Predicting the investment environment in the year ahead can be tricky as volatility continues to flavour investment trends. Independent managers of several of Amplify Investment Partners’ funds are accustomed these conditions and agile enough to remain cognisant of and act according to the winds of change. Based on their track records in this regard, their views on the investment landscape in 2024 are worth listening to. Here are some of their expectations.
Amplify SCI* Flexible Equity Fund manager Abax Investments
The outlook is highly dependent on global central banks’ response to the return to normal, Abax says. Excess debt has built up across the globe, and slowly deflating this balloon will be a difficult balancing act.
Locally, Abax is positive on the technology, banking and small cap sectors. Naspers continues to be one of the only counters providing exposure to global technology, and there is value in Tencent/Prosus/Naspers, although better value in other Chinese stocks. South African banking shares continue to offer attractive return potential, with high dividend yields and attractive P/E ratios offering favourable valuations. Banks are well run with conservative balance sheets, which positions them well for any upturn in economic growth.
Small caps have been out of favour with very attractive valuations and reasonable growth prospects. Some of the fund’s bigger holdings include Zeda, Kaap Agri and Sun International.
Abax is negative on SA property, which is affected by increased interest rates, higher occupancy costs, work from home and loadshedding. Valuations have come down, but the fund has a selective approach with holdings including Dipula and Octodec, which are trading at attractive yields and at large discounts to net asset value. It is also negative on mining and resources on concerns about the strength of the Chinese recovery, weak commodity prices and labour market uncertainty.
Looking at asset classes, the fund is positive on local fixed income, which remains attractive despite the recent rally. Bonds are supported by attractive real returns, supported by expected interest rate decreases. It is cautious on offshore equity due to the potential impact of persistently high US inflation. Its preference is for China and Europe over the US.
Offshore fixed income has moved from being an uninvestable asset class to offering potential real returns, but offshore property faces headwinds.
Amplify SCI* Wealth Protector Fund manager Truffle Asset Management
Truffle expects continued economic uncertainty and market volatility globally. It is becoming more likely that both inflation and interest rates in most regions have peaked and should start to come down over the year, but rate hikes over the last 18 months will impact the US economy in early 2024 and put further pressure on an already high earnings base. Chinese growth remains lacklustre.
Truffle is neutral local equity, but said SA valuations are compelling, particularly for certain sectors and stocks. It said local fixed income is offering compelling real yields, but long-term SA economic constraints will keep pressure on yields. Most local property companies are still trading 30% to 50% lower than 2019. Peak rates or rate cuts could be major catalyst to unlock value.
Persistently high interest rates are a headwind for global markets, and Truffle is negative US equities, where valuations remain elevated. Tech stocks’ rerating continues to support the market. It is neutral offshore fixed income in Europe and the UK which, while not expensive, face continued headwinds as interest rates stay higher for longer and economic activity is starting to slow. However, it is positive emerging markets, which are generally very cheap and a good value in the medium term. The offshore property sector has been extremely weak, but given the fund’s view that rates have peaked, it has started to increase its exposure.
Locally, the fund continues to focus on select stocks with high free cash flow and attractive dividend yields, and which are trading at significant discounts to intrinsic value. It is positive banks and finance with larger banks at attractive valuations and showing relative resilience, and it favours banks with high dividend yield and some operations outside of SA. It is also positive clothing retail companies that have struggled through 2023 with loadshedding, excess stock and low margins. Earnings bases are low, and valuations reasonable. It is also positive on Naspers/Prosus whose cross holding restructuring and share buyback programme is value accretive. It is positive foreign-developed companies like AB InBev which should show margin recovery and good earnings growth. However, it is negative on telcos, and on mining, where the lack of significant Chinese infrastructure spend and stimulus, and the struggling property sector don’t bode well for base metal demand.
Amplify SCI* Balanced Fund manager Laurium Capital
Laurium sees value in local equity, which is very diversified and trading at 9x forward earnings which is nearly two standard deviations cheap and not far off the lows last seen in the depths of the pandemic.
