The Balanced Perspective: The Great Rotation

By Nedgroup Investments

In this month’s edition of the Balanced Perspective, we look to go behind the trends we are witnessing and gain further perspective of both the global and local markets’ response to the phenomenon. 

To watch a recording of this webinar go here.

Growth stocks have dominated the market in the last 10 years and recently we have seen the value stocks close some of that gap from a valuation point of view. What can we attribute this to?

The move in some of the value stocks that we’ve seen recently can be attributed to the announcement of a Covid-19 vaccine alongside the certainty of a pathway back to normalcy. These developments have unlocked deeply distressed valuations that some of the economically sensitive shares had been priced at, creating a knee jerk reaction to the upside.

The other factor is the level of stimulus and support that governments have injected into their economies, both through loose monetary policy and unprecedented levels of fiscal stimulus,  which we believe will provide a runway for a robust recovery. Investors will get excited about these value or economically sensitive stocks that should start to enjoy earnings recoveries. And the opportunity for investors to buy in to these value/cyclically exposed companies remains on the table. 

Having said that, there are two sectors being disintermediated in the classic value category. The first sector is banks, by the new challenger banks and online payments technology and so we see a derating in some of those companies. And then the energy companies as well with the world starting to pivot away from fossil fuels, those businesses have not been able to grow earnings to the extent of  others.

What JSE sectors would one regard as value and growth from a South African perspective? 

The reality is that the growth picking from a South African perspective is relatively limited. Typically, you would look at companies that have been able to sustainably grow their earnings despite the cycle. The list in South Africa is pretty short and would include businesses such as Naspers, Clicks, Transaction capital, and BidCorp – the problem in South Africa is that we don’t have a big tech sector comparable to what we see overseas. 

Which counters have benefited from the release of the lockdown in terms of the rotation that we are seeing into value? And which sectors do you and your team believe still have value to unlock? 

Stocks which have done well are many of the SA Inc names post the November vaccine announcement, which experienced very sharp re-ratings. So, the first sharp leg of the recovery happened in the 3 months thereafter, where we saw circa 50% upward movements from those low levels. Of late we have seen SA companies delivering better than expected earnings outcomes across the board, as a function of decent cost management.. We have also seen a much sharper recovery in the economy than anticipated, which talks to the stronger and faster global recovery powering the commodity cycle, which our primary sector has really benefitted from. Coupled with the fact that we have had an outstanding agricultural season despite Covid.

The have been very clear winners and losers coming out of Covid. Companies in the services sector and tourism have taken strain. And then there are some companies that have benefitted from Covid because of the way in which consumers have changed their behaviour. Examples of these include data/mobile companies who have benefitted more, while clothing retailers have lost market share in formal or workwear as people are working from home. Other companies who have benefitted from the behavioural changes include Cashbuild and Italtile, as people renovate their homes to accommodate home offices, using money that they would have perhaps spent on travel. 

While there have been lots of winners and losers amid the changing environment, we believe there are lots of opportunities in the South African space, particularly in the healthcare and financial services sector. And in a sea where value stocks are hard to find or expensive, South Africa stands out fairly attractively priced with a prospect of decent earnings growth.