Sasfin Domestic Equity Model Review – Q3 2022

World equity markets once again fell for the quarter. The JSE did not escape the rout but did perform better than world markets dropping - 1.9% for the quarter compared to the -6.8% for the MSCI All World Index. South African markets were held up by commodities, especially in the energy sector with coal producer Thungela Resources moving up 20.74% in September alone. Other commodity performers in September were Sibanye Stillwater +12.87%, Glencore + 6.57% and BHP +3.99%. This led to the Sasfin Domestic Equity Portfolio outperforming the All Share for the quarter, returning +1% compared to the J303 which was down -1.9%.

Locally the South African Reserve Bank is continuing to increase South African interest rates following similar moves from central banks around the world to bring down inflation. The US Federal Reserve minutes are still signalling for continued tightening and equity markets are battling to find a floor. The risk of a recession is weighed against a strong US economy with little to no unemployment and strong corporate earnings, which conflict with the negativity in world markets, brought on by the war in the Ukraine, stubbornly high inflation and a huge spike in European energy costs. All this is adding to uncertainty in markets. Growth projections for the world continue to be revised downward, however inflation is predicted to start coming down in 2023.

South African Banks continue to show resilient earnings and are paying shareholders back by providing strong dividends. During the quarter Walmart offered to buy out the rest of Massmart that they do not already own for R62.00 a share leading to a strong jump in the share, rallying as much as 30%. These corporate actions continue on the JSE and in recent weeks, Sanlam has made an offer for Afrocentric and One Logic has cleared a management buyout and will delist early next year. Many Small Cap JSE companies are trading on very low price to earnings and M&A parties are increasingly seeing opportunities to buy out these businesses and delist them. A far easier prospect than trying to start a new business in South Africa, this provides good opportunities for investors that are willing to take positions in these smaller companies. To counter the continued delisting of companies from the JSE, the JSE recently announced a tie-up with the NYSE to possibly list US stocks on the South African Exchange allowing investors locally a broader investable universe. This could be a game changer for the JSE and it is worth keeping up to date on the progress of this initiative.

During the quarter we added new holdings in ABSA Group and Glencore to the model and exited AngloGold while reducing our BHP Group holdings from 6.95% to 3.7%. We added to our British American Tobacco and Richemont holdings. At the end of June just before the start of the quarter we also added Thungela Resources to the portfolio. 

Bid Corp had strong earnings for the quarter and management was confident that they have seen peak inflation in the markets they deal in, which include the UK, Europe, Australia, Asia, South Africa, and South America. Bid Corp more often than not experiences inflation before market indices pick it up and they are a good leading indicator on where inflation is heading. If they are correct this time around it leaves Bid Corp in a strong position for further growth.

If one looks at the weightings in the portfolio against the All-Share, Consumer Discretionary stands out as being largely underweight. This is mainly due to Richemont’s weighting in the index increasing to 13%. While China is a headwind for luxury, earnings from the US and Europe are still solid and growing leaving luxury earnings overall as defensive in this environment. We will look to add more to our Richemont holding in the months to come and in turn increasing the portfolios weighting to consumer discretionary, but with a strong rand hedge bias.

Strong commodity contributions added to performance with Thungela not only moving up substantially in price but also declaring a R60.00 dividend in the quarter. Prosus continues to sell off with the double whammy of negative Tech sentiment coupled with negative Chinese sentiment. We are underweight in this counter and will not look to add to it in the current environment, even though extensive share buybacks from Prosus, Naspers and Tencent are supportive of earnings per share. Richemont as mentioned above was not immune to the Chinese slow down either causing both counters to be the main detractors of performance for September and bringing down the quarterly return.

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