Old-school investors know that with crisis comes opportunity, or as Winston Churchill once pointed out, “never let a good crisis go to waste.”
The local market was hit by a series of crises last year, from cargo suspensions to rail and port outages.
Jacques Conradie, Peregrine CEO and Portfolio Manager, sees many opportunities in this bleak situation. Restructuring the management of state-owned enterprises is one of three major themes likely to dominate in 2024, along with interest rate cuts and elections.
“The big challenge we face in SA is getting state-owned enterprises to improve their management, and there are signs that this is starting to happen at both Eskom and Transnet,” Conradi says.
“These two companies are the main drag on economic growth and we need to fix them. Part of Eskom's improvements will involve private sector players supplying their own electricity and connecting them to the grid. There is no doubt that this is due to a reduced dependence on Masu.”
The graph below shows the monthly load shedding stages. In January 2024 he was much better than in January 2023, but much worse than in January 2022.
The end of load shedding could still be 12 to 18 months away. Still, the country will steadily improve this year, especially if it can restore some of its coal-fired power plants, which are currently operating at 40-50% efficiency, back to pre-crisis levels of 60-70%.
Transnet is also showing signs of improvement, with coal transportation volume expected to reach approximately 50 million tons in the year to March 2024. Although this is still far from historical volumes, it is still an increase compared to the previous quarter.
The next topic to focus on is interest rate easing, but SA is likely to be a follower rather than a leader.
This could relieve some of the stress on companies' balance sheets and allow for some recovery in earnings over the next two years.
Then there are elections, both within SA and overseas. Conradi points out that in 2024, 49% of the world's population will head to the polls, from South Africa to the United States to India. With geopolitical tensions rising, especially from the Red Sea to Eastern Europe, the potential for shocking outcomes is always present.
“What is clear from the SA state polls is that we are probably entering an era of coalition government, which could see a change in government in some states,” Conradie said. “While we don't see this as a particularly big risk, the outcome of the election will give investors some clarity about the future governance of the country.”
The JSE's poor performance in 2023 (up just 3% in the same year) has created some interesting opportunities, including banks trading at price-to-earnings (PE) multiples of 6-8x and paying dividend yields. (DY) 7.5-9%.
“We think these are very attractive opportunities, especially now that banks continue to grow their earnings. In fact, bank valuations are not far off from where they were in 2008 during the financial crisis,” Conradi said. added.
“Many small businesses also look attractive. They are unloved because big money is concentrated elsewhere and there is a lack of external demand.”
One mid-cap stock that caught the eye of Peregrine's fund managers was Motus, which looks cheap at a P/E ratio of 5x. It serves the automotive aftercare market and has seen valuations downgraded during the rising interest rate cycle. Conradi believes a rating review could be considered as interest rates begin to fall.
One of Peregrine's biggest holdings is Naspers and Prosus, which derives a significant portion of its revenue from Chinese tech giant Tencent, which currently trades at a P/E ratio of around 10. This is the lowest level in some time and reflects China's economic slowdown and rising stock prices. Regulatory pressure from governments.
Peregrine is also focusing on luxury goods companies like Richemont and LVMH, both of which have seen prices drop to more attractive entry levels.
“Another trend we are watching is AI, which is going to change the world over the next five to 10 years, even more so than the arrival of the Internet, cloud computing, and other waves of technology that have redefined the business world. It’s going to make a big difference,” Conradi said.
“Companies like Meta and Amazon that invest in AI will be able to ride this wave.”
Overall, he expects 2024 to be a better year for the JSE.
Peregrine Capital's two flagship funds, High Growth Fund and Pure Hedge Fund, have delivered impressive returns of 14.7% and 12.5% respectively, significantly outperforming the JSE All Share Index. With more than R15 billion under management, the two funds have low correlation with their peers and the market as a whole, due to their unique portfolio construction and identification of opportunities that simply do not track with the overall index.
The High Growth Fund has grown its early investors' money 100 times over 25 years, making it the first fund in SA to achieve this result.
“We look for hidden or locked-in value,” Conradi says.
“Sometimes we focus on growth companies, sometimes on value companies, sometimes on out-of-favor stocks. Our goal is to beat the market over the medium term. It means adjusting, limiting loss positions and making strategic decisions based on corporate and economic data. The results speak for themselves.”
Brought to you by Peregrine Capital.
Moneyweb does not endorse any products or services promoted in sponsored articles on the Platform.