Investing when the market blows hot and cold
26 Jun, 2023

Gustav Schulenburg, Fund Manager at PSG Asset Management


It is amazing how many major events the year has already delivered – and we are only halfway through. We have seen a banking crisis causing fall-out on both sides of the Atlantic, a debt ceiling stand-off in the US, the rand at (repeated) record lows against the US dollar and unprecedented levels of loadshedding locally, not to mention the diplomatic fallout from the Lady R debacle. Investors would be forgiven for feeling slightly exhausted so early in the year.


High levels of volatility, uncertain economic growth and geopolitical concerns create conflicting inputs into our decision-making process. We believe the current volatility obscures the fact that markets globally are in the midst of a painful recalibration process, as the highly accommodative monetary policy that has prevailed since the Global Financial Crisis (GFC) is starting to unwind. Thus, the current volatility may also be obscuring the extent to which markets are aligning to a new market equilibrium, in which the drivers of return will be materially different from those of the past.


How are investors to navigate an unpredictable environment that is prone to dramatic reversals and where conflicting signals abound?


While it is easy to fall into the trap of compulsive headline watching, succumbing to the fear of missing out (FOMO) or betting it all on binary market outcomes, we believe a considered focus on valuations and acquiring quality investments at below their intrinsic value offer the best chance of achieving long-term investment success. Eventually, true quality is bound to shine through, and assets will trade at levels closer to or even above their fair value. However, overpay for an asset (even if it is a quality asset), and any potential headwinds are more likely to cause the market to mark them down in light of new (negative) developments. While low valuations might forgive a multitude of sins, the reverse applies to highly valued counters – a lot has to continue going right for lofty expectations to materialise.


But how does such an approach help to remove anxiety in the currently volatile and uncertain environment?


We invest a lot of time and research in truly understanding the assets we hold, the kind of returns they are likely to generate, and how they are likely to behave in a variety of conditions. While we believe no-one reasonably knows what the market will deliver in a week, month or year’s time, it is far more likely that great companies and management teams will deliver for their shareholders – despite the challenges the macro environment might throw at them. By constructing carefully crafted portfolios from the bottom up, taking the overall risk of the portfolio into account and keeping the ultimate client goal in mind, we believe we can tilt the odds of success in our clients’ favour. We always remain cognisant of the macro environment and manage the risks we identify as part of the research process and at the portfolio level, but we prefer to focus on longer-term drivers rather than shorter-term factors. As such, macro considerations are not the primary motivator for our decision to invest in a company, or not.


It’s also worth remembering that the management teams of companies are in a sense secondary stewards of our clients’ capital, aiming to generate shareholder returns despite a challenging operating environment. Rising interest rates, supply chain snarls, mitigating the impact of climate change or finding applications for artificial intelligence (AI) to their businesses? Good management teams are constantly working to ensure their companies remain future fit and aiming to ensure their businesses continue to compete efficiently despite the challenges. They can do this even in the most challenging environments, like South Africa, where most would expect little to no growth.


Case study: Discovery shows that valuations can provide a margin of safety


The recent experience in Discovery provides an interesting case study of this dynamic at work. It would be difficult to imagine more negative news for a medical aid than the recent National Health Insurance (NHI) Bill which was passed by Parliament, and yet despite this, the company’s share price has been remarkably resilient. The graph below tracks the company’s share price since the passing of the NHI Bill first became a serious possibility, and show how it has responded since the Bill was passed (purple dot). The improvement in the share price despite what can only be considered as ‘negative news’, highlights the important role that valuations play in providing a margin of safety to investors.


Discovery vs FTSE/JSE Capped SWIX TR (since Sep 2022)

Sources: PSG Asset Management and Bloomberg


Thus, we believe a focus on identifying investments with an inherent quality that is mispriced by the market, helps us to remove some of the anxiety from the investment process for our clients. And by keeping our eye firmly on the goals and objectives we are trying to achieve for our clients, and building portfolios of quality assets, we are confident that we can help our clients build their long-term wealth – however unpredictable the environment may seem currently.




Article extracted from the PSG Angle: “The PSG Angle is an electronic newsletter of PSG Asset Management.”


@Gustav Schulenburg
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