While countries like the US and China have seen strong economic growth over the past decade, allowing corporations to thrive, South Africa stands in stark contrast. The country has made negligible to zero real economic progress.
Corporate-specific challenges have added to the aggravation. There were multiple corporate failures due to mismanagement and over-leveraged institutions that became vulnerable in a structurally low-growth environment . The construction industry is being wiped out, falling victim to a brutal operating environment. Group Five, Basil Read and Esor have all filed for business rescue, with Aveng teetering on the brink of doing so.The mid- and small-cap stocks are, in general, more domestically exposed businesses, deriving a larger portion of their revenues and profits from within South Africa,” says Vanessa van Vuuren, portfolio manager at Sanlam Investments.
He adds that valuations for small stocks averaged around 16 in the 1990s, and came down to eight about 10 years ago.The new normal is four,” he says. He doesn’t expect the extreme multiples of the past, but adds the current levels can easily double when the domestic conditions start allowing for it. It’s affordable. It’s a good start. In fact, an internal assessment conducted by Sanlam Investments shows the potential upside in the mid- and small-cap sector is the highest in close to 10 years.