After September’s near double digit average drop in stock prices around the world (including the JSE which lost 9% in dollar terms), investors are justifiably nervous as the fourth quarter of 2022 begins. Corion’s David Bacher, however, offers some positive suggestions – specifically on South African financial and resources shares which he reckons offer value, especially relative to offshore alternatives. A realist, Bacher remains cautious about local economic prospects, but says valuations are just so low that avoiding these stocks would be a mistake. On the other hand, he is staying away from offshore stocks, especially in the US, where the Bear’s Grip is tightening. He spoke to Alec Hogg of BizNews.com.
Excerpts from the full audio discussion with David Bacher
David Bacher on the month of September
The month was nothing short of brutal. My colleague said to me, Spring sprang and the markets came undone and the past month saw many markets experiencing their worst monthly decline since the onset of the pandemic. It was very hard. World equities were down about 10%. The South African market, if you judge the market in terms of dollars, was down 9% and global bonds were down about 5%. So negative sentiment was far and wide and cash was unfortunately too. But even there, you had to be in the US dollars; the pound, the euro, the yen, the rand all depreciated substantially against the greenback.
On whether it’s darkest before the dawn or if we’re entering a really serious bear market?
I think the jury’s still out at Corion. We definitely look at valuations being our guiding principle from an international perspective. We think fortunately valuations are no longer expensive. They’re not cheap, but they’re reasonably priced. From a South African perspective, we see lots of opportunities in the South African market. Local is in our minds lekker – our valuations relative to international markets are substantially more attractive. A bond market is offering very good, real returns and much higher yields in international markets. So there’s obviously risks in South Africa, but comparing that to the risk overseas is not a bad place to be: buying into the dip in South African equities, but I probably would guard against buying offshore equities at this stage.
On the loadshedding problem in SA
Loadshedding is just a catastrophe for the poor, for the broader economy. The manufacturers, as you said, and we recognise that and hopefully the Government gets a handle on that. It will be a while. But, you know, when you break down our market in terms of an investment, to answer your question, you’ve got two big sectors that contribute to your market – resources and financials. Financials relative to history, all you know, they’re offering in some of the banks very high dividend yields, very attractive valuations relative to history. If you look at resources, you know, the valuations of a lot of big basic materials companies are trading at peers or 5 to 6. And that historically is a very, very low entry point. So if you’re taking two big parts of your market and you’re looking at investing in equities, well, when you’ve got those two segments at. Yeah. Very attractive dividend yields well capitalised. Well, that’s the main reason why we are bullish on the local equity market. Sure, there are going to be manufacturers and other players in the industry that are going to feel the brunt of what we are all facing in terms of loadshedding. But by and all putting everything together, you know, those valuations in our mind justify an overweight position to South African equities.
On what kind of asset allocation would Bacher be recommending right now
I think it’s very interesting, time for asset allocators in the video that you mentioned, there is no no alternative to equities to risk assets because bonds were at an all time low, yielding very little cash, yielding next to nothing. So you were forced to go into risk assets. Now you have bond yields in the US at about 4%. That dwarfs the yields you could get in the equity market and that’s a similar picture locally. So it’s a very interesting time as an asset allocator because you know, you’ve got to really diversify and it’s not just a call on equities, but being more specific, where do we think you need to be invested over the next few months? We still think international equities, specifically the US and we put an article about this at the beginning of the year, is expensive. So we’re cautious about being exposed there. We think that bond assets for the first time globally are attractive. If there is going to be a fallout and if the inflation gets under control and yields a10-year treasury at 4% over the next ten years, while inflation does get into check, that’s an attractive or certainly a much more attractive asset class, as it were, to history. So there’s lots of things to consider. But from a Corion perspective, underweight international equities, overweight South African equities and bonds, and starting to nibble more and more at international fixed income assets.
See also:
- Corion’s David Bacher: Assessing Peche’s performance fee exposé – and an explanation for why July’s market rebound faded away
- Andrew who? Corion’s David Bacher warns amateurs taking on the professionals
- Valuations matter, forget the story – Corion Capital’s David Bacher
