- 2021 saw large share price rallies in some shares, especially in the mining sector.
- A repeat of 2021's performances is unlikely, says Allan Gray.
- But the fund manager sees value in Remgro, and banking shares.
Last year delivered eye-popping returns for some investors in the JSE – particularly those with exposure to mining stocks, some of which saw their share prices multiply several times.
This includes ArcelorMittal, whose share price gained over 700% last year.
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Among the companies that recorded the most significant share price movements in 2021 were those clawing back losses they incurred when investors thought they'd go out of business at the beginning of the pandemic, said Allan Gray portfolio manager Tim Acker during a webinar on Thursday.
"Clearly, that's not the case today. So, I wouldn't expect kind of that magnitude of move from here," Acker says. "When you see these big kind of moves, it's often because the base was so depressed because we were coming out of Covid-19."
Acker said the earnings growth and the recovery in many companies' share prices looks magnified because of the dip in profits in 2020 and the fact that earnings didn't grow much in real terms for quite a few years.
A key element to 2021's gains was the record-breaking commodity prices, which translated into strong profits for mining firms. For instance, the share prices of platinum miners are now three times higher than where they were a few years ago. Whether that will repeat in 2022 is yet to be seen.
Acker said the mining sector is still a good investment that will likely deliver good returns in the short term. But investors need to pick specific companies because not everyone will get a repeat of the 2021 fortunes.
"One has to be selective. I wouldn't just blindly buy the entire platinum sector. Even though some of them are trading on attractive valuations, you have to have to form a view on how long you think these prices can last," said Acker.
He said Allan Gray's estimate for "normal prices" for the platinum is lower than what these metals are currently being sold for.
"We do expect prices to come down. But it might not happen overnight given the car supply chains that need to restock and buy in some more palladium and rhodium," he added.
Acker expects that the stock market’s short-term performance will remain volatile, and said that investors should concern themselves instead with the medium- to long-term performance.
Given that valuations of most stocks are almost at fair value or slightly below fair value, Acker thinks a reasonable expectation is a real return of at least 5% from equities in the medium term.
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One of the companies that currently offer value to Allan Gray is Remgro. The company is currently trading at a 38% discount to its underlying intrinsic value. It owns a basket of good businesses, including Mediclinic, Distell and Grindrod Shipping.
"You can buy this whole […] portfolio of businesses at almost a 40% discount because holding companies are out of favour at the moment. Not a lot of foreigners look at SA holding companies. There aren't any management fees. So, it's quite an attractive opportunity," said Acker.
Allan Gray also believes that banks will rerate. Earnings are expected to return to levels they reported before Covid-19. So, their piece-to-earnings multiple, which currently sits at seven to eight times, will still rise to about 10 to 12 times.
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