The South African economy is facing a raft of challenges: the political landscape is on a knife-edge; a sovereign debt downgrade to “junk” status is a real possibility and a fragile low-growth economy is buckling under the pressures of high rates of inflation and rising interest rates. This is not a “feel-good” scenario and downside risks are elevated as far as economic growth is concerned.

It is therefore not surprising that investment sentiment is very poor and investors are seeking to protect their portfolios against further deterioration in the status quo. The preferred method of portfolio protection seems to be by raising exposure to non-resource rand hedge stocks. While many of these companies are amongst the highest quality and largest businesses listed on the JSE, and investors in them have been handsomely rewarded in recent years, it is worth noting that the ratings of these businesses are very high - we think they are overvalued. And this risk of owning expensive shares is further exacerbated by a high level of earnings when expressed in rands (given material rand weakness over the last year). Accordingly, it is highly possible that owning expensive rand hedge shares may not prove to be such a defensive strategy after all.

PSG Asset Management, on the other hand, has been reducing our exposure to rand hedge and offshore stocks and utilising our very large cash balances to acquire some of the out-of-favour domestically-focused businesses in SA at what we consider to be a wide margin of safety.

We are often asked why we would be buying SA banks, insurers or interest rate sensitive industrials under the current circumstances. Our answer is simple - it is the very tough economic conditions and very poor sentiment that result in the opportunity to buy good businesses at very attractive valuation levels. In fact, many of the stocks that we have been buying for our clients are trading at price-earnings ratios or dividend yields last seen in 2003 or 2008. To buy above-average quality companies at distressed prices bodes very well for long-term returns for our investors.

The PSG Flexible Fund was a buyer of Firstrand, Imperial, Old Mutual, Coronation and Discovery during the first quarter of 2016.

The level of cash in the Fund decreased from 30% to 28% over the quarter. It is worth remembering that cash levels were as high as 42% in May/June of 2015 and we were aggressive buyers of equities as opportunities presented in the latter stages of 2015.

The foreign equity component reduced from 29% to 26% during the quarter.