How we balance the upside-downside risk in South African equities

We often write about large individual equity positions in our portfolios, but this quarter, Duncan Artus focuses on the opportunities and risks in “SA Inc” – the local domestic shares we own that earn a material portion of their profits in South Africa.

SA Inc shares, such as retailers, banks and property REITs, are currently top of mind for many investors. This is unsurprising – not only because the recent election caused much uncertainty, but also because their share prices are depressed when measured in US dollars and valuations are low relative to history, as shown in Graph 1, which reflects the forward price-to-earnings (P/E) ratio for the market.

How did we get here?
The cumulative effect of years of anaemic economic growth and poor governance of the country, combined with the recent political uncertainty, has pushed up the cost of capital, or required rate of return, via higher government long-bond yields. This has stifled investment (projects need to have high prospective returns to be approved) and resulted in low valuations being placed on South African companies' earnings streams. This is simply the mathematics of it. This trend was recently exacerbated by investors unwilling to take on risk, waiting on the sidelines until the outcome of the election was known.

Read full article on: https://www.allangray.co.za/latest-insights/local-investing/how-we-balance-the-upside-downside-risk-in-south-african-equities/

August 14 2024 By Duncan Artus - Allan Gray