Laurium said global consumer stocks and the likes of AB InBev look attractively valued, with the added tailwind of reducing input costs and lower debt levels going forward. Naspers and Prosus remain supported by buybacks and robust earnings growth in Tencent. South African banks are attractively valued and well provisioned, and it continues to see upside in paper and packaging and diversified mining companies which are attractively valued at this point in the cycle.
It is negative on discretionary retailers that are likely to be under pressure as consumers take on the strain of higher inflation and high interest rates. It is less positive than in was in 2023 on insurers, purely on a valuation basis.
The relative valuation differentials between offshore equity and local equity still favour local equity. While interest rates in the US will come down towards the latter half of 2024, which should be supportive for US equity markets, valuations overall are still reasonably elevated. The S&P500 is trading at 19x forward earnings, which is nearly a standard deviation higher than its 10-year average. Within international equity markets it favours value.
Offshore fixed income has not been an attractive asset class, but as nominal yields have ticked up, the fund has begun to take exposure to US treasuries. It continues to find pockets of value in offshore credit markets where South African companies have issued USD/EUR debt. The fund has no direct exposure to offshore property and is not looking to add aggressively in 2024, and remains underweight local property, with bonds as an asset class looking more attractive, and lower risk, on a relative basis. Laurium continues to see value in SA government bonds, favouring nominals over inflation linkers.
Amplify SCI* Equity Fund manager Oyster Catcher Investment
Oyster Catcher said that at the start of 2024, it is most overweight Prosus, believing in the Tencent growth story and the value unlock through the sell down of Tencent to buy back Prosus shares. It is most overweight the foreign developed sector with the key overweights being Naspers/Prosus, AB InBev and British American Tobacco.
The fund expects reduced loadshedding in 2024. Apparel retailers have been especially hard hit, and the market has been overly pessimistic on share prices, and it is overweight Mr Price, TFG and Pepkor. It remains underweight in the PGMs, gold sector and SA industrials as it finds better value in other sectors.
Amplify SCI* Defensive Balanced Fund and Amplify SCI Absolute Fund manager Matrix Fund Managers
Matrix is positive local fixed income, saying there is good value in SA bonds, although persistent fiscal and political risks are likely to sustain the discount. Local fixed income offers an attractive running yield even without capital gain. It is also positive on local cash, with attractive yields and rising risks in other asset classes.
It is neutral on local property, which is persistently undervalued, but needs a turn in the rates cycle, and neutral on local equity, saying there are attractive valuations, although earnings momentum remains tepid on the soft commodity cycle and slow domestic growth.
Offshore, it is positive on cash which is an attractive hedge, and neutral on fixed income, which offers competitive returns for the first time in years, but where there is still risk of a more persistent positive term premium being priced.
It is negative on offshore property in a period of higher rate resets ahead for developed real estate, although there are specific opportunities. It is negative on offshore equity due to the downside risk to 2024 earnings and multiples having risen to well above average.
On local equities, Matrix favours tech, industrials and healthcare with a preference for defensive industrials with solid earnings momentum. It has reduced financial exposure as late cycle risks rise.
It is generally negative on gold mining (gold already being stretched with a geopolitical risk premium) and luxury, where earnings are past the peak.
Amplify’s managers say the trajectory or outcome of various events that are already known in 2024 hold high risks and uncertainties. These include local national elections, the power crisis, Transnet’s rail and ports crisis, war in Ukraine and the Middle East, US GDP growth and the Fed’s response and Chinese economic recovery.
There is generally consensus among Amplify’s managers that the key lies in a balanced and adaptable approach with a diversified portfolio. Geopolitical risk globally, elections (notably in the US, Russia and the EU), local elections and continued local economic pressures point to continued uncertainty and volatility, and a relatively defensive portfolio positioning.
Amplify’s managers, who have proven their ability to perform well during volatility, remain active and true to their philosophy and practice and remain cautiously optimistic for 2024.
*Sanlam Collective Investments
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