PSG Asset Management’s deputy chief investment officer, John Gilchrist, believes that a regime change is underway in markets.
Speaking at the PSG quarterly roadshow, Gilchrist said US markets have reached an inflection point, as inflation and bond yields were coming off multi-decade lows.
‘Low interest rates and weak economic growth have favoured growth sectors such as technology,’ he said, ‘but there are signs of higher economic growth, particularly in the US – and this almost always leads to a revival in value shares.’
He said higher wages in the US would lead to higher spending by the middle classes. Multitrillion-dollar spending on infrastructure and converting economies to a carbon-neutral future would also boost economic growth.
Gilchrist believes there will be echoes of the high inflation years from 1967 to 1980 in the current cycle. In that period, coal and oil stocks as well as value shares in general comfortably outperformed inflation, the overall stock market and growth shares.
‘As the 10 year US Treasury yield goes up, research shows that commodities lead the market in terms of performance,’ Gilchrist said.
He said there is a high likelihood that, in the next decade, bond yields will rise, short-term interest rates will increase, and inflation will remain higher, but there will be stronger growth.
This will help ‘short-duration’ assets such as commodities and utilities, which give cashflows back to shareholders in the near term. He said high dividend-yielding shares and real assets such as infrastructure will also benefit.
Local opportunities
He added that there is still an opportunity to get significant real returns from South African assets.
He said that there is an asymmetrical return profile available from the 10-year South African sovereign bonds.
‘If there is no capital gain or loss there will be a comfortable 9.7% return. Under our bull case, if there is a 12.3% capital gain, the return will be an attractive 22%. And even in our bear case, of a 12.3% capital loss, the total loss will be a muted 2.5%.’
Gustav Schulenberg, co-manager of the PSG Equity fund said that big winners in 2021 were Grindrod Shipping, up 402% and the Greek-based Star Bulk Carriers, up 185%. Both benefited from the supply constraints on global shipping.
But Schulenberg believes there are several unappreciated quality shares in PSG’s funds, which had a flat year in 2021.
‘There is plenty of opportunity for these shares to reprice.’
The universe includes locally listed shares such as Anheuser-Busch Inbev, Discovery and the JSE itself. Internationally, it includes Japanese brewer Asahi; Prudential, the life insurer and asset manager focused primarily in Asia; Hiscox, which is a niche short-term insurance underwriter on the Lloyd’s market; and Liberty Global, a US cable television business.
Schulenberg said that although the US has outperformed the rest of the developed world (Europe, Japan and Australia) for more than 14 years, the non-US markets outperformed the US for six years before that and in four other multiyear periods since 1970.
He said buying a global index tracker does not look like a good solution. ‘In the S&P 500, just the 10 top shares account for 31% of the total market capitalisation. That is significant concentration risk.’
Performance
PSG had a very strong 2021, with the PSG SA Equity fund up 45.45%, well ahead of both the FTSE/JSE All Share index (29.2%) and the FTSE/JSE Mid Cap index (28.4%). The PSG Diversified Income fund returned 9.7%, outperforming nominal bonds (8.4%) and cash (3.8%).
Gilchrist, who co-manages the fund, said it selectively added value by investing in other asset classes which fall into the universe available to multi-asset income funds – preference shares (up 45.0%), listed property (36.9%) and inflation-linked bonds (15.5%).
And PSG’s selection of global equities, in the PSG Global Equity fund, was ahead of the MSCI All Country World index, at 32.7% and 29.3%, respectively. And the fund isn’t managed in London, New York or Boston but at home base in Cape Town.