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Value investing amid South Africa’s economic challenges: Opportunities for Namibian Asset Managers

by editor
June 21, 2024
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This week has seen positive movements in the markets, particularly for the South African rand, reflecting traders’ confidence in the new South African government.

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On Wednesday, the JSE reached a new milestone by surpassing 81,000 points, achieving a record high on the day of the inauguration of President Ramaphosa. The rand strengthened for the eighth time in nine days, reaching a peak of 17.9273 per US$ 1.00 dollar. Additionally, the yield on South Africa’s 2035 local-currency bonds dropped to 11.23%, marking its lowest closing level since April 2023.

These securities have been the top performers among developing nations this month, showing a return of 9.3% in dollar terms. However, there was a pull-back on the JSE on Thursday as market participants took profits from the rally with heightened cautiousness, with eyes locked on the political developments of the country.

Despite a somewhat positive week in the markets, these developments are unlikely to alleviate the ongoing economic challenges, leaving systematic risks still in place. Systematic risk significantly impacts portfolios because it involves factors that asset managers cannot control, such as interest rates, GDP growth, and supply shocks. This risk is often measured by how returns on investments move in relation to overall market returns.

One of the key systematic risks is GDP growth. Looking at South Africa’s first quarter 2024 data from StatsSA, the economy had a challenging start to the year with a 0.1% quarter-on-quarter contraction in gross domestic product (GDP). Weakness in manufacturing, mining, and construction sectors contributed to the decline in production, while demand across all sectors also saw a decrease.

This subdued economic performance is expected to persist due to ongoing structural issues that hinder growth. Over the past decade, South Africa’s GDP growth has typically ranged between 1% to 1.8% annually. Unless structural challenges such as those with Transnet, Eskom, and water supply are addressed, economic growth is likely to remain subdued.

During a panel discussion at the World Economic Forum (WEF) Annual Meeting in Davos earlier this year, Finance Minister Enoch Godongwana emphasized the need for structural reforms to address these issues.

Where does this leave asset managers with GIPF mandates invested in South Africa’s equity market? How can they aim for superior returns in an economy expecting weaker growth in the future?

This challenge is significant because the funds they manage often represent the hard-earned pension savings of Namibian workers, which makes their responsibility crucial.

Outperforming the benchmark is not just about financial success; it’s about safeguarding and growing the wealth of every hardworking Namibian. As I write this late into the night (Friday, 1:48am), I’ve been researching tirelessly on how asset managers can navigate these challenging times.

Asset managers may not control systematic risks (market-risk), but they do have control over unsystematic risks (firm-specific risk) that affect their portfolios. Total portfolio risk includes both systematic and unsystematic risks, with the latter being manageable through diversification. Utilizing models like the Fama and French 3-factor model or other strategies can make a significant difference in managing these risks.

To succeed in these markets, it’s crucial to invest in high-quality companies with intrinsic value, echoing principles from Benjamin Graham’s ‘The Intelligent Investor’. While the ideal time to invest in such companies may have been yesterday, there are still opportunities available. Some companies offer low-beta opportunities that can unlock value even in a slow-growing economy.

I’ve noticed companies with high tangible net asset value on their balance sheets, yet their share prices are trading much lower. Alongside this trend, shareholders are increasingly deciding to separate some subsidiaries to unlock value, a behaviour I expect to continue in the markets. This presents an opportunity for asset managers to position themselves strategically.

For instance, Transaction Capital and WeBuyCars, RCL Foods and Rainbow Chicken, and Pick n Pay and Boxers have already made such moves, and we anticipate more to follow. One notable example is Fortress, a major shareholder in Nepi Rockcastle, which I believe still holds significant value to be unlocked. Another promising prospect is Hosken Consolidated Investments, expected to generate cash flow from the Venus-1 oil-fields off Namibia’s coast starting in 2029, potentially benefiting shareholders greatly.

Companies with strong fundamentals such as sustainable revenue growth, high return on equity, effective capital expenditure management, and visionary leadership—like FirstRand, Dischem, Lewis, and Shoprite—also offer opportunities to enhance portfolio returns. However, it’s crucial to approach with caution. While many JSE-listed companies may appear undervalued, some could be value traps or might take time for their true worth to be reflected in the market.

Finally, as Nathan Mayer Rothschild wisely said, “It takes a lot of courage and caution to build a great fortune; and once you have it, it takes ten times as much to maintain it.” Therefore, I firmly believe that the ability of portfolio managers to select great stocks will be crucial not only for preserving the entrusted wealth but also for its growth.

It’s essential to note that being an asset manager involves more than just focusing on stocks; it also encompasses other investment vehicles. In our next discussion, we will explore into fixed income securities, exploring opportunities in the Namibian and South African bond markets to enhance investment returns.

*Arney is a young investment professional with over 3 years of experience in economics and finance, specializing in fixed income and equity research analysis. He can be reached at arneytjaro@gmail.com.

The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of any associated organization, employer, or company.

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