Amazing: The JSE is now up for the year 2020

As investors remain wary of the sustainability of the recovery, South Africa’s money managers are trying to navigate the fine line between controlling ongoing risks and taking advantage of the significant opportunities that the volatility has presented to them. 

In an investment note, Lara Dalmeyer, portfolio manager at Abax Investments, says global governments and central banks have provided unprecedented levels of fiscal and monetary support, which has allowed markets to rally despite poor economic fundamentals.

As a fundamental investor, Abax “cannot justify purchasing expensive and non-sustainable assets”, but at the same time, cannot ignore macro-dynamics either, Dalmeyer says.

From an asset allocation point of view, Abax’s view “is that one should guard against being too bearish, but at the same time look for assets within each asset class that can weather further depressed economic conditions, and are well placed to benefit from growth once there is greater economic recovery”.

Investors should also be aware that, in some cases, the coronavirus crisis has led to changes in the relative risk profiles of various asset classes.

The risk profile of local bonds is fundamentally higher than it has ever been, according to Dalmeyer, but local equities aren’t, despite the volatility. With local bonds, “for the first time, we are questioning the creditworthiness of our sovereign”. 

Dalmeyer warns that the impact of coronavirus “will be extremely challenging for the South African economy, and the government has limited fiscal room to help support business and consumers”. 

She says that emerging markets “should benefit from the search for yield”. 

While the structural issues South Africa is facing may limit the potential upside, investors should remember that not all JSE-listed companies are affected to the same extent, and good portfolio managers are finding these anomalies.

Abax’s perspective is that markets could push higher due to ever-increasing policy stimulus or rerate down again, due to the massive disconnect between market levels and fundamentals.

A lot of this hyperactivity has washed over to the local landscape and has muddied the waters of pure price discovery.

https://www.dailymaverick.co.za/article/2020-06-23-should-the-rising-stock-market-amid-the-chaos-raise-suspicions/

The S&P 500 index, which represents almost half of the global stock market, is now only 9% away from its all-time high reached at the beginning of the year, and the JSE has now regained all of its 2020 losses.

David Shapiro, deputy chairman at Sasfin Securities, says the spillover from abroad is only half the story, and it is mostly the US tech stocks that got us there. 

“For valid reasons, of course, as the tech companies allowed us to survive the lockdown,” he says.

If you look at the JSE, most of the gains came from Prosus and Naspers, which make up 35% of the local market, and have logged respective gains of over 35% and 60% for the year. The rest of the muscle was provided by the gold outfits. GoldFields was up 120%, AngloGold 55% and Sibanye-Stillwater 36% for the year-to-date.

“If you take out miners and tech, the local market is an absolute disaster,” says Shapiro. “If you want a view of the real economy have a look at the share performances of the hospitality and property counters and the banks.” 

City Lodge, Tsogo and Sun International have all lost stock value in the region of 60% this year. Nedbank is down 50%, Investec 45% and even the market darling, Capitec, has fallen by 40%.

Peter Armitage, CEO of Anchor Capital, says what makes the local market’s moves even more misleading is that the rand has gone from R14 to the dollar at the beginning of the year to around R17.50/$1 so rand-hedge stocks like Prosus look even more valuable. 

He says if the rumours around a possible Covid-19 vaccine were the reason for the recent recovery, travel and airline sectors would have jumped on the news, which they have not. Shapiro agrees and says it is just one of the many market theories out there.

Armitage says the reams of rights issues show which companies are most under pressure, like Foschini, City Lodge and Sun International. “They would not have survived without  capital injections from their shareholders.” 

He says the property sector has also changed forever. 

“After years of ridiculous shopping centre growth,” he says, the shift is moving to logistics and warehousing. “Amazon, for example, is looking into leasing more storage space to make up for the boom in e-commerce.”

Office rentals are also bound to take on a different shape, he says, as landlords will no longer be able to rely on fixed rental rates or occupancy and will probably have to move to a model linked to corporate and economic activity.

He says what is bound to happen as we move out of Covid-territory is that the tech stocks will continue their dominance, and the drive into gold as a safe-haven asset will disappear. 

“When it unwinds, it does so very fast,” he says. “Iron and copper prices are holding up surprisingly well and the BHPs and Anglos of the world will probably hold the fort.”

Key calls for August, according to Capital Economics, is that South Africa is likely to suffer particularly weak recoveries over the coming quarters, especially as officials have struggled to bring the virus under control. 

“In South Africa, we expect that GDP will contract by 11% this year, which puts us at the bottom of the consensus range. If we’re right on the depth of the downturn and that inflation will stay low, the Reserve Bank is likely to cut interest rates further.”

Capital Economics says South Africa won’t face the same kind of immediate financing problems as many of the smaller economies in the region, but public debt ratios are on unsustainable upwards trajectories.

“Governments will probably struggle to push through austerity, prompting a shift towards financial repression in South Africa,” it adds. DM/BM