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  • Writer's pictureLisa Perry

The opportunity in SA Inc.

Updated: May 2, 2023

The following is an extract from an article published by PSG; the link to the full article is at the bottom of this extract.

Mikhail joined PSG Asset Management in 2015 and serves as an Assistant Fund Manager. He conducts research on both local and global companies across various sectors. Before joining PSG, he worked in the assurance division at Ernst & Young. Mikhail is a qualified Chartered Accountant.

'It was the best of times, it was the worst of times…'Charles Dickens, A Tale of Two Cities

The best investment returns are born in times of fear and uncertainty

The views of value investors currently assessing South Africa are likely to echo Charles Dickens’s description of the atmosphere ahead of the French Revolution in the late 1700s. On the one hand, there’s a prevailing negative narrative about the endless and seemingly unsolvable problems facing the country. On the other hand, these ‘worst of times’ politically and economically could be the ‘best of times’ for investors.

Exploiting market cycles is key to investment success

Markets are inherently cyclical. There are ups and downs, good times and bad. Understanding and exploiting these cycles is a key determinant of investment success. In his book The Most Important Thing, Howard Marks, the esteemed American investor and writer, provides a framework to understand market cycles. He introduces the concept of taking the market’s temperature. The goal is to determine if markets are at either of two extremes: hot (where market participants are very optimistic, and valuations are high) or cold (where market participants are very pessimistic, and valuations are low). As counter-cyclical investors, we exercise caution by building cash in hot markets while aggressively deploying cash in cold markets.

South Africa is currently at the cold end of the market spectrum

Signs that point to this include: • Newspaper headlines that consistently highlight the negatives: recession, political turmoil and fears around land expropriation. Any talk of the ‘Cyril Spring’ or ‘Ramaphoria’ is a distant memory. • Business confidence (shown in Graph 1) that is close to 40-year lows seen during the Rubicon speech in 1985, fears of a civil war following Chris Hani’s assassination in 1993, the Asian financial crisis in 1997/1998, and the global financial crisis of 2008/2009. • Recent financial results commentary from JSE-listed companies that reveals just how tough the current economic environment is. Businesses exposed to South African GDP (SA Inc.) are experiencing some of their most testing times.

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