Novare Bets on Insurers, Small-Caps as Big Winners in SA Market Rally
South African insurers, banks, retailers and domestically focused small-cap stocks are set to be the biggest winners from a rally in the country’s stock market, driven by growing optimism that the Government of National Unity (GNU) will make progress in promoting stability and economic reforms.
That’s the view of Handre Retief, a portfolio manager at Novare Holdings, who also sees strong potential for South African bonds to outperform global averages.
Reflecting this confidence, Novare has strategically increased its allocation to local assets, adopting an overweight position in South Africa relative to its benchmark indices.
“Many of the building blocks are in place for solid returns over the next year,” Retief says. “Within equities, we’re particularly keen on financials, with a preference for banks and insurers.”
“We believe insurers are well-positioned to benefit most from a potential interest rate cut. We also see significant value in small-cap SA Inc. stocks.”
Novare has been buying shares in companies such as Motus Holdings, Southern Africa’s largest automotive company, and other small-caps trading at attractive valuations.
The investment firm, which has R10 billion in assets under management, expects faster economic growth, lower interest rates and the release of billions of rand in pension funds from September – thanks to the introduction of the two-pot system – to provide relief to consumers and boost retail stocks.
“Our macro strategist is forecasting economic growth of 2%-3% over the next three years,” Retief adds. “We are also seeing improvements at Transnet and a reduction in load-shedding.”
“This is a good time to be overweight South African equities.”
Hedge Your Risk
Despite this optimism, Retief urges caution.
While Novare is overweight in local equities, it does not take excessive risks. The firm uses hedging strategies to protect clients from potential losses, particularly in stocks that have made significant gains in recent months.
This cautious approach underlines Novare’s broader risk management strategy, ensuring that gains are preserved even in a volatile market.
Novare is a strong advocate of including hedge funds in a retirement portfolio. Retief argues that hedge funds provide an important layer of risk mitigation, particularly in uncertain markets.
Unlike traditional long-only funds, which earn a return when an asset rises in value, hedge funds can take advantage of short opportunities – selling an investment to buy it back later at a lower price – and employ market-neutral strategies that offer greater flexibility and protection against market downturns.
The use of hedge funds remains relatively limited in South Africa, with only about 2% of assets allocated to these vehicles, compared with about 10% globally, according to Retief.
He attributes this to the lingering stigma associated with hedge funds, which are often perceived as high-risk investments.
However, hedge funds are growing in popularity, with assets under management in the local industry soaring 24% to a record R94 billion in 2022 compared to the previous year.
This growth, primarily driven by significant inflows, is highlighted in the latest Novare Hedge Fund Survey.
Retief believes that as awareness grows and investors begin to see the benefits of diversification, the adoption of hedge funds will accelerate.
Novare continuously analyses asset managers, focusing on their profiles, investment styles, consistency, and culture, allowing the firm to construct portfolios and allocate funds strategically across various managers to achieve the best returns with the least amount of risk.
The annual hedge fund survey, which debuted 20 years ago, has become a key industry guide, providing deep and objective insights into the sector.
Bonds to Buy
On the bond side, Retief says Novare sees further potential for yields to fall, pushing prices higher, as bond yields and their prices move inversely.
While yields have already come down, Retief believes there is room for them to fall further, especially if the government continues to make progress on its reform agenda.
He notes that the Medium-Term Budget Policy Statement (MTBPS), which is typically released in October, could further boost bonds as the GNU adopts a more conservative fiscal approach.
However, Retief warns of external risks, such as potential shifts in US monetary policy and the upcoming presidential election, which could affect global bond markets.
A victory for former President Donald Trump, for example, could push up 10-year Treasury yields.
Further interest rate hikes by the Bank of Japan, geopolitical uncertainty and a slowdown in China could also affect the value of South African assets, says Retief.
To manage these uncertainties, Novare has shifted its focus from longer-dated South African bonds with maturities of 10 years or more to bonds that become due in two to five years, giving its funds a more defensive stance while still positioning them for potential gains.
With China’s economy growing more slowly than expected, placing pressure on commodity prices, Novare’s funds are also underweight commodities relative to their benchmarks.
“Where we can hedge, we do so to protect our investors on the downside,” Retief adds.
“There are a lot of opportunities in the South African market,” he says.
“But we’ve always believed in diversification, and hedge funds bring that to your portfolio. At the end of the day, it’s all about risk mitigation.”
Loading ...
