Wall Street not necessarily better than South African stocks – Schroders

South African investors do not need to invest in the US for good returns, as many high-quality local companies are better priced and have shown their resilience in a tough economic environment.

This is according to Stonehage Fleming’s head of equity management in South Africa, Johan Barkhuysen.

Barkhuysen said the US stock market’s S&P 500 Index ended the first quarter on a high note after reaching an all-time high in the first quarter of the year and adding $9 trillion of value, rallying 22% from the start of October last year. 

However, he said investors should not give in to ‘the fear of missing out’ because South Africa also has several world-class and well-priced opportunities.

He explained that US valuations are historically high, and many investors have mistakenly invested near the top of the bull market cycle at expensive levels, only to lose once stock price valuations return to realistic levels. 

History shows that when price-to-earnings (P/E) ratios are elevated, future earnings have been lower.

According to UBS, at a forward P/E of 21 times, the US market historically has an annualised expected 10-year return of a mere 1%. 

Meanwhile, Bloomberg data shows that the S&P 500 Index was priced at 24 times earnings in early May compared with a five-year average of 19 times.

Therefore, US companies will need to grow into these P/E ratios over the next few years to justify their elevated levels. 

In addition, while the US economy remains robust, the outlook is less clear, with credit card delinquencies rising steeply, unemployment ticking up, and interest rate cuts in the offing, but still subject to an unpredictable timeline. 

The prospect of a Donald Trump 2.0 Presidency later this year also means further macro-economic and geopolitical volatility could lie ahead.

“Against this backdrop, it’s well worth considering some of South Africa’s quality companies, whose businesses and growth prospects have benefited from their focus on innovation,” he said.

Barkhuysen used Shoprite, Capitec, and PSG Financial Services as examples of such companies. 

He explained that, relative to the US stock market, the South African investment universe is small, with limited investment opportunities. 

However, this does not mean South Africa does not have some exceptional businesses that offer attractive investment opportunities. 

In addition, due to recent challenges the domestic economy has faced – like logistical constraints and energy shortages – local businesses have experienced some of the toughest operating environments in history. 

“However, we believe that quality businesses will perform irrespective,” he said.

These companies are coming from an extremely low base, have remained profitable and even managed to grow profits notwithstanding the challenging broader macroeconomic backdrop. 

“Imagine what they can do if the economic environment were to become more favourable,” Barkhuysen said.