Local equities: where to from here?

Global equity markets have recovered since the collapse in March 2020 and are now at record highs. Our local equity market has also proved to be more resilient than initial forecasts and has posted an impressive cumulative return of 60.6% from 1 April 2020 to 31 October 2021. The year-to-date return (to 31 October) of 18% is equally notable.

Given that equity is a fundamental building block and the key driver of the growth potential of any portfolio, we believe understanding and calibrating expectations from equity is essential to consider how best to use both local and global equities in your clients’ portfolios.

Momentum Investments remains optimistic about SA equity over the medium-term. This optimism is based on our constructive view of global economic growth, low interest rates, recovery of more sectors as vaccination rates increase, and attractive valuations as measured by Price Earning and Price-to-Book ratios as South African equity appear to be undervalued relative to developed and other emerging markets. We also believe that earnings and dividends in South Africa should recover and grow over the medium-term. The growth in dividends is based on a return to more normal dividends among the mining companies and banks, whose balance sheets have proven to be healthy and resilient. These factors provide very compelling reasons to be positive about SA equity over a three- to five-year period.

While there are many positive factors that support the view for equity, we are mindful of increased volatility as there are concerns around Chinese growth and tighter monetary conditions in parts of the developed markets. We are also acutely aware of the risks stemming from global supply chain disruptions and the impact this could have on local equity counters. We are also cognisant of the South African macroenvironment and the headwinds we need to overcome.

To navigate through this, we believe it is prudent to continue to have a well-balanced and diversified equity portfolio with exposures to the dominant equity styles, which includes value, momentum, growth and quality. This style diversification is a hallmark of our investing philosophy and process and is a function of our fundamental and risk-based mindset. This portfolio construction principle has ensured that our equity solutions are robust through market cycles over the better part of 20 years.

We believe that this diversified strategy is not only sensible given our outlook but will also continue to provide our clients a smoother return profile in the event of any market shocks. A smoother journey will help you to help your clients to stay invested and ultimately achieve their life goals, dreams and aspirations. That is how we make investing personal.

To illustrate the well-balanced nature of our current equity positioning, we maintain a healthy exposure to resource counters, defensive rand hedge industrials which include the likes of Naspers and British American Tobacco, exposure to SA-focused companies such as banks, retailers, healthcare, and a number of attractively priced small and medium sized companies. The resource allocation is geared to the cyclical global economic recovery, the defensive high quality rand hedge exposure will act as a shock absorber in the event of protracted market volatility and the exposure to the domestic orientated companies are a function of the compelling valuations and decent upside over a three- to five-year period.

Markets are fluid, dynamic and never constant. Covid-19 has had a negative impact on certain sectors and industries and has propelled certain stocks to new highs. The last 18 months created many opportunities for the patient investor.

We think that equity markets have room to grind higher over the medium-term and we are confident that our well diversified multi-strategy equity solutions are suitably positioned to participate in this uptick. Investing is a long-term endeavour and a well-constructed and diversified equity portfolio, like we create at Momentum Investments, is a critical component for long-term investing success.

Source: Inet, 15 November 2021

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406). Past performance is not necessarily a guide to future returns. The information contain herein is only for general information purposes and not an invitation or solicitation to invest. The information is not intended to be investment, legal or other professional advice or services as set out in the Financial Advisory and Intermediary Services (FAIS) Act, 2002, or otherwise. It is your and/or your financial adviser’s responsibility to do a suitability analysis and due diligence on the investments mentioned in this document as part of the investment mandate with you, and as part of the investment advice process.