Capital Gain

The outlook for SA Inc in 2021

Published: in FINANCE by .

South African resources and commodity stocks performed spectacularly in 2020. Image: Supplied


As well as equities performed after the Covid bounce in 2020, global equities can look forward to further positive gains in 2021, says Iain Power, chief investment officer at Truffle Asset Management, which manages the Nedgroup Investments Balanced Fund and the Nedgroup Investments Managed Fund.

The Nedgroup Investments Balanced Fund has delivered annualised returns of 11.6% since its inception in 2011, placing it well ahead of its peers. It also delivered a return of 11.5% over one year.

South African resources and commodity stocks performed spectacularly in 2020, particularly the likes of Sibanye-Stillwater and Impala Platinum.

Power explains that the Balanced Fund bought Impala at R18 a share. It now trades at R219 – making it a “ten-bagger” for the fund. Rand hedge stocks such as Naspers and Prosus have also been clear winners, which accounts for their heavy weighting in the fund. It was the same with Sasol, which tanked at the start of the Covid crisis in early 2020. Power says the fund picked up Sasol at bargain prices and has since seen capital appreciation of more than four times the purchase price.

Source: Nedgroup Investments

“Platinum group metals have done well for us over the last three years, as well as diversified miners,” says Power.” We’ve started taking some profits on these stocks, though they still look attractive on the basis of cash flow yields.”

There are pockets of opportunity in SA Inc, but for the broad rump of companies, much depends on government’s response to the fiscal crisis looming ahead of it. The fund remains underweight SA Inc companies because of the structural issues the country is facing – notably the need to cut spending and promote growth.

As Power said in a presentation to investors this week: “Our debt is too high, as is our spending. Unless we fix that, a financial crisis is what awaits us. As our [national debt] interest cost grows, it crowds out other more productive investments.”

While SA long bonds with yields of around 11% might look attractive, few are likely to be willing to hold these to maturity, given the uncertainties facing the country.

Global outlook

On the global front, the outlook for equities remains positive. The world has seen unprecedented fiscal stimulus, flanked by dovish central bank policies, placing few obstacles in the way of further equity price growth in 2021. Nor are there any real threats of interest rate increases before 2023.

“This is good for risk assets,” says Power. “In 2021 we can expect earnings to recover from their lows in the second half of 2020. One fact that will drive this is the rollout of the [Covid] vaccination process, which will start to gain traction into 2022.

“China is leading the global economic recovery, which is good for commodity demand. This has certainly helped resource countries like SA.”

The Nedgroup Investments Balanced Fund has tilted its weightings to companies with an exposure to a cyclical economic recovery, but remains cautious about SA Inc, as the following table shows:

Source: Nedgroup Investments

Power explains that before settling on offshore investment ideas, Truffle uses a filtering process to separate out companies offering good valuations with decent returns on invested capital through the economic cycle. These companies should also demonstrate strong cash generation and be attractively priced.

The reason for including a substantial exposure to exchange-traded funds (ETFs) in the fund is the discount this offers to more traditional forms of exposure.

“We’re going into a global economic recovery, so we will see a good recovery in equities.”

The fund also took a position in SA bank US dollar-denominated debt, which was bought in at yields of 6% to 7%. These yields fell to 4% to 4.5%, delivering strong capital appreciation, not unlike that seen in equity markets but with excellent interest yields.

The following table shows the fund’s asset allocation: underweight cash, financial services and SA industrials, and overweight Naspers and Prosus, PGMs and diversified resources.

Source: Nedgroup Investments

Brought to you by Nedgroup Investments.



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