Allan Gray Namibia Stable Fund

The past quarter has shown a mixed performance across various stock indices. The FTSE NSX Local Index experienced a positive quarter, buoyed by strong results from the banking sector. In contrast, the FTSE/JSE All Share Index trended lower, with several companies seeing a drop in their share prices following the release of financial results.

The challenging operating environment for South African businesses stands in stark contrast to the robust performance of global equities. The MSCI World Index has even surpassed its 2022 all-time high, largely driven by US mega-caps, with notable strength also seen in Japanese and certain European markets. Against this backdrop, our Fund returned 1.6% for the quarter.

2024 could be described as the global year of elections. Based on research conducted by Deutsche Bank, 2024 will see the highest percentage of the world’s population voting since 1800. Some of the key regions heading to the polls include Taiwan, Europe, the United States of America, India, the United Kingdom, South Africa and, of course, Namibia. In the normal course of thinking about investments, we do not pay special attention to politics – but this is not a normal election cycle; the outcomes could drastically change many policies that affect some of our underlying holdings. In our view, 2024 has above-average political risk.

The various elections are taking place against the backdrop of a world increasingly divided along both geopolitical and social lines. This is a trend we have been discussing with our clients for several years, and one that is making the operating environment increasingly complex for many multinational companies. Think of the partial ban of iPhones for certain public sector workers in China or the shipping attacks in the Red Sea affecting global shipping routes. While we have no unique insights, we do think about these risks when constructing the portfolio. For example, we have written many times about the significant exposure that the South African equity market has to China. We put limits on this exposure.

Closer to home, we may see quite a different political and economic landscape after the South African national elections in May. No one knows the outcome with certainty, given several potential scenarios. Clearly, not all of them are positive. Rather than hedging our bets on one or two scenarios prevailing, we try to understand what is discounted in current asset prices.

This is of particular importance to the valuations of many depressed South African-focused shares. The political and economic uncertainty in South Africa has pushed up the cost of capital via higher long-bond yields. When this is combined with low or non-existent real growth, the result is a low valuation placed on profits.

Of course, any positive change in yields or growth could result in an upwards rerating from depressed levels. We believe that this scenario would require a return of foreign investors, first to South African bond and then equity markets. For that to happen, the country needs to become an attractive investment destination again. Large pools of foreign capital have many choices globally, and South Africa is small enough to ignore if the risk-reward ratio is not favourable.

Our elections in November also bring some uncertainty, at least on the fiscal discipline and finalisation of policies fronts. A positive sign is the smooth, stable transition of power after the unfortunate passing of our late president, Dr Hage Geingob.

With these risks and opportunities in mind, we have deliberately constructed a diversified portfolio for a wide range of outcomes. The portfolio has exposure to offshore assets, South African listed shares that are international businesses, attractively valued South African and Namibian businesses, high-yielding cash and bonds, as well as precious metals. We believe running a successful asset allocation fund requires a holistic view of the portfolio that allows us to balance the opportunities and risks derived from our positioning.

Commentary contributed by Birte Schneider and Duncan Artus