JSE will not offer last year’s easy money in 2022 — Denker Capital

Denker Capital, the asset manager spun out of Sanlam in 2015, says SA investors need to moderate their expectations for local equities in 2022, though it believes the bourse could still deliver double-digit returns even after last year’s bull run.

The JSE all share index defied the prophets of doom in 2021 when it rallied 24.1%, despite index heavyweights Naspers and Prosus losing 18% and 18.3% respectively. That was due partly to a surge in resource stocks on a commodity market rally led by Royal Bafokeng Platinum (up 139%), Anglo Platinum (26%) and Glencore (73.3%), as well as a small caps index surging 52%.

The 2021 rally paid handsome dividends for asset managers willing to take a punt on the bourse. These included Coronation, Ninety One, Denker and Truffle Asset Management, who all piled in last year. One of the biggest rallying cries for the JSE in 2021 was its relatively cheap valuations, which left blue chip stocks such as MTN, Pepkor and Investec as well as small caps such as Italtile and Hudaco trading at substantial discounts to their intrinsic value.

“The easy money has certainly already been made,” says Claude van Cuyck, a portfolio manager and co-founder at Cape Town-based Denker, which has about R5.6bn in assets under management. “Valuations are still fairly reasonable in general in the SA market, which in our minds means you can still generate reasonable double-digit returns from local equities. But your view on expected returns should be moderated relative to last year.”

Van Cuyck points out that when one measures the JSE’s performance over four or five years, its performance in 2021 appears far less impressive.

While the Capped Swix index, which caps the weightings of individual stocks in the JSE all share at 10% to reduce concentration risk, returned 27.1% in 2021 its compound annual growth over the past five years is just 7.2%. Over the past four years the compound annual growth in returns was 5%, including 2021.

Though Van Cuyck is not willing to go so far as to predict what the JSE might deliver in 2022 he does say that Denker is not at present allocating capital to SA shares unless they are likely to achieve its required annualised return of at least 14%. That compares with Denker’s required annual returns for US stocks of 7%-8%, which is based on the weighted average cost of capital.

Though he says the US market still offers good stock-picking opportunities it is likelier to be affected negatively by the expected upward interest rate trajectory from the Federal Reserve. Van Cuyck says that is because the oversized weighting of the FAANG stocks (Facebook,

Amazon, Apple, Netflix and Google) on the US market are pricing in high growth for the next two to three decades. By contrast, SA stock valuations assume low to modest growth for the foreseeable future.

“Every percentage increase in US interest rates will have a disproportionate impact on stocks like the FANGs that are highly rated and priced for longterm growth, especially relative to more cyclical assets, says Van Cuyck.

With one year forward”priceto-earnings multiples of the Capped Swix at about 10 or 11 times, versus about 20 for the S&P 500, Denker’s SA equity team sees greater relative value in the local market. It especially likes banks, industrials, select commodity stocks and small caps.

Denker’s favoured banking pick is Investec, though it also holds FirstRand, Absa, Standard Bank and Nedbank. It does not hold Capitec as it finds the valuation too steep.

WE BELIEVE RATES ARE STILL LOW ENOUGH TO KEEP CREDIT-LOSS RATIOS IN CHECK, WHICH WILL BE POSITIVE FOR EARNINGS RECOVERY

“The banks are starting to look attractive now on a relative basis,” says Van Cuyck. “In a rising interest rate environment you will get the positive endowment effect, although we believe rates are still low enough to keep credit-loss ratios in check, which will be positive for an earnings recovery.”

Denker says credit losses will be affected only once rates have been hiked a cumulative 1.5% to 2% as that is the level at which consumers begin to be affected.

In the small to mid-cap space Denker holds Hudaco, Combined Motor Holdings, Grand Parade Investments, Alviva and Libstar. As a smaller fund manager, Denker is better positioned to include small and mid-cap stocks in its portfolios, as it does not have to allocate the large chunks of capital that its bigger rivals do, which can be a headache given the lower liquidity of smaller counters.

Denker also expects hospital groups Life Healthcare and Mediclinic to continue to recover as SA emerges from the ravages of Covid-19. Hospitals have suffered lower occupancy levels and an absence of highmargin elective surgeries while costs have ballooned due to the Covid-19 pandemic.

“The PPE costs they’re having to carry are pretty significant while their general length of stay has diminished during the pandemic period,” says Van Cuck. “They will start to recover as the Covid situation normalises, which should lead to a recovery in revenues and margins.”