Is the longest bull market
in history back?


Quintus Kilbourn

Head of Equities: Absa Corporate and Investment Banking  


Encouraging announcements around the effective development of vaccines by leading multinational pharmaceutical groups have triggered a broad-based rally across equity markets going into the final quarter of 2020.

While both domestic and global equity markets have rebounded strongly from the lows encountered in the first half of the year, the question for many investors is what trends will drive investment returns going forward and what is going to be the “new normal”?

With some clarity now emerging around the US elections these are some of the key trends we see influencing financial markets in the next 12 months.

Trend 1: Day traders are moving markets

One of the major trends driving global financial markets has been the emergence of the day trader.

In the US, the likes of Robinhood are moving markets as thousands of day traders are able to invest at incredibly low costs and it is now estimated that these retail investors now make up 20% of all trade in US equity markets.

In South Africa, we can see a similar trend evolving where a number of electronic trading platforms have attracted hundreds of thousands of retail investors. Importantly, these platforms have also opened low-cost offshore investment opportunities in places such as the US and Australia.

This also presents a fundamental change for listed businesses in terms of how they interact with the market and sell themselves to investors.

In the past, listed corporates have focused on the institutional investor market but with the day trader now becoming far more influential, corporates are having to change the way they share their investment proposition. Investors are now far more digitally savvy, and management need to take advantage of different tools and platforms to communicate with this new generation of investors.

Trend 2: Active “Passive” is now mainstream

Low-cost exchange traded and index tracking products are rapidly evolving and innovating and one of the trends we are watching is the new generation “Active” Exchange Traded Products (ETPs).

These new generation products make use of management teams who take a more active role in the investment strategy and asset allocation while placing their investments inside of tax efficient products with high levels of price transparency.

Investors can get access to niche asset allocation including crypto-currency, fixed income and specialist equity strategies while making use of low-cost ETPs.

Research from etfgi.com shows that these products have attracted record inflows with $228.4bn now invested in these products at the end of the third quarter of 2020. The Fixed Income space in particular has enjoyed significant inflows as investors look to diversify their investment portfolios.

Trend 3: The hunt for yield is real … and South Africa Inc offers opportunities

Who remembers the good old days when shares on the JSE actually used to go up?

For experienced market participants, the last 10 years on the JSE have left much to be desired when it comes to investment returns. Once the darling of emerging markets and for many years one of the best performing exchanges in the world, the bourse has been a disappointment for many investors.

We think this might be changing.

With policy makers cutting interest rates to record lows and dividends and share buybacks being canceled or significantly reduced, investors have been crowding into a handful of US technology and biotechnology stocks to generate returns.

When the likes of video conferencing service ZOOM are now bigger than an industrial heavyweight like 3M or technology group IBM which has over 100 years of trading history, it is clear that investors are adopting momentum strategies rather than looking at value strategies. At this point equity valuations in some of these stocks appear stretched while traditional bell-weathers have been roundly ignored.

With many of these stocks now trading at record highs, investors are being forced to evaluate the price they are paying and whether they are likely to be caught out at the top of an investment cycle. The response to the original announcement from Pfizer was telling with a number of these “defensive” stocks geared toward “work-from-home” being sold off aggressively.

In contrast South Africa, already plagued by low economic growth, rampant unemployment and a persistent energy crisis, saw its risk profile as an investment destination deteriorate due to the hard lockdown restrictions. With investors taking fright, the JSE’s All Share Index has lost close to 10% of its value so far this year and many of its blue-chip shares are trading on single-digit PE multiples.

As the world starts to adjust to a new investment landscape, we believe that South Africa has a number of positives which investors are potentially ignoring:

  • The JSE still has a number of high-quality businesses with long, well established trading histories, experienced and respected management teams and track records of paying dividends. We are particularly excited about the prospects for industrial businesses which are trading on undemanding multiples and remain cash generative.
  • Telecoms businesses listed on the JSE, including Vodacom and MTN, are attractively priced and trading at between 10 and 12 times forward earnings while offering 5 – 6% dividend yields. Despite the impact of the COVID-19 pandemic, Vodacom was able to increase its dividend by 9.2%, boosted by its Safaricom investment and both telcos enjoy access to the growing African market
  • The consumer sector has been under pressure and may be for a little while longer, but it has potential for growth as recent third quarter sales figures out of retailer Mr. Price demonstrate and the share has rebounded 22% since the start of November while banking groups including Absa are trading at significant discounts to book value

A tough but optimistic call – we might just make it

As an equities team, we are heartened by some of the recent developments in the market. The Rand has strengthened in recent weeks and looks set to end the year at under R16 to the US dollar and we see this as a significant vote of confidence in the country and its financial markets.

In the first week of November 2020, we saw foreigners purchase R609m worth of South African equities and roughly R11.2bn in South African bonds. Year-to-date foreigners have been net-sellers of R100bn in South African equities but there are signs that the wheel is turning.

While 2020 has taught us that there are no easy predictions to be made, there are encouraging signs that the wheel is turning, and South Africa might just surprise to the upside.

Quintus Kilbourn

Head of Equities: Absa Corporate and Investment Banking

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