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SIMON BROWN: I’m chatting now with Luigi Marinus, head of discretionary fund management at PPS Investments. Luigi, I appreciate the early morning time.
A recent piece came out from you. The line that really struck with me is ‘Elections matter; [but they] should not influence your investment thesis.’ Luigi, we’ve got US midterms tomorrow. We’ve got local government on Wednesday.
The argument is that, yes, elections are important, but they’re not important enough necessarily for us to do wholesale portfolio changes and repositioning.
LUIGI MARINUS: Good morning, Simon. I think you’re spot on there. And I think it’s not only we that are saying that. I think most of the underlying managers that we use in our portfolios are saying the same thing. I think there’s so much – not that it’s uncertain what the outcomes of elections – but elections are just one part of what you consider when you’re thinking about asset allocation across portfolios.
It often doesn’t have such a massive long-term impact on the outcomes of portfolios.
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SIMON BROWN: That’s a great point. We’re almost falling into the trap of very short-term implications – i.e., an election, a result and potentially changes – into what is crucially a long-term multi-decade portfolio. In 10 years’ time we’re going to forget this morning.
LUIGI MARINUS: [Chuckles] We probably are. But I think, more from a social perspective, the outcomes of our municipal elections are very important. And I think the point made across South Africa is that it’s probably Johannesburg that’s going to be the most important point. That is our economic hub.
I live in Cape Town, so even I will admit that, and I think there are going to be very important parts.
But a growth rate of 1% in South Africa – we don’t change that overnight, regardless of changes in an election.
And I think it takes some time for that to play out, regardless of the outcome. Whichever way you lean, if you think it’s a positive outcome, I think there are still processes that need to be put into place, infrastructure to build and all that.
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And so we think about that from an investment perspective, but we are aware that those changes don’t change overnight, and so that doesn’t mean you need to make wholesale changes in portfolios. You can maybe lean into something that might require a slight adjustment in asset allocation.
But at the end of the day, are the companies going to be profitable? Is your economy going to grow? Those are still the important questions that need to be answered when we make these investment decisions.
SIMON BROWN: That’s a great point. Whoever the mayors end up being in the various different metros around the country, GDP is not going to double suddenly to 2%, 3%, 4% by the end of the year.
You do say that SA managers are going to be watching the rand, they’re going to be watching bond yields as kind of early warning signals, but I imagine we might get, I don’t know, some sort of knee-jerk moves on Wednesday and into Thursday and then kind of maybe a settling back to the broader trend, stable currency, better looking bonds.
LUIGI MARINUS: Indeed. And of course, whether we like it or not, what happens in the US has an influence on the rest of the world. So we might even see that Tuesday evening have a bigger influence than what happens here on Wednesday, depending on what happens in the US.
We have seen that the yield on US bonds has increased significantly, that the yield on the US 10-year is above 5.25% now. So there’s some indication that maybe there are some question marks about what’s happening in the US.
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Five and a quarter looks like a good yield, but we will still first wait for the elections and see what happens and see how that plays out before making any changes.
Again, I think the important thing is there are many things to consider and this is just another one of the things. It’s not the only thing that comes into account when decisions are made.
SIMON BROWN: Hundred percent. And apropos my conversation with my markets a moment ago, you also flag that US valuations might be more around AI than elections, notwithstanding there might be big changes in the Senate and the House, both swinging to Democrats. The AI trade seems a lot more important than the election trade.
LUIGI MARINUS: Exactly. And I think that’s the point and I think it’s easy to kind of think of it from that perspective. And the same applies in South Africa. Regardless of whoever wins in whichever municipality in South Africa, are businesses going to be profitable? Are people going to go out and spend money?
Those are the questions that need to be answered and those are the questions that drive returns in our equity markets – more than kind of the philosophical long-term perspectives, I suppose.
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SIMON BROWN: A quick last question. At PPS you sit overweight SA; you sit overweight global equities. I think you’ve also moved local bonds from underweight to neutral. You’re certainly bullish on SA and global.
LUIGI MARINUS: Yes, so it hasn’t been an easy year from an SA equity perspective. I think we got most of the returns last year, and we’ve continued being overweight, meaning, that [being] very positive in the SA market is that earnings have actually been quite strong.
So valuations have actually been cheap. I mean kind of at the valuation levels that we’re at. Again, if you think of the long term, we’ve never had poor returns starting from these valuation levels.
And so quite clearly we are thinking of the longer term. If we have cheap market conditions, we’re going to try to take advantage of that.
And as we know, unfortunately, the equities don’t go up in a straight line, but we feel fairly confident that they will go up – we just don’t know over which period from this point at a cheap valuation.
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And earnings have been remarkably strong in the US and globally, but more in the US as well, if you see the most recent earnings numbers out of the US.
And we know where that’s coming from. But it has also been that there’s large parts of the market that are not that expensive. Of course, we have to watch the earnings and see if that’s sustainable. So there’s a question mark around that, and we don’t take it lightly.
We are overweight equities, but we are just slightly overweight. We’re not kind of throwing the kitchen sink at everything. But we think this is the right side of the trade to be when valuations are on the cheaper side.
SIMON BROWN: Yes, and I take your point. At this level of valuations your returns are way better than at the other end of valuations, which is when they are expensive.
We’ll leave it there. Luigi Marinus, head of discretionary fund management at PPS Investments, appreciate the early morning time.
#Elections #valuations #longterm #strategy