Denker SCI SA Equity Fund - Dec 22 - Fund Manager Comment22 Feb 2023
Market review
Global markets
2022 was a volatile year with global risk aversion heightened by a number of factors - including rising global inflation, interest rates and the risk of a global recession. However, uncertainty creates opportunity for the discerning investor and we have been through many of these cycles in the past. In 2022, the MSCI World Index fell by 18.1% in US dollar terms while the MSCI EM Index fell by 20.1%. Other factors that contributed to the volatility were:
- The invasion of Ukraine by Russia in February. Following this, the US and Europe coordinated broad based sanctions against Russia and specific individuals.
- The US Fed raised interest rates and dropped the term ’transitory’ when discussing inflation. Markets remained volatile as participants tried to determine the prospects for the US economy, labour markets, inflation and the consequent interest rate trajectory.
– The UK experienced major upheaval, with three different prime ministers serving in a matter of weeks.
– Xi Jinping secured an unprecedented third time as the top leader of the Chinese Communist Party. Despite zero-Covid being a cornerstone of Xi Jinping’s policies, towards the end of the year the policy was relaxed (the potential normalisation of economic activity was welcome by markets).
– Europe agreed to impose taxes on imports based on the amount of green house gases emitted in the production of the goods. This is the first time that climate change regulation has been inserted into global trade rules. The bloc also proposed a cap to natural gas prices to shield consumers from the effects of higher energy costs.
The energy sector was by far the best performing sector for the year (gaining 46%). It was also the only sector that posted growth. Utilities (-4.6%), health care (-5.6%) and consumer staples (-6.1%) held up relatively well. Communication services (-37%), consumer discretionary (-33.3%) and technology (-30.7%) were the worst performing sectors.
South African markets
South Africa experienced unprecedented loadshedding in 2022 as the executive team tried to balance competing constraints. The CEO (under political pressure) resigned in the middle of December, whereafter he opened a case of attempted murder for suspected cyanide poisoning. The ANC announced the new ‘Top 7’ National Executive Committee (NEC) members. President Cyril Ramaphosa was comfortably re-elected as president of the party, deputised by Paul Mashatile. The remaining positions were won by Gwede Mantashe (chairperson), Fikile Mbalula (Secretary General), Nomvula Mokonyane (First Deputy SG), Maropene Ramokgopa (Second Deputy SG) and Gwen Ramokgopa (Treasurer General). Political commentators believe that the leadership is largely allied to Ramaphosa. Ramaphosa continues to be embroiled in the Phala Phala scandal. We remain concerned that the political leadership will be distracted by political infighting and legal battles and not the very urgent business of economic reform. We believe that local political considerations should have limited impact on well diversified portfolios.
The FTSE/JSE Capped Swix was up 4.4% in 2022. The SA resources index was the best performing index (up 8.6%), with financials up 6.9%, while industrials fell 3.7%. The small cap index was up 7.6%, while the large cap index rose by 3.9% and the mid cap index by 1.6%. The SA market performed better than most global markets, despite a weaker rand relative to the US dollar (it depreciated by 6.2% for the year).
Portfolio review
We are proud to say that the fund outperformed its benchmark for the year – as well as over 2-, 3-, and 5-years. With good stock picking, the team generated performance ahead of the underlying benchmark and we generated positive absolute returns for the year.
Reflecting on the year, a number of our holdings performed well ahead of the market. Corporate action was one of the themes that played in our favour. Our holdings in Mediclinic, Alviva, Grand Parade Investments and Royal Bafokeng Platinum all benefited from some sort of corporate action. The portfolio benefited from the consortium that bid to buy out the minorities in Mediclinic. For the year, the Mediclinic share price rose by 46.6%. The recent bid to buyout minorities in Alviva at a price of 2800 cps, in cash, resulted in the share price rising by 67.5% for the year. The Grand Parade Investments share price benefited from recent interest in their gaming assets, with the share price rising by 24.2% for the year.
The interest in Royal Bafokeng Platinum from both Impala Platinum and Northam Platinum has led to a bidding war for the assets. We sold out of our holding in Royal Bafokeng during the year as the share price reacted favourably to the bids from both Implats and Northam. Our performance was broad based as we benefited from good stock picking in the large cap segment of the market (our holdings in Investec, BHP Billiton, ABSA, British American Tobacco, Woolworths and Nedbank all contributed handsomely to performance). In addition, many of our small cap positions performed well (including Alviva, Combined Motor Holdings, Sun International, Famous Brands and City Lodge). We also managed to avoid many of the poor performing stocks last year (like Telkom, Aspen and Spar; to name a few). We’re proud of the team’s stock picking ability and we remain focused on generating the best possible returns for our clients.
The outlook remains uncertain. Trying to consistently predict the future macro environment
is always unpredictable (unless you get lucky on the odd occasion). We need to focus our attention on what we are able to control. This means that we must manage risk and uncertainty by constructing diversified portfolios and sticking to our tried and tested investment philosophy and process. Our larger investible universe relative to our peers remains a competitive advantage. Our investible universe in SA of approximately 110 stocks is significantly greater than our larger peers. We see a number of attractive investment opportunities. The median stock in our universe has a normalised price to earnings ratio of 9.1 times and a one year forward dividend yield of 4.5%. These are attractive metrics relative to history. As mentioned above, uncertainty creates opportunity. Long term returns are generated from the price you pay. If your entry levels are reasonable, the prospects of generating long term returns above inflation are sound.