PSG Asset Management head of Research Kevin Cousins believes that elevated inflation and recessionary fears present attractive opportunities to South African investors in mid-cap equities and supply-side commodities.
The significant uncertainty created by rampant inflation, recessionary fears, and geopolitical tensions has clouded the near-term global outlook.
The global response has been to retreat to safe assets and preserve capital until the storm blows over.
However, Cousins says investors should be mindful not to be discouraged by the current volatility.
“Investors should look past the noise of the simple narratives and take a longer-term view based on more enduring factors,” he said.
Cousins added that some assets that historically acted as safe havens could amplify risk over the next few years. But investors that maintain and build exposure to carefully selected equities are likely to be well rewarded for weathering near-term volatility.
Opportunity in South African mid-cap companies
Inflation in the US, UK and Europe is back at levels last seen in the early 1980s and 1970s. SA is also experiencing elevated inflation, but its rate is below that of the US, UK and Western Europe.
At current inflation levels, South African bondholders will still make a respectable return, but inflation is priced to get worse in South Africa.
It means that long-term bondholders are likely to suffer losses.
Despite this, Cousins said that South Africa should remain a resilient market.
“As a large commodity exporter with ample labour, SA is likely to be a resilient market in this environment, as history shows that SA’s inflation rate tends to be curtailed by a strong currency,” he said.
“The obvious equity beneficiaries are “real assets” sectors such as materials, energy, shipping and capital equipment,” he added.
However, Cousins noted that significant foreign capital flows are likely, meaning lower yields and domestic companies will perform well. It could make selected South African mid-caps the pick of the bunch.
Attractive value in supply-side sectors
The likelihood of a recession, especially in the US, has dominated the financial media space.
The rapid increase in rates in the US has already impacted the economy, leading economic indicators have shown a sharp slowdown in activity, and yield curves have inverted.
Financial markets are now explicitly pricing in an imminent recession.
Cousins believes the impacts of a probable recession are slightly exaggerated. It may be influenced by the market’s previous experiences of severe recessions like the global financial crisis in 2008 and the global lockdown in 2020.
“The significant probability that the next recession is mild – more like 2001 than 2008 – is not appreciated by the market consensus, and economically sensitive sectors have been aggressively sold off,” he said.
“There are attractive opportunities in equities, such as supply-side sectors like materials and energy,” he added.
Cousins also said that South African equities are attractively valued now, and remaining invested makes sense. It is because developed market bonds are likely to be sources of risk rather than safe havens, given the stagflationary environment.