Investing can be challenging at the best of times. But Covid-19, and global lockdown response to the pandemic, have made decisions about where to invest even more difficult. Which is why it’s a good idea to consult the experts before making any market moves. Walter Aylett, Simon Kendall, and Kokkie Kooyman, are such experts. These three specialist fund managers from Nedgroup Investments offer their perceptions on the present state of some key sectors, and their future prospects.
Walter Aylett, Manager of the Nedgroup Investments Bravata Worldwide Flexible Fund says that only 30% of the portfolio is currently invested in South African stocks, where growth is forecast to initially be slower than most developed global markets. That said, Aylett says that there are complexities in international markets that go beyond Covid-19 and need to be carefully considered when making geographic diversification calls.
“We don’t know what the future holds, but believe in our investment philosophy and process which seeks out assets that we are confident will be around for at least the next five to 10 years, continuing to produce good returns,” Aylett explains, “and given that there is a lot of uncertainty in other markets, not least the Trump effect in the US, Brexit which needs a weak dollar to progress smoothly, and several other issues in Europe, there are a number of assets in Asia and South Africa that are starting to look more attractive.”
Simon Kendall, manager of the Nedgroup Investments Mining and Resource Fund agrees with Aylett, pointing out that 2019 was a tremendous year for the resources sector, which delivered market-leading returns of around 28%. As a result, the fund returned 40% for the year, largely driven by its link to the Platinum Group Metals, with Impala Platinum up 300% and Northam up 185%.
2020 has been more of a roller-coaster for the sector due to the Covid-19 outbreak. Oil is having a particularly torrid time of late, with a combination of demand destruction and an oversupply of around 20 to 30 million barrels a day taking a severe toll on prices, and participants in the sector. “Sasol is in the eye of the storm as its products are mostly linked to the oil price, which together with rand movements, are primary drivers of the share price,” he says, “and below the recent level of around R35/share, there is another layer of concern about the level of debt in the company, which Sasol has been attempting to temper through aggressive cost cutting and asset sales.”
He says that these factors are raising the likelihood of an equity raise after Sasol’s year-end results in June, and this would be an attractive opportunity to increase exposure at a discounted price and on a discounted valuation.
Taking a broader view of the resources sector, Aylett says that the fundamental case for miners’ equities is still attractive, but he advises caution. ” Covid-19 is much more than just a health crisis, and there will be a potentially lengthy period of uncertainty and recovery coming out of the economic slowdown it has caused,” he explains, “but while demand may disappoint in the short term, this is also a good opportunity to build a position, which is why we are cautious right now, but have a more constructive stance in the medium term.”
Kokkie Kooyman, manager of the Nedgroup Investments Financials Fund says that while the Covid-19-driven sell down in the financial sector has been sharper and more ferocious than anything seen before, particularly in terms of bank valuations, it’s worth noting that this crisis is different to others that have gone before it. “While this is undoubtedly a more global event than previous financial crises, we also know what caused it, that it will end, and that economies will normalise when it is safe to do so,” he explains, “and compared to 2008, the markets have acted very quickly and, so far, banks have actually come through this crisis well with their capital ratios largely intact.”
That said, Kooyman expresses concern that negative reactions to some of the banks, notably Absa and Nedbank, has been unjustifiably negative. And he believes this presents opportunities going forward. “If normalisation happens by 2022, Nedbank is on track for a 19% dividend yield, which will grow every year,” he says, “which just goes to show how low the current valuation is.”
While it’s impossible to say with any certainty, what a good investment strategy should look like for the foreseeable future, Aylett, Kendall and Kooyman agree that the focus of any successful investor over this period needs to be on quality of management, reasonable capital reserves, and an exemplary track record, as those are the companies that have the highest potential to not only recover quickly, but to leverage their positions to gain sustainable competitive advantage post-Covid-19.