RAND hedge stocks such as mobile phone operator MTN
[JSE:MTN], media giant Naspers [JSE:NPN], global brewer SABMiller [JSE:SAB] and
consumer goods giant British American Tobacco [JSE:BTI] (BAT) remain
attractively valued compared to pure domestic businesses.
This is the view of Quinton Ivan, the head of research at
Coronation Fund Managers, who says global equities like these are discounting
the worldwide economic downturn.
"This justifies a holding close to the 25% offshore
limit in our domestic balanced funds," says Ivan, adding these equities
comprise about 73% of Coronation's equity portfolio.
He says markets remain extremely challenging and expects
this volatility to continue, exacerbated by political brinkmanship and policy
paralysis, especially in Europe.
Increased risk aversion during the second quarter resulted
in a reversal of the strong gains enjoyed by equities at the start of the year.
"Europe remains the protagonist dominating global news.
Steps to achieving a resolution of the eurozone crisis were dealt a blow when
the electorate of France and Greece voted against the German-enforced austerity
measures, thereby increasing the likelihood of a disorderly breakup," says
"This followed the dissolution of the ruling Dutch
government on the same austerity issue.
"In Greece the pro-bailout parties, New Democracy and
Pasok, secured sufficient votes to form a coalition government, slightly
reducing the risk of a Greek exit.”
Investor confidence was further shaken when Spain was unable
to escape the contagion of uncertainty, which saw Spanish bond yields rise to
unsustainable levels. This culminated in a €100bn bailout package for Spanish
Nearly three years into the eurozone crisis the economies of
Ireland, Portugal, Greece and Spain have been bailed out and Europe is still
nowhere near implementing the necessary structural reforms required for the
continent to survive.
"The risk of a disorderly breakup of the eurozone is no
longer a tail risk and market volatility will be with us for the foreseeable
future,” says Ivan.
The All Share [JSE:J203] Index returned 1% for the second quarter.
Financials were once again the best performer with a 4.6% return.
Industrials returned 2.6% and resources lagged with a minus
-3.6% return. Resource stocks remained under pressure given concerns over the
slowdown in China, a large consumer of commodities.
"Although most commodity prices remain high, we believe
that resources currently offer value, with selected resource shares trading at
less than 10 times our assessment of normal earnings," says Ivan.
"While we continue to buy resource, the sustainability
of Chinese demand remains the great imponderable and we do not have sufficient
conviction to justify higher exposure at current prices.
"Our preferred resource holdings continue to be Sasol,
the diversified miners (specifically Anglo American) and Mondi."
Coronation remains underweight on gold shares as these
stocks are overvalued based on the assessment of normal earnings.
The fund managers also remain concerned over declining
grades, impact of safety stoppages on production and enormous cost pressures
faced by these businesses (labour, electricity and water).
Banks returned 2.7% in the second quarter, underperforming
"We have long espoused the attractiveness of South
African commercial banks in previous commentary. Year-to-date, banks have
returned 18.8%, comfortably outperforming the market and we have taken
profits," Ivan says.
"In an environment where markets oscillate wildly,
depending on the news of the day, we remain committed to our investment
philosophy of 'cutting out the noise' and investing for the long term."
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