A rotation from growth to value is on the cards for South African investors
18 Jul, 2022

A rotation from growth to value is on the cards for South African investors as the country weathers significant market volatility

Market volatility made a dramatic return in the past few weeks, with the S&P 500 index plunging more than -10.81% year to date as at 10 March. Its counterpart, the tech-heavy Nasdaq is down nearly -16.72% year to date. While investors may be tempted to chase the highs and lows of this heightened volatility, the best course of action to take would be to make a plan and stick to it, bearing in mind that a rotation from growth to value may be on the horizon.

Providing his outlook for economies, markets and the 2022 investment landscape in a recent interview with Ciaran Ryan from Moneyweb, PSG Wealth Chief Investment Officer, Adriaan Pask commented on the inherent cyclicality of markets, advising investors to take a “measured” and “tactical” approach to investment within the current climate of uncertainty.

In an economic environment where change is the only constant, there is much to be said about the importance of research and making data-driven decisions. Investors who have done their due diligence and are reasonably confident that the companies they are investing in have longevity, should continue to cast their sights beyond the volatility of the short term in favour of longer-term thinking. Diversification, however, remains a vital buffer against the unexpected, of which Covid-19 is a prime example.

A major contributor to the current market volatility is record-high inflation, with a rate that is at its highest level in 40 years in the United States, coupled with geopolitical uncertainty driven by the war in Ukraine. In a similar vein, South Africa’s current inflation has reached its highest level since 2017 – a phenomenon that some analysts attribute to rising transport costs with fuel prices rising by more than 40% over the last 12 months in South Africa.

On the topic of interest-rate hikes, which according to Pask is the “flip side of the inflation coin,” he suggested that the South African position is somewhat less dire than that of the US due to bond yields being relatively high – an indication of the fact that more fiscal risks were priced in, thus creating a margin of safety. Both in South Africa and the US, the market is pricing in three hikes or more. However, in Pask’s opinion, where the US is concerned, there is “every possibility that it might be more aggressive than that,” and is “something to keep an eye on.”

In supporting this point, Pask pointed to higher commodity prices – the first of two key tailwinds for South Africa over the past year – which had a positive impact on fiscus. In addition, by rebasing GDP (an exercise that took place in 2021), the country’s statisticians projected that debt-to-GDP would rise to 80%-100%. Instead, as Pask commented, “with income being elevated and GDP being restated, government has moved our debt-to-GDP number from roughly 80% to roughly 70%, which is, below the 5:14 average debt-to-GDP ratio, because many of these developed economies are carrying quite a lot of debt on the back of the stimulus from 2020/2021.”

Referring back to South Africa as an emerging market, Pask projected that a rotation from growth to value is a very real possibility given the current context of volatility in both local and offshore markets. Enquiring as to whether this transition will lead to a “value trap” and whether there are opportunities to be seized for South African investors, Ryan prompted Pask to comment on South Africa’s prospects for 2022.

Pask offered the following response: “I think there are certainly some areas of the market that would be value traps, that look stressed – and they are justifiably rated lower from a P/E perspective. But I think on aggregate there are actually very good opportunities – real value and not really value traps.”

There are of course a number of challenges to be taken into account – challenges which are in themselves, unique to the South African context. Among those mentioned by Pask were high unemployment, dysfunctional state-owned enterprises and corruption. These realities are indicative of a very real risk. The key, for Pask is understanding how these possibilities could impact the investment prospects of the securities in a portfolio – an assessment that will need to be made on a case-by-case basis.

As Pask concluded: “I think investors are going to become more sensitive to how much growth they price into the investments they make. I think that on the growth front investors will start to price in less growth than they did historically, especially over the preceding two years. At the same time, investors will also start to become more price-sensitive in terms of how much they’re willing to pay for stocks and assume future growth.”



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