The best investment returns are born in times of fear and uncertainty, says Mikhail Motala, assistant fund manager at PSG Asset Management, and there is a prevailing negative narrative on South Africa.
Business confidence is close to 40-year lows and recent financial results commentary from JSE-listed companies reveals just how tough the economic environment is. SA Inc businesses are experiencing some of their most testing times. The FTSE/JSE Mid Cap Index, which serves as a good proxy for SA Inc companies, is trading at lows last seen in 2002.
“Valuations closely follow business confidence, as both are proxies for investor sentiment,” Motala says. “Depressed valuations signal that the market has very low expectations for future earnings growth. “It is therefore not despite but because of the tough economic environment that local mid-cap shares present attractive opportunities. Many of the fears about South Africa’s economic woes appear to be priced into these shares. “So even if economic headwinds persist for longer than expected, shareholders can still expect to make decent returns. “If, however, a ‘normal’ cycle unfolds and some of the headwinds abate, the resultant earnings recovery could be dramatic.
“In this scenario, shareholder returns could be highly attractive.”