eBusiness Weekly
There are many investment opportunities around — ranging from local and international bonds offering ‘nice’ yields to a long list of forgotten shares sitting on ‘attractive’ valuations.
“Investors just need to look past the bad news. You need to separate [those] bad emotions from your investment approach,” says Peter Armitage, CEO and co-chief investment officer of Anchor Capital.
During one of Anchor’s regular updates on the state of investment markets and where to look for the best investments, he said that almost all interactions with clients and other investment professionals start off with a discussion on what SA is experiencing at the moment.
“The first 10 minutes of any conversation with investors are spent talking about investors’ anxieties. Things that are on people’s minds include the rand, Eskom, politics, failing infrastructure and Russia.
“We are realists. Investors need to realise these things are all known,” says Armitage, alluding to the fact that these knowns are reflected in the prices of particularly SA shares and that any improvement in the investment environment will give these shares a quick boost.
“Domestic bonds also offer good returns. SA bonds offer yields of around 11 percent – a very nice yield compared to inflation. An income fund currently offers investors 9,4 percent without any risk,” he adds.
“We remain positive on local bonds and alternatives, neutral on domestic equity and cash and negative on SA listed property.
“From a global perspective, we maintain our positive stance on global alternative investments [including hedge funds, protected equity structured products and physical property]. We also retain our neutral stance on global equities, government bonds, corporate credit, listed property and offshore cash.”
Armitage says Anchor is not in the “scare camp” and tells investors to take advantage of challenges.
“SA is still a country full of opportunity. There are opportunities here. Have a plan (to deal with the challenges).”
For instance, Armitage and Nolan Wapenaar, Anchor’s co-investment leader, both offer solid advice when considering the spectre of a weakening rand.
“It can be accepted that the rand depreciates at around 5 percent per annum — the difference between the SA inflation rate and that of our trading partners.
“Position yourself to benefit from this. Implement a plan and position yourself as a global citizen,” says Armitage, adding that Anchor still suggests a global investment portfolio to its clients.
Interest rates
However, he notes that it was rising interest rates rather than rand weakness that gave SA shares headwinds over the past year or two.
Wapenaar says high interest rates are always bad for investments and that, worldwide, rates have remained higher for longer than originally expected. But the worst is over. He says the “heavy lifting” has been done.
“The hiking cycle is coming to an end. US interest rates have remained higher for longer than expected, but the end is in sight. Nine months tops,” he says, guessing that 90 percent of the hiking cycle is behind us.
“Inflation in the US is declining, and interest rates will follow. It will flow through to SA.
“We estimate that 60 percent of the increase in SA interest rates can be attributed to the increase in US rates as SA interest rates had to rise to protect yields,” says Wapenaar.
“When US interest rates start to fall, SA rates will follow. (The) interest rate is likely to decrease next year.”
He notes that longer-term rates in the US are actually somewhat lower than short-term interest rates.
Wapenaar’s figures show that US bonds offer a return of 5,3 percent over three months and 5,5 percent over six, but just above 4,8 percent over two years and only 4,2 percent over five years.
“Interest rates are now more attractive than [at] any time during the last 10 years. The Federal Reserve might have a few hikes left, but it is time to lock in these high rates. The lower rates at the long end of the market are showing that interest rates are expected to decline.”
Forgotten shares
His advice is for investors to lock in the current high yields available in the bond and money markets while looking for shares that are bound to recover when interest rates start to decline.
Armitage says Anchor has been cautious of companies exposed to the local economy and stayed out of the so-called SA Inc shares.
“Local companies will remain under a lot of pressure until the electricity crisis is sorted out.
“Load shedding has done the most damage to consumer sentiment and business confidence,” he says.
“However, we reiterate that electricity supply will improve as new production from private suppliers comes on stream over the next 18 to 24 months.
“Eskom comes up in every conversation. But remember, not long ago, we were talking about the risk of Stage 8 load shedding. The reality is that we are stuck with Stages 4 to 6.
“At year-end, we expect Stages 1 and 2. Load shedding is not going to disappear in the next year or two, but it is improving,” he says.
‘Midcap candy store’
While Anchor expects local companies to continue to suffer from the effects of load shedding, the firm describes the current valuations of some local shares as a “midcap candy store”.
It notes a lot of shares with the potential to show good earnings growth over the next two years while trading at fairly forward price-earnings ratios, such as Afrimat, Capital Appreciation, Santova, Super Group, Curro, AdvTech, Master Drilling and Invicta.
Armitage says investors always seem to have to climb “an ever-present wall of worry” — which includes load shedding, climate change, inflation, SA elections, recession, a weak rand, rising interest rates, Russia, US-China trade relations and even the return of Donald Trump.
In SA, there are serious concerns about who the ANC will choose as an ally to govern after the 2024 elections, as it is clear that it will not get a majority at the polls, and corruption is also still a big worry.
“Look past the bad news,” says Armitage, venturing that all these problems are looking less serious than they did three months ago. — Moneyweb
