Investors often focus disproportionately
on share prices, to the detriment of a sound long-term investment strategy.
It is easy to get caught up in the negativity and headlines that often drive
share prices, rather than focusing on the fact that these shares are issued by
robust, real-life companies that continue to bring in earnings despite
challenging market conditions.
The market can be extremely efficient at
assessing risk. Recently we saw that when a new virus emerged in China, share
prices around the globe responded swiftly to the new economic threat. However,
we also believe the market can enter into self-fulfilling feedback loops, with negative
expectations feeding a further gloomy outlook and positive expectations feeding
further inflated expectations. The role of sentiment on the long-term returns
investors ultimately achieve should not be underestimated, especially when
sentiment gets the upper hand and starts driving decision-making.
We believe the market has already priced in
the bad news around the South African economy. Poor economic growth, high
unemployment and a potential Moody’s downgrade to junk status are all known
risks. However, we believe the market has been extremely negative in its
assessment of these risks. SA Inc. shares have been harshly judged by the
market, while a few rand-hedge market darlings have seen their prices rise even
more. This unusual dynamic has seen SA Inc. counters detracting from our total
However, history has shown that it can be a
big mistake to equate low prices with low value, or little future return
potential. In challenging market conditions, the strong often get stronger.
Roadbuilder Raubex is a prime example of this principle at work. As tenders
dried up over the past few years, the number of JSE-listed road builders in the
industry started to shrink from 10 to 2. With fewer players left in the market,
however, a well-managed company like Raubex is well-positioned to exploit
market opportunities on offer, capturing a bigger market share.
Raubex’s share price has already appreciated by 50% since late 2019, and serves as clear example that there is still value to be derived from South African companies, even if we assume a low-growth scenario. Moreover, it should be noted that the appreciation in Raubex’s share price happened at a time when local news headlines were extremely negative. This again reinforces the dangers in looking for catalysts before deciding to invest – in our experience, there is a never a clear signal to the bottom of a company’s (or the market’s) share price. Those who sit on the side lines waiting for catalysts are likely to miss out.
As value investors, we are always excited when we can find above-average quality at below-average prices, because we believe the price investors pay for assets when investing plays a key role in the long-term returns they can expect to realise.We are currently encouraged by what we consider to be an unequalled opportunity set in our funds. It is true that in the short term, you can be made to look very foolish by the market when you enter into positions early, as value managers often do. However, we remain focused on finding quality companies that stand out from the rest at good prices, understanding that we are ultimately investing in real companies that bring in real earnings. We believe that this ability to look beyond the headlines will ultimately reward our investors handsomely in the long run.
Anet Ahern is the CEO of PSG Asset Management.