Peter Brooke 00:00
Good day. I'm Peter Brooke, Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective Number 44 of 2020, and I want to reflect on some of the market action on the JSE last week.
A number of South African-orientated shares jumped sharply higher, with double digit gains in typical names like Absa, Bidvest, Liberty Holdings, Nedbank, Pepkor, Truworths, and Woolworths. In such a volatile year, many of you may not be surprised by these type of moves. But what I found interesting was the lack of volume. There are no really large sellers left at the lower levels, allowing a small amount of buying to push prices higher. This is particularly noticeable in the small cap space. For instance, one of the counters we own, Omnia, has jumped 35% month to date. This was on the back of news of an asset sale of Oro Agri for more than expected, highlighting that there is a lot of value in the company.
This is something we've been flagging for some time. South African shares are cheap, they just need a catalyst. In the Omnio case, a corporate deal was the catalyst. But for the large cap shares last week, all it took was a shift in sentiment and some bywaters. Now, sentiment will ebb and flow. But what I am confident on is that the attractive valuations will deliver better real returns from South African shares in the next five years. In particular, relative to the lean years we've suffered under during the last five years.
For those prepared to take some risk in South Africa, the small cap shares are the most neglected part of the market. Many of these are no longer covered by stockbrokers, because they're too small and the industry is cutting back. Our Old Mutual Mid and Small Cap Fund, run by Kayalethu Nodada, gives a good and easy way of buying exposure to this. There's a broad basket of South African shares trading at 10 times earnings, with a dividend yield of more than 4%, and an analyst fair value upside of more than 20%. In line with that little bit of money coming into the market, the fund has done very well over the last month.
And this is good news for me. In the fund that I manage, the max return fund to fund, I'd increased the allocation to small and mid cap shares via Kaya's fund. I funded this purchase by bringing money back, particularly cash from offshore. The Max Return Fund still has more than 50% invested outside of South Africa, but the opportunity to come and buy these cheaper shares will create better returns in the long run. So, here's hoping that these neglected shares enjoy many more months of strong returns.
Until next week.