Equities look expensive, but appealing valuations make a positive case for listed property
Despite improving political momentum and policy clarity, if below-par growth continues to characterise the economy, SA risks more of the same in terms of falling short of fulfilling its not insignificant investment potential.
According to Bastian Teichgreeber, Portfolio Manager at Prescient Investment Management, South Africa’s escape from another sovereign rating downgrade to junk status bought some time to implement much-needed political change and introduce an advanced level of policy certainty on which investors can base informed decisions.
In the long-term, however, the country needs to generate competitive economic growth to turn around its investment story on a sustainable basis.
“We expect that growth will come through, not only because South Africa is finally doing the right things, but because the country’s economic prospects are highly correlated with international growth – which is currently characterised by a synchronised global upswing.
“However, while global growth is expected to approximate 3.5% this year, the expectation for South Africa is somewhat lower at around 2%. We believe that growth of this order is achievable given that a lot of economic data has already started turning. Business confidence, for example, recently jumped to the three-year high. While this was from a low base, with indicators, direction is more important than the level.”
But Teichgreeber added that he’s hesitant about the stock market, which is inherently expensive against a background of tightening global monetary policy. He said:
“The global economy has entered the later stages of the current cycle, making a slowdown inevitable. For the investor in South African assets, it may be too early to de-risk completely.”
Although lower interest rates in the wake of falling inflation will make domestic bonds pricier, Teichgreeber says they remain attractive due to the real yields on offer. This is especially the case in a global context because most developed economies still have negative real interest rates.
By comparison, real yields of 3% or 4% are available from the domestic bond market, leading to fund inflows that support the rand.
However, the downside for bonds lies in the inevitable rise in global yields and the risk this will pose for the South African bond market. It is for this reason that Teichgreeber is also neutral on SA bonds.
One sector he’s more bullish about is listed property. Negative press on the land expropriation issue is amongst the factors that have impacted local prices, while there’s been a sell-off of property globally, triggered by higher interest rates. Teichgreeber says:
“Together, the stronger economy, lower refinancing costs as domestic interest rates come down and attractive valuations make a positive case for listed property.”
Prescient Investment Management (Pty) Ltd, is an authorised financial services provider (FSP 612). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, contact Prescient.
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