A few days ago, a team from a local asset management firm came to visit us, to give us an update on their current thinking. We regularly have these meetings and presentations with respected asset managers to keep abreast of their view on where the market is going.

This one was quite surprising, relative to most others we’ve had in the past 15 months, and we thought we’d share their interesting take with you:

The general view for the past few years has been that the SA Incorporated is overpriced and is due a correction. Of course with hindsight, we can see that it continued to give over 20% per annum. Since May 2013, when Bernanke announced that tapering would come to an end, money has been taken out of emerging markets. In fact, R190 billion has flowed into emerging markets globally and it was reported that R130 billion has already been removed.

Many commentators are blaming the weak rand on local issues like strikes and elections. However, these are not particularly important events at the moment. International managers (who, for example, are managing R100 billion funds in New York or London) had strategically allocated 10% to emerging markets up until last year. Now, they have decided to allocate that money to developed markets. This has had a knock on effect weakening our currency as the funds are withdrawn from the market.

The asset managers felt that R10.50 to the dollar was a good rate. Their firm was hoping to see a bit more of a sell-off in the short term, and then get in to buy with a three-year view. They pointed out that if you removed Naspers on a Price Earnings ratio (PE) of 70, SAB on 26 and BAT on 28 from the SWIX index, then South Africa has a very attractive forward PE ratios of around 14. They pointed out that Woolies is on a dividend yield looking forward for 2 years of 8% and Truworths on 6%. They are not as negative on the SA consumer as the rest of their competitors. Banks are on current PE’s of 12 and current DY of 4%.

They reiterated their positivity for offshore equity. Many global companies are sitting on huge amounts of cash. For example, Apple has $140 billion that it does not know what to do with!

Three very important observations they made were:

  • The JSE always goes up if Wall Street goes up.
  • All SA managers have already used their 25% offshore allowance and will have to buy SA equity with new inflows thereby driving the SA market upwards.
  • Nobody is talking about how much money they’ve made from their equity investments. Most investors are talking about how expensive the markets are. When you can sense a massive crash or sell-off coming, it is generally a time when people are boasting about their returns. There is not much of this taking place at the moment.
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