You would be forgiven for being apprehensive about the real level of international demand given the low equity market volumes, local macroeconomic situation, and political environment we are going through.
However, according to Jarrett Geldenhuys, Head of SA Equity Capital Markets and co-head of Investment Banking at Investec SA, the demand for engagements between some of the leading South African-listed corporates and an international institutional client base is strong and encouraging as we head into 2024.
“This includes significant US institutions who are earnestly assessing opportunities,” says Geldenhuys.
Geldenhuys bases these observations on the interactions at Investec’s 22nd annual executive conference in London, which connected 22 leading, listed South African corporates to over 100 international investors. It is the largest internationally hosted conference of its kind.
Geldenhuys says international institutions have seen many cycles in the past and, with the peak in global rates seemingly imminent, they may believe that paying more attention to emerging markets is justified, if history is a guide of relative emerging market outperformance from this pain point.
“What has also become apparent is that there’s a lack of interest in the local macro environment and non-existent positioning on any confidence in a reform narrative – so it’s clear that making a call on a new entry point into a South African corporate is as much a Fed rate call as an individual company decision,” Geldenhuys notes.
“Consensus is certainly still out on whether we have troughed, turned, or are still heading downwards on the consumer front, but hopefully we are in the vicinity of an inflection point.”
Geldenhuys observes that banks, with the broadest view of the consumer, are generally more bullish in seeing green shoots, despite a tighter credit environment, while the retailers, especially the clothing retailers, remain cautious on the outlook.
Where consensus is clear is that any economic recovery is certainly not factored into corporate thinking, or at least it’s not a centre point of the investment narrative positioning, outside of a potential curtailment of loadshedding.
Within the broad summary of “a rising tide lifts all emerging markets, but to a lesser extent South Africa”, Geldenhuys sees two key investment narratives getting the majority of the attention:
- The biggest and best, who continue to reinvest for future market share gains and/or new product lines.
- Scaled businesses with believable self-help narratives, where expectations of margin expansion yield earnings growth, with the latter expected to drive a valuation re-rating.
To these, he adds a third bucket of interest to create a powerful trifecta for value creation: where perceived strong management teams are focused on transformational M&A.
“Again, with the macro-outlook depressed, it remains a ‘show me’ story. There is merit to this opinion though, as M&A bankers still view the valuation expectation gap between buyers and sellers of assets as inhibitive for the bulk of transactions coming across corporate desks. This is especially the case when added to international investor perceptions about competition regulation as a business enabler,” he explains.
Geldenhuys notes that what binds all three of these narratives is the ability to grow in a no-growth environment. Investor focus, when viewed through this lens, is to narrow down on a select group of potential winners, ascribing a reasonable probability to success despite the macro situation.
“It’s clear that the age-old, value-based building blocks of an investment decision are back in favour with international investors again: only the best management teams; ensure the quality of the moat around the business; ensure the investment case is easy enough to explain to the internal investment committee; and it is often better not to lose money in emerging markets than to make money, so ensure the risk-adjusted returns have ample room for safety, especially post events in Russia, Ukraine, Turkey and China.”
Geldenhuys makes the point that, measured against this demanding set of criteria, South African management teams are still highly regarded, and that certain business models are highly prized on an international stage.
“The global rate cycle might have made South African companies more attractive than last year, despite the deterioration of local investment climate,” says Geldenhuys. “However, as an investment destination, we seem firmly back on the opportunity radar, without the burden of expectation of any positive shift in local fortunes.”
Further, where investors are pricing South Africa’s trajectory relative to alternatives, Geldenhuys says any optimistically biased investor, corporate, or investment bank will be looking forward to any sustained shift in sentiment.
“When combined with the quality and resilience of our corporates, such a shift implies we could be back to long-forgotten equity return trajectories. Now we are just left with the simple matter of assigning a probability to that outcome, and from our vantage point, without constructive policy reform, it is best to remain selective in our optimism, as will international investors.”
Returning to the conference, Geldenhuys says the quality of the interactions and the knowledge shared are testaments to the work of Investec’s London and New York-based equity sales professionals who ensure the South African investment cases resonate with the appropriate investment manager styles.
“With over 70 years of combined South African equities sales experience, our team has assisted many corporates to drive valuation ratings and broaden shareholder registers over the years, demonstrating Investec’s commitment to our corporate clients locally and in their international ambitions,” adds Geldenhuys. “We also host about 40 international corporate roadshows annually, and together these events provide the equity advisory team with a unique outside-in perspective of our clients.”
Investec also recently acquired a majority interest in Capitalmind Investec, a leading European advisory firm, while Investec’s positioning is also bolstered by a significant, on-the-ground presence in London and partners in the US and Australia, alongside Investec’s presence in India.
“This matches our corporate clients’ international expansion ambitions,” he notes.
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