I bet my raging bull on the African continent

05 February 2013 - 02:09 By David Shapiro

Last Wednesday evening our local asset management industry celebrated its equivalent of the Academy Awards - well not quite. Whatever, it's an occasion when the best- performing fund managers and investment houses are honoured.

I was fortunate to receive two prestigious awards for a value fund I run. The fund, measured on the returns of a lump sum invested over three years, was not only the top achiever in its category, but the best broad-based domestic equity fund.

Although my prime business remains managing private wealth, I created the unit trust in November 2005 in an attempt to take advantage of businesses I envisaged would benefit from then president Thabo Mbeki's commitment to spend on infrastructure, eliminate poverty, eradicate disease, help build a better continent and, most importantly, lift South Africa's growth rate to 5% by 2010.

As with most other investment professionals, the plunge in the market that followed the collapse of Lehman Brothers in September 2008 eliminated my hard-fought gains, but thankfully - perhaps naively - I never swayed from my mandate, maintaining faith that the world's leading central bankers would take whatever action was necessary to save the global economy from falling into a black hole.

I favoured equities above safe-haven, alternative assets and continued to search for well-managed companies, with dependable earnings that paid dividends in excess of money market rates. Still, not in my wildest dreams did I imagine applying a strategy that did not require complex spreadsheets or a deep understanding of macroeconomic theory would produce returns that elevated my returns above some of the smartest investment brains in the country.

In hindsight, few investors worldwide forecast that 2012 would be an exceptional year for equity markets. But as fears about another global crisis began to lift with an easing of tensions in the eurozone, a recovery of growth in China and a rebound in jobs, housing and manufacturing in the US, investors, hungry for yield, shifted large amounts of money from bonds, hedge funds and private equity into stocks.

Locally, two further catalysts propelled our market into the stratosphere - foreign money managers' insatiable appetite for domestic consumer stocks and, incongruously, the sharp fall in the rand that followed the unlawful strikes on the Platinum Belt. The strong flows into retail stocks hoisted valuations to historical peaks, while the slump in the rand bolstered the prospects of our exporters and companies operating offshore businesses.

The global bull market we have experienced over the past three years still has a long way to go before it runs out of steam. Admittedly, there are a number of obstacles to negotiate, like addressing the US fiscal budget, the recessionary conditions in Europe and a softer earnings outlook. But with central bankers from Washington to Tokyo committed to asset buy-back programmes and with business activity improving in China and the US, there is still plenty of room for the share market to move higher. The biggest impetus to the ongoing gains will probably be generated by a swing in sentiment from disillusioned institutional investors who have spent the past three years sidelined picking bonds and cash over equities.

There are dangers, though, that the climb in world markets may bypass the JSE. Not for a second am I including the heavyweight offshore giants - like British American Tobacco, SAB Miller, Richemont and BHP Billiton, highlighted in my column last week - that earn virtually all of the revenue abroad and whose share prices are determined on foreign bourses, but instead a long list of smaller quoted enterprises that rely solely on the health of the South African economy for their success.

Last week a number of companies issued trading updates that fell shy of analysts' forecasts. Poultry producer Astral reported its worst trading performance in its history, the outcome of rising feed costs and violent strike action in the Western Cape and Gauteng. Rainbow Chickens revealed a similar decline in profits while industrial consumables distributor Hudaco - a favourite with punters - announced that the trading environment in the final quarter of the company's financial year, normally its most profitable, proved difficult, disturbed by the forced closure of the mines it supplies. Another popular stock, Cashbuild, informed the market that revenues in its second quarter rose a paltry 1%, a worrying sign of slowing consumer demand in the economy.

With manufacturing and mining in the South African economy battling higher input costs, rising wage demands and softer international demand, economists are still looking to consumers to drive growth, but at a pace not likely to match last year. And with a number of counters at stretched multiples, it's hardly surprising that analysts remain cautious.

I intend remaining faithful to my self-imposed mandate of avoiding companies that earn a major part of their revenue outside the African continent (apart from stocks like Aspen and Naspers that I added before they expanded internationally), sticking to my belief that we still have some of the best private sector managers who have proven time and again they can operate gainfully even in gruelling conditions. I'm confident enough to bet my "Raging Bull" on it.