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Quo vadis for South African investors?

by | Coronavirus, Fund Updates, Uncategorized

Many investors who have been opening their Quarterly Investment Summaries have been looking glumly at the values of their portfolios at the end of March 2020.

Some investors are asking what has been done in their portfolios to protect them from the markets on the downside and to position them to be able to grow in the future.

Coronation Fund managers have shared this update with us about what happened in Q1 2020, and how they are positioned.

Portfolio Actions

The first quarter of 2020 will be remembered for a number of records, none of which we would want to ever repeat. Globally, this will go down as the worst first quarter experienced by stock markets in recorded history. While the moves have been extreme and brutal so far, we think the worst has been priced into equity valuations and most of our funds offer significant upside to fair value. 

Top 20 for example, has a total upside of 68% to our analysts’ fair values. This is the highest potential upside the portfolio has offered in a decade. Obviously, there are assumptions in these valuations, but our investment team has moved quickly to ensure they have priced in the effects of the pandemic and the lockdown on all our fair values.

Some of the portfolio actions we have taken in our funds are listed below (although positions will vary, the key features are common across our fund range):

In our multi-asset class funds, we have moved from an underweight to an overweight equity position over the last two weeks. We have closed out the puts that protected us from the worst of the early declines and bought some equity exposure at lower levels. Notwithstanding this, we don’t feel that we have reached the point of capitulation quite yet, and we have therefore put cash aside to buy in more meaningful sizes, should that situation arise.

We believe that both domestic and global equities are attractive to any long- term investor. This is in contrast to our view throughout 2019, where we felt that global equities were fully priced.

The current turmoil is providing a unique opportunity to buy high-quality stocks at great prices. This is the case across both domestic and global markets, and we have taken advantage of it across all our equity mandates. It is not often that one gets the opportunity to buy great businesses, with excellent management teams at low prices. We are confident that these stocks will give investors good risk-adjusted returns, even if the tough economic environment endures. As an example, the local component of the Coronation Equity Fund currently has a 77% exposure to high-quality companies. This is the highest it has been in 20 years.

In multi-asset class funds, we have held, and even increased, our domestic bond holdings. These now offer double-digit yields. The risks are clearly high, given worryingly high levels of government indebtedness, but we think this is compensated for in yield.

We remain concerned by thin credit spreads in the local fixed income market. Elsewhere in the world, credit spreads have blown up, as investors that were reaching for yield are being forced to price in a significantly higher risk of default. In South Africa, the market is thinly traded, and limited re-pricing has happened. If the market does become stressed, then we would actively look to deploy cash into attractively priced credit, be it new issues or credit that has to be sold in the secondary market. The Global Financial Crisis provided a once-in-a-lifetime opportunity to do just that. We hope to get that chance again.

Developed market bonds. We remain extremely negative about this asset class. We are very uncomfortable with government levels of indebtedness and we question whether future generations will ever be able to repay this level of debt.

Inflation. We have become concerned that the very long-term consequence of all this fiscal and monetary stimulus will be monetary debasement. We have all lived through two decades of declining inflation. Most central bankers have never experienced inflation. Their jobs have become one of stimulating economies and bailing markets out of crises. The risks feel very asymmetrical to us and we think it makes sense to avail oneself of long-term inflation protection, even if it is not something that is likely be rewarded in the next year or two. “

Investors should take comfort (and even be a bit excited) by this update from Coronation. They are clearly optimistic about the outlook for their investors who take a patient, long-term view.

We agree.