In the first RE:VIEW of 2009, we published an article highlighting the dramatic fall in world markets over the preceding year (‘Who Is The Idiot?’, RE:VIEW Volume 7, January 2009). We attempted to provide some insight into our thinking at the time and what we were doing for clients. In the process, we pointed out that while a mantra such as ‘buy when others are fearful’ sounds good in theory, actually implementing it in practice is a different matter. There were numerous situations in 2008 where investor sentiment clearly was fearful, but buyers of assets in those situations lost everything.
At the time, we had been increasing equity exposure in our funds materially – especially in the Global Fund. By referring to some broad measures of value for markets, we illustrated how the overall pricing of markets was consistent with, and conducive to, the wealth of bottom up opportunities we were finding. But we also noted that, despite more plentiful opportunities in South Africa than before, we weren’t finding great value in the larger companies on the JSE.
In the preceding issue (‘Are We There Yet?’, RE:VIEW Volume 6, October 2008) we had pointed out some markers that one typically sees at market bottoms. Among these was the delisting of companies at cheap prices. While all the boxes had not been ticked for a market bottom early in 2009, we did discuss the delisting of Celcom from the JSE as an isolated example of the kind of delisting one often sees at market bottoms. We noted that if this type of transaction became more common, one would probably also be able to tick the ‘Delistings’ box for a market bottom.
What’s happened since then
Early 2009 was undoubtedly a great time to be buying assets, and we were right to have been allocating capital to equities – and corporate bonds – at the time. However, many markets experienced a very quick and sharp bounce back to levels where we were again finding it more difficult to buy compelling value. This was probably at least partly due to the aggressive fiscal and monetary stimulus measures implemented by many governments.
What we learned
South African stocks delivered stellar returns in rands and dollars from early 2009 to early 2011, and we should have been buying those stocks more aggressively than we did at the time. We consciously did not invest in some stocks that went on to do very well because in our analysis we could not come to the conclusion that they were cheap enough to buy at the time. However, there were instances where there was a brief window of opportunity to buy some stocks very cheaply which we failed to capitalise on. We took this lesson to heart and have made changes to our investment process to avoid such mistakes in future.
Current thinking and positioning
Our original article contained three charts, showing valuation measures for the US market, the world market, and South Africa. All three of these show far less attractive value on offer today. See Chart 1 to 3 on the following pages.
Chart 1: US Stock Market Price to Replacement Cost (q) and Cyclically Adjusted Price-to-Earnings
Source: Smithers & Co
Chart 2: World Market Price-to-Book Ratio
Source: Thomson Reuters Datastream
Chart 3: South African Market Price-to-Book Ratio
Source: Thomson Reuters Datastream
Whereas the RE:CM Global Fund was fairly heavily invested in the United States at the time of the original article, the Fund’s exposure has since moved away from the US and towards Europe and Japan. We’ve found that many of our large US holdings reached fair value in the time since early 2009 and we’ve reduced exposure meaningfully as a result.
In South Africa, large parts of the market have become downright expensive since early 2009. However, we’re finding a large discrepancy between the prices the market is willing to pay for the shares of most South African industrials and some financials, and the prices being offered for many resources stocks. We’ve been able to find some very attractive pockets of value in South Africa in industries such as platinum mining and steel.
Whereas there were some, if not all, of the signs of a market bottom evident in early 2009, today we’re seeing no such signs. In fact, in South Africa specifically, the market is reaching new highs on the back of price increases of expensive stocks that keep getting more expensive. This is typically something more associated with a market peak than a trough, which corroborates our bottom up conclusions on the South African market. So while we were quite excited about global markets in early 2009, and perhaps not excited enough about the South African market at the time, today we find ourselves much less excited about the global market, and even less so about South Africa.
Chart 1: US Stock Market Price to Replacement Cost (q) and Cyclically Adjusted Price-to-Earnings
Chart 2: World Market Price-to-Book Ratio
Source: Thomson Reuters Datastream
Chart 3: South African Market Price-to-Book Ratio
