The Absa Asset Management (Pty)Ltd) Absolute Return Franchise was showcased at the most recent External Distribution Channels (EDC) lunches in Pretoria, Johannesburg, and Cape Town. Professor Eben Mare (Prof.) and Kanyisa Ntontela, the dynamic duo behind the franchise had captive audiences in all three locations.

Prof. shared his view that "the consensus expectations were that the domestic equity market will be a great performer in 2018 following positive political events in December 2017. A number of factors, however, took the shine off the market. The corporate failure at Steinhoff created distrust in governance, generally, and a number of companies came under fire. The listeriosis scandal, for example, as well as accounting-based questions, placed equities on the back foot.” He went on to unpack issues which led to the disappointments we have seen in the first three quarters of the year. Trade wars or the threat thereof, have dominated headlines. Prof detailed issues around the global macroeconomic fundamentals, namely global monetary policies and the drain in liquidity. Interest rates are on the rise, which will make it difficult for South Africa (SA). World markets have had a great time, and the US stock markets are currently the second most expensive they have been in history. Unfortunately for SA, we have not experienced this phenomenon. Prof stated that “the weak domestic economy provided little support for earnings growth - the domestic markets are not cheap." He sees some value in some SA equities, but volatility remains high. Conviction is difficult when the short-term economic indicators are so low, and the outlook is uninspiring. “The forecast risk is immense,” he says.

Local property depends on local fundamentals. Prof mentions that the dynamics on the ground are difficult and this is visible in shopping malls, as vacancies are on the rise and consumers are purchasing less. Kanyisa answered a lot of questions focused on listed property in great detail. She explained how a lot of listed property companies have gone offshore as they are struggling to see growth opportunities locally. Prof also explained how SA against Emerging Market (EM) peers, has the most developed properties per square meter and also per capita, which is not positive. How this manifests can be seen in vacancies and in weaknesses in trading densities. They view logistics-focused companies as the most attractive locally.

Inflation is actually a good story, but only because growth is anemic. Inflation has formed a base now, and there is no demand. Most of the inflation we are seeing is from administered prices. This factor is positive as it also assists the Monetary Policy Committee (MPC) to keep rates on hold for longer. The rand depreciation is a major concern, particularly as this feeds through to higher fuel prices, and creates potential upside risks. Bonds are attractive, mainly because inflation is contained. The medium-term budget speech (MTBPS) will be important for the fixed income outlook. National Treasury (NT) have a tough task at hand as they need to convince rating agencies and everyone else that fiscal slippage is contained and that the metrics will improve in the medium term.

The good news is that Prof.does not see the bad news going on indefinitely. He sees the market as more attractive, especially if one removes Naspers from the analysis of local stocks. SA needs a few ingredients in order to unlock value for investors and for markets to see a rally. To support this, Kanyisa presented on Woolworths as a case study of a stock which displays value. She broke down the Australian and South African dynamics and took it a step further as she broke down food and clothing fundamentals. The entity has a lot of issues but the food division remains a star performer.

Source: ABAM (September 2018)

While the counter has disappointed investors consistently in the last few years, when you break down the sum of the parts, the intrinsic value now makes it attractive as a new investment. “As an investor one needs to know when to walk in, and when to walk out,” says Kanyisa. She explained that they made ten percent (10%) on the share in December as they sold the holdings they had at the time. They recently started building their position again as they see value at current levels.

Source: ABAM (August 2018)

The Absolute franchise aims to build flexible portfolios which consistently yield positive real returns with minimum risk. The aim is to deliver CPI+4% over rolling 3-year periods. The Absa Absolute fund has delivered positive returns in 24 of the last 36 months despite challenging market conditions. Their deep insights could fill a book and this generated interest from clients of follow up engagements.

It was an absolute pleasure watching the two investment professionals in action and passionately demonstrating their expertise to clients, and as the EDC team, we look forward to many more positive interactions with them in the near future.

Tsitsi Hatendi-Matika is Head: Retail Investment Specialist at Absa’s Wealth and Investment Management unit.