Allan Gray backs these companies to beat South Africa’s problems 

Allan Gray

Allan Gray’s balanced fund is heavily invested in ‘self-help’ South African companies that can withstand periods of volatility and economic hardship, such as Standard Bank, Remgro, Woolworths, and Tiger Brands. 

In a research note, portfolio manager Jithen Pillay and business analyst Matthew Patterson outlined their investment strategies during a period of elevated uncertainty in South Africa. 

While investing is fundamentally a game of skill, macroeconomic factors, geopolitical events, and other unforeseen incidents introduce an element of chance into the equation, particularly over the short term.

2024 is a year of heightened uncertainty, exacerbated by elections at home and abroad and ongoing conflicts in Africa, the Middle East and Europe. 

Dealing with the uncomfortable period of uncertainty following the outcome of our national elections could significantly affect investment performance. 

The decline in support for the ANC has ushered in an era of coalition politics at a national level. While this shift towards coalition politics can be seen as a sign of our democracy’s maturation, it also brings unpredictability. 

The results of the ongoing negotiations could significantly reshape many policies, impacting companies in various ways.

This uncertainty compounds the effect of inflation and interest rates that will be higher for longer, particularly in developed markets. 

Pillay and Patterson said South Africa’s stagnant economy makes it extremely vulnerable to external shocks and susceptible to interest rate changes in other parts of the world. 

Many South African companies appear cheap on a headline level, as seen in the graph below. It shows the price-to-earnings ratio of the FTSE/JSE Mid Cap Index, a proxy for companies mostly exposed to South Africa. 

However, this comes with a warning. The real earnings of these companies, on average, have struggled to grow over the last decade owing to sluggish revenue growth and rising costs

How to invest in this environment

Pillay and Patterson said that given the heightened uncertainty and the difficult environment, which have the potential to deliver binary outcomes, 2024 is a year to minimise risk and preserve capital.  

Allan Gray has positioned its portfolios defensively for a wide range of potential outcomes, as shown in the graph at the end of the article, which uses the Allan Gray Balanced Fund’s positioning as an example.

Just over one-third of the portfolio is invested directly offshore, and Orbis manages the majority of it. 

One-quarter of the portfolio is invested in local businesses with minimal exposure to the South African economy, such as packaging and paper group Mondi, British American Tobacco, and brewer AB InBev. 

The asset manager favours precious metals and selects precious metal miners because it believes they behave differently from the rest of the market in times of crisis.

They also favour South African “self-help” companies, which they believe have internal levers to pull to improve their economies, even if the local economy is weak. 

Examples here include Woolworths, Standard Bank, Remgro, and Tiger Brands. 

There are also a few local companies we believe are too cheap to ignore, where things only need to go slightly better for investors to realise decent returns. 

However, Pillay and Patterson warned that selectivity is crucial, as not all companies in this category are likely to emerge as winners.  

A good example in this category is hospitality. An investor can buy the market value of the JSE’s entire listed hospitality sector for US$1.7 billion (R32 billion) – less than the price tag of a single US hotel, the Waldorf Astoria New York, which sold for nearly US$2bn in 2014. 

Interestingly, Allan Gray prefers local cash over government long bonds. They argued that at a 9% yield, the highest in 14 years, local cash today delivers a respectable real yield and provides optionality should buying opportunities present themselves.