Murray Winkler and Dwayne Dippenaar of Laurium Capital, one of the largest independent investment boutique managers in South Africa with a core focus on South African equity markets, share their insights into the South African equity market and where they see value for investors. As the newly appointed managers for the Nedgroup Investments Growth Fund, they also discuss the Fund’s current positioning.
Introduction to Laurium Capital
Laurium Capital’s investment philosophy is 80% fundamental analysis where they seek to identify companies whose share prices differ materially from their intrinsic valuations based on longer-term, through-the-cycle cash flows and earnings. 10% is a macro and risk overlay where they identify and take advantage of economic cycles and market trends to contribute to superior, long-term investment returns. 10% is focused on opportunistic trades where shorter-term inefficiencies present trading opportunities, often around money flows, news flows and emotions, structural inefficiencies and other special events.
Their research process focuses on three areas. From a macro and asset allocation perspective, the team conducts an economic review, looks at local and global market valuations and the expected returns and weightings from the various asset classes. When researching and analysing individual stocks, the team evaluates companies in three different ways, namely business assessment, financial analysis and valuation. Many competitors do this, but the key is how well you do it and the rigour that goes into each of these processes. The third focus area is the construction of the portfolio where the team looks at expected risk and return, factor and concentration risk, liquidity and conviction.
Despite the MSCI World Index being down about 5% in Dollars for the first six months, investors still made 15% return over the period. The ALBI made zero in Rands, the capped SWIX was down 13% while the Dollar returned 23%. The Dollar gold price was up 45% in Rands, while the Nasdaq Tech and Krane Indexes were up 58% and 39% respectively.
IT now accounts for 19% of the MSCI World Index, up 13% in Dollars for the year. Healthcare accounts for 12% of the index and was up 4%. The laggards included energy, which was down 34%, financials with a 14% weighting was down 22% and industrials with a 10% weighting was down 12.7%.
The South African equity sector saw SA resources up 9%, industrials down 4% and financials down 30.8%. The gold index returned 83% to June and has continued to perform into July. Naspers/Prosus stocks have held up the SA markets for the last five years in particular, returning 45%.
The consensus global GDP growth forecasts -4% for 2020, bouncing back to 5% in 2021. A V-shaped recovery is expected given the fiscal and monetary stimulus that has taken place, notwithstanding threats of a second wave. The US economy is forecast to shrink -5% in 2020, recovering to 4% in 2021. China is going to grow this year by 1.8% and up to 8% in 2021. Consensus for South Africa is shrinking by -7% this year, which we think is optimistic and could be closer to -10%, followed by a muted bounce back of 3% next year. The very aggressive central bank purchases account for some $6 trillion and is the wall that’s pushing the market.
Over the last nine years, the trade weighted Dollar has been very strong, appreciating by 20%. We’ve seen a weakening of the Dollar and think this will continue over the next 12-18 months. Given the negative real rates in the US, the competitive advantage of better rates in the US no longer applies. Generally, when economies rebound and recover, the Dollar tends to underperform, which is good news for resources and emerging markets as commodity prices tend to rise when the Dollar weakens.
It’s important to note that almost 75% of the ALSI is not driven by the Rand and the domestic economy. The ALSI is very concentrated with Naspers/Prosus accounting for 22.5%, BHP Group and Anglo American at just less than 20%, which is good if resources do well in the next 12-18 months. Richemont has been struggling and accounts for 7.8% with gold at 3.3%. 52% of the ALSI in South Africa is actually just five stocks. 30% of the Capped SWIX is in SA namely, Naspers/Prosus (15%), Anglo American (4.5%), FirstRand (4.4%), British American Tobacco (3.6%) and Standard Bank (3.4%).
South African equity market outlook
The forward Price-to-Earnings ratio (PE) for Laurium’s domestic index took quite a hit as we came into Covid. The PE has recovered a lot since then to about 11.5x with most of the recovery driven by downgrades and earnings as companies’ earnings were impacted by Covid. We think a normalized earnings basis in South Africa, looking out to June 2022, is a 10.3x forward PE compared to its historic average of 12.5x, which on the face of it makes South Africa look cheap. We will continue to look for companies with strong management teams and balance sheets that can trade through this period.
Laurium Capital’s Equity Strategy performance
Since inception, the Fund has outperformed both the Capped SWIX and its peers’ general equity funds. Over the shorter period year to date and one year, the Fund outperformed the Capped SWIX, but underperformed its peers on a relative basis. Over the last three months, there’s been a big bounce back as markets recovered and the Fund is up 26%, beating both its peers and the Capped SWIX.
In terms of the Fund’s risk statistics, since inception its standard deviation looks slightly higher than both its peers and the Capped SWIX. But, using the Sharpe or Sortino Ratio, which looks at the amount of excess return that’s been delivered for the risk taken on, the Fund looks better than the Capped SWIX and its peers.
One of the main drivers behind the Fund’s year-to-date performance was our overweight position in Naspers/ Prosus where we continue to be bullish. Technology and gold also performed well as have our resource stocks, which have benefitted from China’s early recovery. Detractors were driven by SA Inc including banks, property and Sasol, but we remain constructive on these stocks.
Q2 saw a good bounce back in the Fund driven by Naspers/Prosus, Sasol and the resource stocks, the latter benefitting from the weakening Dollar. Nedbank and ABSA have bounced back a bit, but still underperformed relatively although we think there’s still a lot of value in banks in the SA market.
Nedgroup Investments Growth Fund portfolio positioning
There will be some changes as we transition the portfolio. The Fund currently has 36.6% in financials (including property), 22% in consumer services, 13.4% in basic materials, 8% in industrials, 6% in technology, 5.8% in consumer goods, 5% in SA cash and money market and 3.2% in commodities. We think the Fund offers a lot of value at the moment and should show good performance going forward.