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The Covid pandemic started as a big growth depressant as countries went into lockdown and economies ground to a standstill. Yet, it also morphed into one of the biggest stimulants and ironically has been good for financial markets with markets reaching all-time highs, but what can we expect from here? We recently interviewed the fund managers at Obsidian Capital and Prudential Investment Managers to discuss the state of equity markets, their Covid experience and thoughts on the way forward.
A general equity fund or a long-only equity strategy involves taking long positions in equities that are expected to appreciate in value. This approach does not employ derivatives or gearing for hedging purposes (unlike an equity long / short fund) and is considered very mainstream. This is one of the more common retail products across the unit trusts.
While markets have done well and economies continue to recover, Royce Long, Fund Manager at Obsidian Capital, believes that we’re at an important juncture. “The acceleration and peak stimulus are behind us and valuations now have to be supported by earnings. From here, it gets more difficult. We need to get our minds around the withdrawal of stimulus, a rise in interest rates and inflation, bond yields moving higher, the cost of money becoming more expensive and the impact of the base effect starting to wear off as we move further away from a locked down environment,” he says.
“We don’t see anything unusual regarding what’s happened in offshore markets. These markets have no structural impediments, but the debate could be whether valuations have priced a recovery in or if there more to go and what happens to growth stock when interest rates rise. Offshore markets have done well, but are expensive so returns could be a bit subdued going forward.” South Africa has come out of the Covid base and with limited stimulus we’ve seen a very strong recovery in many of the South African shares, some up 100% and 200% from the troughs they reached a year ago. Long believes that the structural impediments we’ve been battling in South Africa have not gone away and could be impediments to our economic growth going forward. “We’re growing off an artificially low base right now, but as we come out of this Covid base effect, we will still be faced with an unreliable energy supply and subdued investor and business confidence. What’s concerning us is that interest rates have fallen, so we should start seeing a reaction in car sales and credit and that hasn’t happened yet. Every time there has been a decrease in interest rates, there has always been a reaction in consumer behaviour and we’re not seeing that yet. If it doesn’t happen, can we look forward to fantastic equity returns from a South African perspective if there is no credit growth or new car sales? If our economy slows, will our commodity prices continue to surge and contribute to our trade surplus?”
Obsidian’s trend of outperformance has continued despite the Covid crisis. The Obsidian SCI Equity Fund returned a net performance of 39.4% over five years. “While we can’t predict the future, we remain true to our process and recognize that the fundamental forces that impact markets can change, and we will react accordingly. We’re watching the South African fundamentals with interest,” said Long.
Check out OBSIDIAN CAPITAL’S details on FUND HUB, where you can access the full video interview, factsheets and contact details: Obsidian Capital – FUND HUB.
Equity markets are not for the faint of heart especially in a crisis when nervous investors tend to exit markets at the bottom of a cycle, locking in their losses. Chris Wood and Yusuf Mowlana, fund managers at Prudential Investment Managers, reflect on the lessons learned over the last year and how they navigated the Covid crisis. “The advice we gave our clients was not to panic, and we followed that too. We didn’t sell nor did we buy aggressively. But, the Covid crisis did give us an opportunity to buy very good quality and established businesses that were trading at deep discounts to what we felt they were worth. When others are fearful, that’s the time to be greedy,” says Wood. In the last two weeks of March and during April 2020, the team turned over about one third of their portfolio, doing almost the opposite of what they observed in some of their competitor funds. “We took advantage of what we saw as better valuation opportunities in the domestic market versus offshore and cut our offshore exposure from 24% down to around 14%. A key lesson was to be consistent with your process and follow valuations,” says Mowlana.
The Prudential Equity Fund is a fully invested fund without a cash balance to deploy when share prices fall. “One of our biggest challenges last year was deciding what to sell in order to buy. We were selling defensives and buying cyclicals, which some may have seen as contrarian. As an example, British American Tobacco is very defensive and while it didn’t fall to the same extent as other defensives, it provided us with the funding we needed to buy other stocks that were offering exceptional value,” says Wood. The Fund holds a diversified portfolio and part of their core philosophy at the company is not to take unintended bets. “We focus on picking stocks within sectors and exploiting valuation differentials between similar businesses facing similar business cycles. We are still more favourably disposed to South African facing businesses, in part because the valuation differential to US is still very wide and we don’t think the Rand is expensive against the US Dollar,” says Wood.
The Prudential Equity Fund has been ranked in the top quartile over the last 15 years and is number 4 out of 41 funds. It returned an annualized performance of 45.6% over the one-year period and 11.1% over 10 years. The Fund has approximately R3.5billion AUM with 87% of the portfolio invested in domestic assets.
Check out PRUDENTIAL INVESTMENT MANAGERS’ details on FUND HUB, where you can access the full video interview, factsheets and contact details: Prudential – FUND HUB.
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