CIARAN RYAN: A shift is taking place in financial markets. A low-interest-rate and high-growth environment has been the general experience for most investors over the past decade. Now the environment looks decidedly unsettled, with the risks of higher inflation and interest rate pressure adding to the uncertainties of the war in Ukraine and threats to oil and wheat supplies.
On the equity side of things, I think valuations have started to become a little bit more noticed than previously. So in a low-interest-rate environment I think investors are quite comfortable for multiples to expand, for PE [price-earnings] ratios to move higher just on the basis that volumes are continuing to grow, [and] profit margins are continuing to grow.
ADRIAAN PASK: These glamour stocks are stocks that typically enjoy plenty of limelight and are usually quite popular. That popularity is propelled by a narrative of sorts that generally excites people. Things like Bitcoin could be an example, but I think there’s a bigger narrative out there that’s been in the limelight under technology – and technology shares have benefited from that as well.
Our data shows that real yields on SA bonds remain attractive – and that’s in spite of significant improvements on the fiscal side. It wasn’t too long ago that we saw some forecasts indicating debt-to-GDP ratios exploding over 100%. They’ve actually moved lower, largely on the back of support from higher commodity prices, but they are now under 70%, which is actually even under the OECD [Organisation for Economic Co-operation and Development] country average.
In the US ratings – and when I say ‘ratings’ I specifically mean PE multiples for valuation ratings – seem to suggest robust growth off a very high base already, with volumes that will remain unchallenged and margins that will remain at record levels. We just don’t think that’s realistic. But then I think there’s also a mistake of over-pessimism at the other end. That comes to my point around the SA bond market. I think our bonds are not accurately reflecting the fundamentals.
And then, maybe lastly, [investors] not taking valuations into account. We’ve seen a lot of this over the last five years in particular: investors buying into glamour stocks and continuing to prop valuations up. I think what we see now is some unwinding of that.
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