Local equities: Opportunities for the patient investor?

Eben Louw, CFA: Portfolio Manager, Naviga Solutions

Over the past few years, South African (SA) equities have seen significant foreign outflows and extreme bearish sentiment from the global investment community. This was amid an environment that supported a shift away from risky markets, and various local headwinds or own-goals. The 2023 Alexander Forbes Large Manager Watch Annual Survey showed that even local asset managers have significantly down-weighted their allocation to SA equities over the past 5 years, holding just under 40% compared to the long-term average of 55%.

This bearish sentiment and continued outflows have resulted in depressed valuations. Based on a forward price-to-earnings ratio, the JSE is currently trading almost 30% cheaper than the level it typically trades at compared to emerging market peers, and close to 40% cheaper than the typical level compared to global equities (MSCI World). Your investment entry point i.e., the price you pay, is one of the most important drivers of future returns. Therefore, the current discounted valuations increase the likelihood of outsized returns in the future.

While short-term drivers may look uncertain, small catalysts or shifts in sentiment can result in unlocking significant value from local equities. This includes the continued improvement and stability in power generation, improvements at Transnet and increased volumes through port and railway services, and even just fair and free elections on 29 May 2024. Furthermore, improving global growth, a global interest rate cutting cycle, a potential shift to emerging markets, and a weaker US dollar are just a few likely global factors that can significantly uplift local equities.

For the patient investor, local equities offer strong return potential because of its attractive valuations and a wide range of potential catalysts. While you wait, you will also have the benefit of capturing dividend yields of between 5 and 10% from high-quality companies. By partnering with the experts, you will ensure that your portfolio makes the most of local equities opportunities.