By James Thorneley Peter Linley, manager of Old Mutual South Africa, expects the performance of the ...
By James Thorneley
Peter Linley, manager of Old Mutual South Africa, expects the performance of the trust to improve, coinciding with a more favourable economic environment now engulfing the country.
Over three years to 16 June the trust's NAV has fallen by 24% compared to a fall in its benchmark, JSE Financial & Industrial index, of 28%. Linley acknowledges that although the trust's portfolio outperformed its benchmark it still fell by a just under a quarter.
He said: "The problems the South African economy faced in the last three years were not domestic in origin. They were due to the general collapse in emerging markets following the Russian and Asian crises. The South African government handled the situation pretty well."
Looking forward Linley believes the prospects for the trust are more optimistic. He points out that the current account is only 1% in deficit.
This is mainly due to the pick-up in the commodity market and strength of the dollar, which material such as platinum are priced in.
The trust is not exposed directly to commodity companies as its investment remit restricts it to only investing in financial and industrial companies. Linley said: "The trust is indirectly benefiting from the pick-up in the South African commodity sector because it is having a knock-on effect on the rest of the economy."
Another factor, expected to help with the continued growth of the economy, is potential cuts in interest rates.
Rates are currently around 14%, relatively high compared to the UK, but Linley points this is off a peak of 25% in 1998. He believes there is the potential of a further 100 basis points cut.
At a market level he believes there is likely to be a rerating in the trust's benchmark index.
He said: "Currently the index is trading on P/E of 12 times. With a two-year view our earnings projections for companies in the index suggest the market should be rerated."
Since the start of the year the Johannesburg All Share index has fallen by 12%, in sterling terms. But Linley's confidence in the market is reflected in the performance of the index over the last two months advancing by just under 8%.
On the downside Linley can see two potential factors which may impact on the country negatively. He acknowledges the economy's own growth is dependent on global growth. However, Linley expects global growth to remain robust, unless the US Federal Reserve raises rates by a further 200 basis points. He added: "Another negative for the market is sentiment. Many investors are scared to invest due to the Zimbabwe situation, which I believe will have little practical impact on the South African economy unless there is a mass exodus of workers from Zimbabwe."
At a sector level Linley is bullish about financials with companies in the sector expanding globally. Within the portfolio he holds his own management group, Old Mutual, which he has been trading in and out for sometime. He said: "The last time was four weeks ago when the company was trading at a 20% discount to its embedded value. It is now trading at par."
The other financial which Linley favours is Investec due to the quality of management, and the company's potential in the UK marketplace.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation