Load-shedding relief could boost JSE

South African equities are heavily undervalued and provide an enticing opportunity for investors. However, asset managers are waiting for a catalyst to unlock this value, which may be found in Eskom’s improved performance. 

This is feedback from the portfolio manager of Ninety One’s Value Fund, John Biccard, who told Business Day TV that reduced load-shedding could spark a period of outperformance for local equities. 

Local equities are attractively valued due to the large amount of bad news priced into the prospects of South African companies. 

This is when value investors, such as Biccard, become interested in buying shares, as the potential upside significantly outweighs the risk of a further downturn. 

South African equities are currently trading near all-time lows in terms of their valuations relative to their emerging market peers and stocks in more developed markets. 

This is coupled with extremely negative positioning in the South African market, with foreign investors selling R710 billion worth of South African equities over the last seven years. 

After the National Treasury’s decision to allow pension funds to invest up to 45% offshore, local investors have joined the exodus. 

The average Regulation 28-compliant fund now holds just 39% of South African equities, compared to nearly 70% 18 years ago.

Biccard said this has made local equities attractive to him, and his fund has been buying up local equities. 

“Our entire domestic equity positioning in the Ninety One Value Fund — outside of 35% offshore and 10% in gold shares — is invested in ‘SA Inc.’”

Biccard said it is key to look for what could be the catalyst to unlock this value, with large upside possible once such a catalyst occurs. 

Load-shedding is an example of a catalyst that boosts market returns and results in money flooding into local equities. 

“You have got very low valuations in part due to load-shedding. The South African economy has been murdered for two years because of load-shedding,” Biccard said. 

Ninety One estimates that load-shedding alone has taken off around 4% of South Africa’s annual GDP. 

If load-shedding could be significantly reduced for an extended period, the local economy could grow by as much as 3% per annum. 

This would boost the earnings of companies with local operations and sharply reduce the amount of money they have to spend to limit the impact of load-shedding. 

Biccard said there are some clear signs that things are moving in the right direction with regard to load-shedding, with the electricity sector being opened up to private players and a more proactive approach from government. 

“There are definite signs in the South African economy that things are getting better. They are a long way from perfect, but things are getting less bad. That is a very powerful thing.”