Stock pickers set for a good year – PSG 

PSG Asset Management listed some of the often-overlooked factors that can potentially impact future returns that stock-pickers are well-positioned to exploit.

PSG Asset Management fund manager Mikhail Motala said many investors conflate South Africa’s weak economic environment with stock market returns. 

“The broader economic context undoubtedly deserves consideration, but it should, in our view, only be one part of the stock selection process,” he said.

The opportunity for stock pickers lies in understanding when the economy becomes a prohibitive factor to investment and when there are aspects the market might overlook due to its reliance on the popular narrative. 

Therefore, there are opportunities in South Africa that stock pickers are well-positioned to exploit. 

“We believe this effect is further amplified where stock picking is coupled with a focus on an appropriate entry price into the investment,” he said.

Below, Motala highlighted some of the often-overlooked factors that can have a material impact on future returns.

The economy is not one homogenous entity

Motala said that while focusing on headline factors may create the impression that the economy is one homogenous entity, this is untrue. 

He said it is possible to see pockets of growth within a depressed economic environment. 

A recent local example is the boom in the travel and tourism sector after the Covid-19 pandemic, as pent-up demand was released. 

This has translated into exceptional revenue growth from companies that operate in these sectors, even as the South African economy has broadly languished.

“A tough economic climate undoubtedly presents a management challenge – and this is precisely what gives stock pickers the edge,” Motala explained. 

“Tough economic conditions often lead to the demise of poorly managed companies, creating supply and demand imbalances as the competition falls away.” 

He used the example of South Africa’s construction industry. 

In 2011, there were eight large, listed construction companies sharing the revenue ‘pie’. While the size of the pie has shrunk, it is now divided between only two listed companies – WBHO and Raubex.

Due to this, the capacity of the construction industry has fallen by 60% over the last decade.

Superior strategies win market share

Motala said investors should never forget that a company’s share price is influenced by a whole host of factors, including its strategy, target market and management acumen.

Notably, all of these factors are at least partially under management’s control, even if the broader environment is not. 

He said this can clearly be seen in the market share swings South Africans have seen playing out in the food retail environment as Shoprite has become the clear market leader compared with Pick n Pay, Woolworths and Spar.

Management can create value via corporate action

Certain companies are laden with opportunities to unlock value via corporate action, irrespective of the prevailing economic environment, Motala said. 

A recent example is the action taken at Remgro, which is the quintessential investment holding company and a conglomerate with exposure to many sectors of the local economy. 

Faced with a share price that reflected a wide discount to the value of its underlying net asset value, Remgro created value, especially from 2020 to late 2023, by inter alia unbundling some of its banking and Grindrod holdings, selling and merging assets and buying back shares.

“Buying back shares can be a smart capital allocation move that leads to increased earnings per share growth even in a tough environment,” he said. 

“In fact, the tough environment often creates depressed share prices and hence the opportunity to do buybacks.”

Follow the cash flow

Many locally listed companies derive a substantial portion of their revenue from other countries and, therefore, in currencies other than the rand. 

Therefore, while their share prices may suffer from the association with the SA Inc label, their earnings may prove highly robust despite the tough local economic climate.

This is because their revenue from sources external to South Africa is not impacted by the local economic malaise. 

Examples include Supergroup, AECI, Discovery, and Standard Bank. 

“Taking a closer look at Supergroup, we note that it trades on a PE ratio of six times despite approximately 60% of its market capitalisation comprising its investment in the Australian-listed SG Fleet,” he said.

Avoid the value traps

Motala quoted Warren Buffett as saying, “Only when the tide goes out do you discover who’s been swimming naked.” 

“In a challenging environment, avoiding value traps can be as important as selecting the overlooked gems,” Motala said. 

“Active stock pickers can add value by avoiding exposure to failures and value traps.”

He explained that looking beyond a constrained local environment, there is scope for stock pickers globally.

“Add to this the current unwinding of imbalances we are seeing in global markets, and we believe stock pickers are likely to enjoy a boon in all areas,” he said. 

“Concentration levels in globally significant indices, like the S&P, in particular, have soared to new levels over the past few years, delivering a period of ‘easy returns’ for index trackers and those who unquestioningly hopped aboard the ‘big tech’ bandwagon.” 

However, he believes these imbalances are in the process of reversing.

He explained that the environment may soon become more challenging for passive investors and others who rely on the recent past to inform their investment decision-making, while it is likely to benefit fundamental stock pickers. 

“Thus, looking at both the local and global environment, we believe that stock pickers are well poised to add value to client portfolios going forward,” he said.


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