Old Mutual Investors comment - Dec 19 - Fund Manager Comment24 Feb 2020
As the 2010s ended, the FTSE/JSE SWIX Index recorded a 9% return for 2019. Resources, led by precious metals, were the outperformer yielding a 29% return followed by industrials and financials with 9% and 0.6%, respectively.
The last decade started with euphoria as South Africa proved doubters wrong by successfully hosting the FIFA World Cup. The rest of the decade was less effervescent. Nelson Mandela’s passing three years later seemed to underscore the rising corruption and falling confidence that was stifling economic growth. There was no global boom to counter our home-grown problems. The global financial crisis cast a longer shadow than many had forecast. The global growth engine sputtered inspiring unprecedented levels of quantitative easing and ultralow interest rates in the developed world. Europe flirted with Grexit and then Brexit. The US elected the most controversial president in recent history. Governance scandals and climate change concerns moved ESG into focus. All the while, increasingly powerful smartphones and ubiquitous internet changed what we take for granted. Ten years ago this sentence wouldn’t have made sense to most South Africans: I watched Netflix on my iPhone while I Uber’d to my Airbnb.
Now we have witnessed the dawn of a new decade. What are the risks and opportunities facing investors as we enter the 2020s? The status of the US as global economic and military leader is facing greater challenges. Rising inequality and youth unemployment are not uniquely local problems, nor is the resultant populism. Geopolitical tensions and trade spats are therefore likely to remain a long-term risk. Fortunately for consumers, conflicts in the Middle East will have a less dramatic impact on the oil price due to the US shale boom during the last decade. Ageing populations and growing government debt will be a drag on first world growth. From electric vehicles to blockchain, technological change will continue to creatively disrupt established business models. South Africa may prove doubters wrong again but as with the 2010s we are unlikely to be bailed out by soaring global growth.
How are we building portfolios in this environment? Our large positions in British American Tobacco, telecommunications and banks reflect our view that companies with strong management teams and resilient balance sheets that can deliver growing dividends will become increasingly attractive. We seek out counters with overly pessimistic expectations implied in their prices and catalysts on the horizon to unlock value. There are pockets of value emerging within “SA Inc” in companies that will benefit once green shoots emerge in the local economy. One such company is Wilson Bayly Holmes. True, the chunky contracts of the 2010 World Cup era are not on the table. However, faced with little competition, their order book is filling up with less traditional work like repurposing office space into residential property. Simultaneously, state-owned enterprise tenders are starting to flow again after a period of focusing on cleaning up governance. We look forward to unearthing more overlooked opportunities in 2020