Allan Gray CIO Duncan Artus sees investing as “a business of probability”. And in a world where major changes in the global economy create huge dispersions, fund managers need to be adaptable.
“At Allan Gray, we are bottom-up investors, but we always want to be on the safe side of long-term trends,” Artus said at the Allan Gray Investment Summit last week. “We want to be on the safe side of valuation extremes and economic variables. ”
These include the risk that inflation will be persistently higher in the years to come than it has been in the recent past.
“This increase in inflation, especially in the developed world, will translate into higher commodity prices in dollars,” Artus said. “This will be exacerbated by ESG (environmental, social, governance) policies increasing the cost of capital for resource companies.”
If inflation rises, it also increases the risk of greater social instability in the world and what governments might do in response. This is against the backdrop of a world already grappling with high levels of inequality exacerbated by the response to the global financial crisis.
“We have growing inequalities where people who own assets get richer and those who don’t get poorer because of QE. [quantitative easing] policies, ”Artus said. “In the future, I think there will be a lot more emphasis on policies that favor redistribution and laws that favor labor over capital.
“In South Africa, we already have a very distributive economy. If this change occurs in the developed world, it could give the government here the cover to introduce even more measures like a basic income allowance. ”
Governance and politics
The ESG impacts will also be felt much more widely according to Artus.
“When people think of ESG, they focus a lot on the ‘e’ – the environment. But I think the ‘s’ and the ‘g’ are going to become much more meaningful. Governance will not be limited to company boards, but will focus more on politics.
“The world is going to become more polarized,” Artus added. “You are going to be part of the West, or you are going to align with China. This is important for South African equity investors as we have massive direct exposure to China. ”
This includes the obvious link via Naspers / Prosus, the fact that Richemont’s growth is very much tied to Chinese wealth and that local commodity producers are heavily dependent on Chinese demand.
To be active
Given this dynamic, Artus sees fund managers under pressure to protect and grow their clients’ wealth.
“I think active management is going to have a big impact,” he said. “I think, in the scenario I sketched out, you can’t manage a benchmark portfolio and look like everyone else.”
According to him, this is an environment requiring careful stock selection.
“How do you expose yourself to this change in leadership, whether it be the unintended consequences of QE or ESG, the energy transition, inflation or what is happening in China?”
“Over the next decade, I would be underweight the tech and disruptive stocks that have been so strong over the past 10 years.”
If you think of Facebook or Amazon, these companies didn’t even exist when the IT bubble burst. We don’t know who the winners will be in the next 20 years.
“We also want to be suppliers and producers of metals that will be used in the energy transition for a long time. We also need exposure to precious metals.
This is the best way to protect yourself against inflation.
“If you’re a bottom-up manager, you’re also looking for specific things like moving to omnichannel retail,” Artus added.
Here, he believes there might be an underrated opportunity at Woolworths as online sales improve and Country Road shows the potential to be a valuable omnichannel retailer.
“If you’re worried about the redistribution policies in South Africa, you could own Pepkor,” Artus added. “If social subsidies go up, it ends up in Pepkor’s first line. ”
The risk that worries him the most, however, is China. When the government can change the rules of the game without notice, investors need to be careful.
“The events of the last month and a half have brought this to the fore,” Artus said. “Everyone is going to have to think a lot more about the absolute size of Naspers / Prosus in their portfolios.
“But you don’t have to own the big stocks so heavily exposed to China, either. And BAT? It’s cheap, it has a high dividend yield in pounds and zero exposure to China. This is because its assets were nationalized by the Chinese government in the 1970s.
Duncan Artus is co-manager of the Allan Gray Balanced fund, the Allan Gray Stable fund and the Allan Gray Equity fund.
Patrick Cairns is South Africa Writer at Citywire, which provides insight and information to professional investors around the world.
This article first appeared on Citywire South Africa here, and republished with permission.