31 July 2021
INVESTING
Just how much value remains in value shares? MICHAEL TITLEY Business Development Fund Manager, Laurium Capital
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or the last six months or so, value shares have outperformed on a relative basis. But a recent pause in this trend has many questioning the sustainability of the growth to value rotation. For the reasons outlined below, we think the relative outperformance of the value style has further to run. In respect to relative valuations, it’s evident that value shares and indices are at historical lows relative to their growth counterparts. The question we now turn to is as follows: What might cause that gap to close? It might sound counterintuitive, but strong economic growth should set in motion a sequence of events that benefits value-style investing more so than growth-style investing. Leading economic indicators are signalling a magnitude of coming growth that’s likely to stir interest rates from their slumber. As with most recoveries, the growth is demand-led. The US consumer has built up an excess of savings well beyond their usual bank balances. Further stimulus payments, compliments of President Biden and his weighty fiscal policy, will only deepen their pockets. And once vaccines have been widely distributed, the theory
goes, it’s a good bet that those consumers will have the confidence to spend their disposable income. This is not a phenomenon unique to the US; consumers in other developed markets also have more cash to spend than usual. If these pent-up savings combine with freedom of movement, it’s the sectors that were battered by the pandemic (think hospitality, energy, travel, brick-andmortar retailers, all of which fall into the value bucket), that stand to experience the greatest earnings revivals. That’s the single most important driver needed to sustainably reverse the fortunes of value investors. The supply side of the growth equation looks equally poised to support a strong economic rebound. Inventory levels fell off a cliff during the pandemic as businesses scaled back their production. However, with new orders rushing in, US manufacturers must quickly put their people and equipment to work. That should be good for employment and capital investment, the two important prerequisites for the virtuous cycle that causes sustainable growth. With consumer demand set to rise rapidly and supply chains under pressure to meet their needs, the stage is set for higher inflation. That creates a floor for interest rates and stokes expectations that they may rise. In addition to the higher demand for materials that comes with accelerating global growth, there’s a spreading belief that US dollar strength may have reached a ceiling. That would make dollar-based commodity prices more affordable, providing further demand impetus. If the tailwinds experienced by resource companies are seen as sustainable, banks
The offshore investing themes SA investors should capitalise on BY KATHY DAVEY Investment Manager, Ashburton Investments
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ver the past five years, investors have achieved about 5% greater annualised rand returns by investing in the FTSE All World Index rather than the FTSE JSE All Share index. These higher returns have also been achieved with lower volatility of returns. It’s always a good idea to diversify your equity assets offshore to gain access to fast-growing economies, global trends and, often most importantly, some great subsectors not available on the Johannesburg
DR JAMES COOKE Director: Investments and Head: Global Equities, Ashburton Investments
Stock Exchange (JSE). The JSE All Share Index is heavily weighted to basic materials stocks such as Anglo American, which by extension means the JSE investor is exposed to China’s economic demand. Interestingly, when it comes to technology exposure, the JSE and the FTSE All World Index have similar exposure, but South Africa’s exposure is almost entirely represented by Naspers, which holds a large stake in Chinese company Tencent.
12 www.moneymarketing.co.za
Figure 1: Excess savings as a % of GDP
Source: Bloomberg
stand to benefit from the additional cashflows resource companies are producing. Value-style investing began its comeback in Q3 2020, but in relation to the damage it has absorbed over the last decade, the rotation may have only just begun. Research from Bank of America Merrill Lynch shows that when value outperforms growth, it does so for a period of about 60 months. So far, we’ve had 7 months. We believe the dynamics we’ve highlighted above have a structural, longer-term feel to them that will level the playing field between value and growth investing. And given the upside on offer from the former, we think it prudent to tilt the international exposure in our multi-asset funds towards value. We will continue to pragmatically weigh up the inherent risks to achieve the best risk-adjusted returns for our clients going forward.
Investors in the JSE may not realise just how much exposure they have to one country. The FTSE All World Index by contrast comprises a much wider mix of technology companies, many of which are exciting growth stocks such as the renowned FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (Alphabet). However, there are also many smaller highly innovative technology companies globally covering all areas of hardware, software and services. Healthcare is also underrepresented in the JSE All Share Index. Healthcare brings an important balance to any portfolio: it is inherently defensive and very well placed to benefit from ageing populations and ever-increasing longevity. People are also becoming increasingly health-conscious and tending towards greater self-medication. We also favour semi-conductor chip companies, which are largely centred in the US, Europe and Asia. There is a global shortage of semiconductor chips, partly driven by supply disruptions and behaviour shifts from the pandemic. The global lockdowns have created spiking demand for personal electronics such as laptops and cellphones. In addition, growth in digital transformation and e-commerce has driven demand for data centres. And 5G is also spurring demand for new phones; its applications are still only in their infancy. Longer term, the secular trend of digital
transformation, the Internet of Things (IoT), data centres, EV (Electric Vehicles) and autonomous vehicles, as well as the rise of artificial intelligence, will provide a strong tailwind for this part of the market. To take advantage of this trend, we have invested in South Korean Samsung Electronics, which is the company with the highest market share of semi-conductor memory and is also a manufacturer of leading-edge process chips for third parties. We have also invested in Dutch company NXP Semiconductors, which is focused on the automotive semi-conductor chip part of the market. The shift away from fossil fuel also presents a thematic investment opportunity. Over the next 20 years, global electricity consumption is forecast to grow 86%. It means ‘green’ generated electricity will have to connect to grids across the world. The rise of EV cars means commercial buildings will need to be retrofitted to enable charging capacity of far greater numbers of cars. Data centres are also very energy intensive and need to be designed in an energy-efficient way that increases the electrical content of these centres. To play in this space, we have invested in Eaton Corporation, an American multinational power management company. These themes are expected to drive prices and attract money flows for years to come. South African investors should look more broadly than the JSE to take advantage.
