As I write this, we are around 140 days into the government of national unity (GNU), we have had an extended period of no loadshedding, and a 25-basis-point interest rate cut indicates a turn in the rate-hiking cycle. Sentiment is distinctly more optimistic than it has been for a while – if cautiously so. The markets, the rand and consumer behaviour are reflecting this shift in mood and, for the first time in years, it seems that business and government are committed to working together to maintain the positive trajectory.
But it is not time to be complacent. With growth barely moving the needle and unemployment out of control, we have lots of rebuilding to do. There is a long, hard road ahead. We need a strong focus on the things that matter, as well as rebuilding credibility as an investment destination with foreign investors.
What does this mean for your investments?
Local stocks that are influenced by the South African economy have rallied of late, suggesting investors should now be approaching them with care, as portfolio manager Jithen Pillay explains in our latest Allan Gray Equity Fund commentary. He notes that good equity returns tend to follow periods when expectations are low and outcomes are better than anticipated. Expectations are currently elevated versus recent history, which warrants caution.
Our portfolio managers aim to generate absolute returns while minimising the risk of capital loss through careful stock selection. Our local equity exposure is generally favouring rand-hedged local shares, particularly those with relatively defensive economics, such as British American Tobacco and Anheuser-Busch InBev. Our Equity Fund also has a healthy allocation to precious metal miners, which tend to outperform in times of global uncertainty. Our local stock exposure is skewed to those companies with self-help levers to grow their earnings, even if the South African economy is weaker than we would have hoped.
Our selection of investment articles this quarter illustrates some of these points. I would also highly recommend listening to our latest podcast, which expands on the local theme, focusing on the retail sector. You can access The Allan Gray Podcast here or via your favourite podcasting platform.
The investment case for hospitality and consumer stocks
In our quest to invest in undervalued businesses for our clients, we have been attracted to companies in the hospitality sector and in consumer staples. Varshan Maharaj delves into some of the opportunities in the hospitality sector, looking at both the different business models and locations. The appetite for travel and experiences has picked up since COVID-19 and it is fascinating to see how this is playing out from an investment perspective.
Moving from luxuries to necessities, Kamal Govan investigates whether there is any potential to awaken investor interest in the generally sleepy consumer staples sector. It is amazing how brands that have dominated markets for generations are often not valued by investors. It is, of course, all about the price you pay: Good businesses (and brands) don’t automatically make good investments, but sometimes contrarian investors find opportunities while others are distracted by the darlings of the day.
All that glitters
I noted earlier that precious metal miners tend to have their moment in the spotlight in times of uncertainty. Given the ongoing global volatility, it should not be surprising that gold-related securities are among the top holdings of the multi-asset class portfolios of our offshore partner, Orbis. Alec Cutler elaborates on how Orbis thinks about an asset that he characterises as “trustless, rustless, shiny and tiny”.
Expanding our fund range
At Allan Gray, we aim to keep our fund range focused. We only introduce new offerings after very careful consideration, and when we believe we can do well for our clients and that the additions will better help them meet their goals and objectives.
… we will continue to follow our tried-and-tested investment philosophy to find the best long-term investment opportunities for you, our clients.
I am pleased to let you know that we have recently introduced the Allan Gray Interest Fund and the Allan Gray Income Fund. The addition of these funds broadens our range, providing you with a more comprehensive selection of lower-risk investment options. Vuyo Mroxiso describes the new funds, how they fit into our range and how they may meet your needs.
Two-pot: Taking stock
Our previous Quarterly Commentary was released a few weeks before the two-pot retirement system went live. Two months in and, according to various reports in the media, more than one million members have withdrawn more than R21bn. This includes just over 11 000 of our clients.
In his capacity as a trustee of our retirement funds, Richard Carter discusses some of the concerns that the trustees have been grappling with in the background and touches on some of their ongoing challenges.
While the two-pot system allows you to withdraw from your savings component once per tax year (subject to certain requirements), we continue to caution that this option should only be used for genuine emergencies. To help understand the complexities and trade-offs of the two-pot system, we launched a two-pot information hub, which brings together all the articles we have written on the subject, including FAQs, to make it easier to understand and navigate.
As a reminder, your withdrawals are subject to tax at your marginal (highest) tax rate. It remains very important for you as a member to understand the tax implications of your withdrawal requests and to ensure you disclose your correct income to the South African Revenue Service so that you are taxed correctly. In this quarter’s Investing Tutorial, Carla Rossouw homes in on the tax implications of your two-pot withdrawals and your obligations as a member.
Looking forward
It is about 60 days until the end of the year, and the Christmas decorations are already decking the malls. In the absence of a crystal ball, I can’t predict with any accuracy where the rand or markets will be when 2024 closes out. I can’t foresee what policies may have been enacted by our newly formed GNU. I have no idea how many more two-pot withdrawal applications will be approved. What I can say with certainty, however, is that we will continue to follow our tried-and-tested investment philosophy to find the best long-term investment opportunities for you, our clients.
Thank you for your ongoing support.