The market is presenting rare opportunities for those who can ride the storm – PSG
Sep 19 2019 07:59
Given the prolonged and heightened uncertainty investors are currently facing, it’s useful to take a step back and re-evaluate the rare opportunity current conditions are presenting, according to Anet Ahern, CEO at PSG Asset Management.
According to the Association for Savings and Investment South Africa (Asisa), investors continue to favour the perceived safety of interest-bearing portfolios.
Ahern says this is not surprising given the market volatility and political uncertainty over the past year. She explains that the premise of investing is simple: buy low, sell high and, by doing so, earn an investment return.
Starting valuations are, therefore, critical to long-term investment outcomes
In practice, however, it’s far more difficult. This is because it is hard for people to set aside their emotions as investors.
“This applies both to buying when security prices are low due to pervasive pessimism and to selling when markets are rising, when we’re tempted to hold out for even greater gains,” she says.
“In fact, most investors end up doing the exact opposite: they exit their investments at market lows in a bid for safety and reinvest once markets have already run. Not only does this crystallise losses, but it also means missing out on market recoveries.”
Statistics released by Asisa for the quarter and year ended June 2019 show that South African interest-bearing portfolios attracted the bulk of net annual industry inflows, followed by money market portfolios. South African multi asset income portfolios were also popular with investors.
On the flipside, equities have lost much of their appeal, with the South African equity – general category – recording net outflows.
“As we have noted over recent months, markets globally continue to be characterised by wide divergences: valuations of higher-quality, defensive companies are generally elevated, while valuations in parts of the markets characterised by fear and uncertainty are depressed,” says Ahern.
“Locally, while the FTSE/JSE All Share Index (ALSI) has delivered a total return of 4% year to date (to 26 August), this has been driven by a handful of counters (primarily mining shares and large-cap rand hedges).”
PSG Asset Management estimates that over 80% of ALSI stocks are in a bear market – trading at more than 20% below their five-year highs.
Globally, US investment management firm Pzena has recently noted that the valuation dispersion between the cheapest and most expensive developed market stocks surpasses 99% of the monthly observations in the 45-year history of its data.
Ahern cautions that areas in which valuations have been driven lower due to fear and uncertainty present the potential for mispricing.
“Where prices fall across the board – an entire sector or geography, for example – quality securities become available cheaply, along with the rest,” she says.
“Tainted by pessimism, their earnings potential is easily overlooked. While it may take time for the market to realise mispriced value, investors who can ride out the storm stand to generate outsized returns from such attractive entry points.”