Beating turmoil in South Africa means taking a longer view: PSG

With the outcome of December’s ruling-party leadership contest impossible to forecast, a South African money manager says the best strategy is not to position for the event, but rather look beyond it.

Instead of assuming the worst and piling into stocks that fare well when South Africa’s rand weakens, or adding holdings in banks in the conviction a market-friendly candidate will win the African National Congress’s top job, PSG Asset Management says those running its funds are positioning to ride out the storm.

“What we want to do is own stocks that are going to do fine for our clients on a long-term view, regardless of what happens,” said Shaun le Roux, who helps oversee R33 billion ($2.5 billion) at Cape Town-based PSG.

The contest to succeed Jacob Zuma has divided the ruling party, with factions forming around two front runners: Nkosazana Dlamini-Zuma, a former wife of the current leader, and Cyril Ramaphosa, regarded as the most favorable to investors. PSG sees the best approach to navigate the potential turmoil as using “bottom up” selections of individual stocks, while staying liquid enough to take opportunities when the market misprices shares, Le Roux said.

“We sit with a lot of cash in the funds that allow for that and we’ll grab opportunities if there is volatility in a sell-off,” Le Roux said in an interview in Johannesburg.

“But there’s an overlaying price discipline that says we’re not going to overpay – we’re not going to pile into rand-hedges just because we’re worried about what might happen.”

South African shares have lagged their developing country peers, with the benchmark index gaining 9% this year, compared with a 25% advance for the MSCI Emerging Market Index. The rand has strengthened 1.4%.

Rand-hedge stocks that gain when the currency weakens have become expensive, Le Roux said. “We’re not avoiding anything, but we do flag that some of the traditional hedge stocks that are big in our index look very pricey to us and we think there are much better opportunities for our clients.”

Discovery, the country’s largest health-insurance administrator, is among Le Roux’s preferred South African stocks. Local investors don’t fully understand the company’s competitive advantage in life and healthcare insurance and how it uses technology and data to gain market share and increase its earnings, he said.

Read: South Africa is no longer the best place to invest in Africa

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Beating turmoil in South Africa means taking a longer view: PSG