After rising for a record 15 consecutive months to end January 2018, the S&P 500 index has recently pulled back. This is a welcome development for local fund managers looking for global opportunities.
For most of 2017, PSG Asset Management expressed concern about the generally elevated levels of global equity markets, based on high valuation ratios (relative to historical levels) and extreme investor complacency.
Conversely, PSG has been increasingly positive on domestically focused South African companies. Here, political and economic uncertainty has kept prices low, despite the inherent quality in these businesses.
“We were finding fewer high-conviction opportunities across global markets and our offshore equity allocations across our domestic funds have not been at full capacity,” says Philipp Wörz, fund manager of the PSG Global Equity and PSG Global Flexible Funds. Cash levels in the PSG Global Flexible Fund steadily increased throughout 2017 and after the strong start to global equity markets in 2018, the fund’s cash exposure reached a record high of 37% in late January.
“The true value of cash shows itself when volatility rises, prices fall and liquidity is in short supply. Then it becomes valuable firepower to capitalise on market mispricing. The recent pullback in global markets has presented a number of opportunities to deploy our cash reserves,” says Wörz.
Wörz notes that several areas of the markets have presented excellent global investment opportunities over the last three months. One such area has been the US retail property sector, where historic overbuild, department store issues, fears of online cannibalisation and higher interest rates have driven valuations to low levels.
“People tend to paint specific sectors with the same brush, and while mall traffic has been under pressure for some time, this doesn’t apply to top-quality, Class A retail properties, which remain sought-after assets,” says Wörz.
PSG Asset Management have been buyers of the New York-listed Simon Property Group, the world’s leading retail Real Estate Investment Trust (REIT). It owns over 190 retail destinations in the United States and has a growing international footprint with 27 assets located in 11 different countries. Simon is also the largest lessor of Class A real estate in the US and owns five of that country’s top 10 malls. The company has compounded its distributions per share by 8.5% per year over the past 16 years and currently yields 5.1% – a spread of 2.3% over US Treasury bonds.
“We have also found company-specific opportunities in Japanese financials, agricultural commodity producers and energy services,” says Wörz.
At end March 2018, cash in the PSG Global Flexible Fund stood at 28%, and offshore allocations in domestic funds have been increased.
Despite the recent declines, overall market valuations remain high
“Investors should bear in mind that although markets have declined by approximately 10% from recent highs, overall market valuations are still elevated when compared to history. In fact, many stocks are only back to where they were a few months ago,” says Wörz.
Fortunately, for bottom-up stock selectors the global investment environment remains one characterised by extremes. “The differences between the prices paid for expensive stocks that dominate indices and those paid for cheap, out-of-favour stocks are at levels last seen during the dotcom bubble,” says Wörz.
The funds that PSG Asset Management have recently allocated to are in areas of the market characterised by higher levels of uncertainty as this is where general sentiment results in the mispricing of attractive opportunities.