Ninety One flags extreme JSE value in South African mid-caps and small-caps

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Highlights

South African small-cap and mid-cap equities trade at record low valuations, with current price-to-earnings near 9 times versus the U.S. market’s 24 times.
Ninety One’s fund has 45% of its local holdings yielding dividends between 6% and 14%, contrasting with a 10-year government bond yield of 9%.
The fund’s largest Q3 positions include Truworths International, Harmony Gold at 8.2% of assets, and new stakes in Master Drilling and Oceana Group.

Valuation gap widens across local equities

As reported by Moneyweb, Biccard says he has never before seen such extreme value in the South African market in nearly four decades of investing and analysis. In his quarterly commentary to investors, he argues that the current setup is marked by a sharp disconnect between market signals from bonds and the rand, and the record low valuations of South African small-cap and mid-cap shares.

He says South African bond yields are trading at a 15-year low differential to U.S. bond yields, while the rand has outperformed the dollar over most periods. In Biccard’s view, those liquid markets indicate that South Africa’s macroeconomic position is improving, even as smaller listed companies are priced as if the country faces a much deeper crisis.

Biccard also highlights the income profile of the portfolio, saying 45% of its local holdings carry dividend yields of between 6% and 14%, which he says does not align with a 10-year government bond yield of 9%. He contrasts current valuation levels with those of a decade ago, when South African stocks traded on 11 times earnings against 15 times for the U.S. market, compared with about 9 times for South Africa and 24 times for the U.S. market now.

Portfolio positioning and market implications

At the end of September, the fund’s largest holdings are concentrated in what Biccard describes as South African staples, including Truworths International, Life Healthcare, Pick n Pay, AECI, Reunert, AVI and Raubex. He says Truworths remains the largest position in the fund and that its weighting is already so large that he is effectively unable to add more.

During the third quarter, the fund continues buying AVI, buys back into African Rainbow Minerals and adds new positions in Master Drilling and Oceana Group. Harmony Gold is the second-largest equity holding at 8.2% of the fund, although Biccard treats it as part of the portfolio’s gold allocation, which totals 10% when combined with smaller positions in Barrick and Newmont.

He says the fund sold out of gold at the beginning of the year when the trade was massively overbought, and has since used the pullback to rebuild roughly half of its previous positions in Harmony, Barrick and Newmont. Biccard says the original case for holding gold remains intact, arguing that developed government bonds are unattractive, western currencies are likely to continue being debased, and central banks and investors are likely to keep increasing gold holdings as a store of value and an alternative to lower-risk bond exposure.

Equites Property Fund’s interim results highlighted how the REIT is lifting distributions while accelerating its exit from the UK and redirecting capital back into South Africa. Our earlier article explained that proceeds from the Aviva portfolio sale helped reduce leverage, strengthen liquidity, and support reinvestment into domestic logistics assets where the company sees better growth conditions.

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