessing the rise in the availability of big, unstructured data is becoming increasingly important, particularly as a tool to anticipate future changes in companies’ profitability. But Leonard Kruger of Allan Gray was a bit more wary. “None of us really know what to do with big data just yet”, he said. He highlighted the risk that it could contribute even further to the “tyranny of the metrics”. This, he explained, is the age-old problem of fixating purely on metrics as a tool of management to the exclusion of other contributing factors. This is especially relevant in financial markets. Investors get caught up in the increasing number of metrics available. They neglect to use their better judgment and risk losing sight of the bigger picture.

Unlocking the investment code

Good Investor

There is a lot of pessimism evident in markets at the moment. Investors negativity and fear of the future may cause them to miss out on the numerous opportunities on offer. Financial markets are inherently uncertain, but investors shouldn’t let this lead to inaction. To “unlock the investment code” and meet their financial objectives, investors need to stay active, informed and apply well-considered judgment in the current environment.


Taking steps toward your financial plan is as easy as requesting an introduction meeting with one of our advisers.

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