The year 2016 will be remembered by investors as one in which politics dominated the headlines. But what do we make of it all as investors trying to focus on the fundamentals of the businesses in which we invest?
While we all have opinions on potential political outcomes, maybe even educated ones, the poor track record of political experts over the last year should give one pause for thought on the usefulness of predictions. We believe it is better to focus on valuations and to take advantage of opportunities that present themselves from short-term market moves in response to what are often unnerving political headlines.
The Equity Fund was well positioned to navigate the sometimes-extreme market moves that resulted from the political upheaval in South Africa during the year. We used our large holdings in British American Tobacco and SABMiller as liquidity to fund purchases of local banking shares, which had reached very attractive valuations. The period was also a reminder that prices in an economy with large imbalances can correct via a fall in the exchange rate, and not just via the price quoted in local currency.
We have seen two similar potential opportunities to look for value:
It was not so long ago that almost every South African company filled large portions of their presentations and annual reports with information about their African strategy – even if it hardly contributed to the bottom line. The huge correction in African asset prices and currencies has exposed many of the fault lines in the Africa growth narrative and, more importantly, also in poorly executed ‘me too’ African expansions.
While the risks in Africa – such as over-reliance on high commodity prices, currency devaluations, repatriation of profits, corruption, indigenisation and local competition – are real, it is important to note that prices have changed significantly in the buyer’s favour. We have been actively looking at shares that may have been oversold due to problems in their African operations which, in our opinion, still offer long-term opportunity.
Brexit caused a reappraisal of the value of British assets and pound profit streams, which are well represented on our market. UK property stocks, for example, were often seen as a one-way bet with an ever-weakening rand and rising valuations in London. Many local consumer companies have recently allocated capital to the UK and we wonder whether the returns will stack up when reviewed in a few years’ time. Unfortunately, Brexit also adversely affected the share prices of Old Mutual and Investec, two of our top 10 holdings, which have substantial UK operations. We have increased our holdings in both shares and we are researching other UK-linked stocks that have fallen from favour.
The portion of the Fund invested offshore with Orbis is now 15%. Orbis has performed strongly in dollars but this performance has to an extent been masked by the strengthening of the rand. Please see the Allan Gray-Orbis Global Equity Feeder Fund commentary for more detail.
Over the quarter, we sold selected banking and mining shares and purchased further Naspers and healthcare shares.