With lots of discussions around potential downgrade in South Africa, many investors have doubts whether Banks should be included in portfolios, according to Alwyn van der Merwe, Director of Investments, Sanlam Private Wealth.

“Banks are very conservatively valued in South Africa at the moment. But for us the valuation is cheap enough to compensate for the potential risk of the credit downgrade,” van der Merwe said.

“Of the South African banks, Standard Bank is the most exposed to the risk of the downgrade, because 14% of the Bank’s funding is done offshore,” he told Africa Global Funds.

“We think the Bank will grow its earnings by 5% over the next 3 years, plus you work with the exit multiple of 11.4 times, then the returns you’re likely to generate over a 3-year period is 59%. That’s quite a decent return in my book in a low return environment,” he stressed.

“Standard Bank is our preferred bank; we carry a weight of just shy of 6%,” he added.

Van der Merwe said that from a value perspective it was a very tough investment environment over the last 12 months, adding that “it’s still going to be a tough economic environment”.

He urged investors to diversify their portfolios: “You have to make sure that at least some of the assets in the portfolio have value, so they could protect on the downside.”

Apart from Standard Bank, Van der Merwe highlighted Anglo American, a global mining company that mines a diverse range of products in South Africa; and Naspers, a global platform operator with principal operations in internet services.

“The potential upside on those shares makes up for the potential risk. Naspers is our top holding at the moment (13.1%),” he said.

“The one area we are probably light in the portfolio is what we call “SA Inc” shares – those companies listed on the JSE where the bulk of their profits come straight out of South Africa, so in other words the companies that are not internationally diversified,” he said.

“The market has been quite harsh in the ratings of those companies. Should we get a further downgrade, some of those companies (the share prices) are likely to come under pressure. If that happens, we are likely to use it as an opportunity,” he added.

Sanlam Private Wealth offers structured wealth management solutions for high net worth individuals in South Africa.

Van der Merwe said that the investment strategy is a dynamic process, but the Sanlam’s Investment team has an Investment Committee Cycle, which has a former review of the markets on a monthly basis.

“We don’t change our investment philosophy. We are value-biased investors with a longer term philosophy. We look at three factors: price, the investment thesis and investment patterns,” he said.

He thinks that for the moment “the macro environment requires a more defensive strategy”.

“If we change our view on the environment we can easily change our strategy to become far more aggressive,” he added.