Sasha Naryshkine on “the new Remgro”, shorting ABIL and fun time for gold

A little known fact is that I was one of the original shareholders in boutique money manager Vestact. Its founder, Paul Theron, was a friend from the early days of the internet (when he launched the since departed Tradek.com) so when he decided to start again, the business I then controlled, Moneyweb, provided office space and acquired a 25% stake. Once the business got going, it made more sense for Paul to use buy back our shares so he could incentivise full time partners. With some reluctance, we sold. Were there any inkling then of how successful Vestact was going to be, Paul would have had to fight a lot harder. But it remains a source of pride to have played a small part in helping get this successful business off the ground. And given that relationship, you can also understand why it’s such a pleasure to have a weekly engagement with Vestact director Sasha Naryshkine on CNBC Africa Power Lunch. Today was no exception as we chatted about gold, PSG, ABIL and more. – AH 

ALEC HOGG: Well, let’s get a more in-depth look on how the market is trading today. Sasha Naryshkine is with us in the studio. He’s a Director at Vestact. Do you think you can give us two good days for the gold shares? The poor old gold bugs have been so hard-hit over the last little while, but they’ve been smiling a bit lately.

SASHA NARYSHKINE: I think that as a collective, they’re up 46 percent for the year. If you look back a couple of weeks ago, they were only up 33/34 percent for the year, so we’ve had a fantastic 15 days. What is it? The chase for yield, not necessarily that the gold companies would give you yield but obviously, an indication that inflation expectations from the Federal Reserve are that they’re going to very muted. As a consequence in their dual mandate, when the economic recovery comes back and when employment gets to an acceptable level, that doesn’t automatically mean that the Federal Reserve are going to hike rates.

ALEC HOGG: This is an interesting point because there are a lot of gold bugs or people who are on a more conservative side, who are watching the inflation rate. It’s been edging up in the U.S. What is it, two-point-one percent? It’s just about nothing compared with us. It was point-nine percent in the latest, which was double what was anticipated in the latest months and there are some hawks who’re saying that if the Federal Reserve continues on its current path, maybe the gold price is going to have its day when inflation rises etcetera. Maybe clutching at straws, but the gold price is up today.

SASHA NARYSHKINE: The gold price has been on a little bit of a tear forward since that announcement from Janet Yellen and a lot of people say ‘oh, this confirms that she’s the dove we always thought she was’. It’s interesting though, because the ECB have actually gone backwards in recent months, so there’s a negative deposit rate for banks overnight. If you give them your money, they slice a little bit away and give you marginally less back.

ALEC HOGG: So you don’t go into an overnight window if you’re a banker.

SASHA NARYSHKINE: There was a very small pot of money in there. It’s just more of a push in the direction, to say ‘hey, we’ll do more if we need to do more’ because the Germans of course, are scared of the ECB doing what the Federal Reserve has been doing – the bond purchases. They don’t want that to happen, so they’re just different methodologies from different Central Banks. What’s interesting to note is that the oil price has been at its steadiest since the 1970’s. Perhaps the inflation outlook for people, who – luckily – earn Euros and Dollars, is going to be a little bit more muted.

ALEC HOGG: Yes, but the oil price has been hopping along as well.

SASHA NARYSHKINE: It’s been hopping up in the last ten-odd days because of the insurgence in northern Iraq, having captured refining capabilities. Even though there’s not a lot of production – as much as 20 percent of Iraqi production – there are some concerns that they’re knocking on Baghdad’s door.

ALEC HOGG: We’re sitting here and we’re talking like men. Men solve the world’s problems.

SASHA NARYSHKINE: But do they really?

ALEC HOGG: Exactly. We stand around the braai and we explain exactly what the government’s doing wrong, what Obama’s doing wrong, and who’s going to win the football world cup, etcetera.

SASHA NARYSHKINE: Not England – not anymore.

ALEC HOGG: Were they every going to? Listen, they beat our Baby Boks this morning, so that’s not good news – 21-20 – whatever… The ladies of the house do all the unimportant things, such as decide where the kids go to school and what we’ll eat etcetera, and we’re talking these big macro themes, which is nice to talk about. However, on the market itself, we’re seeing some very interesting developments. We had PSG Konsult listing this week. Another one of the companies in the group, Zeder, – I don’t know if you picked that up today – good volumes and good increase in price (it was the result of the takeover of Agri Voedsel). Might this be a bit of a spin-over if you look at the PSG Group and say ‘there’s one Jannie Mouton’s stocks that’s been a bit neglected’?

SASHA NARYSHKINE: A lot of people talk about the Rupert magic of yesteryear. If you wanted to buy Unit Trusts, people said ‘don’t buy that. Rather buy Remgro’, so who’s filled that role in the South African context in the last decade or so? It’s been PSG and Jannie Mouton, who’s obviously been able to generate massive returns not only for himself, but also for shareholders at PSG, largely through the success of Capitec, and then their own core business around that. Zeder is obviously…look at how you can benefit from agricultural growth across the continent that should be feeding the rest of the world. I think it’s a longer dated and as you know, agricultural businesses tend to disappoint in the deep parts of the cycle maybe – largely – investment over a multi-decade period. Maybe people are saying ‘well, maybe there’s something magic that they can do there’. I’m not convinced, but I think credit needs to be given to the parent company and PSG.

ALEC HOGG: One thousand hectares under irrigation in Zambia and for those who’ve seen it, they say it’s quite extraordinary – what Zeder’s doing up there. Anyway, the shares are doing well today. A stock that’s not doing well – and we seem to talk about it every time – is Abil and it’s taken hit this morning.

SASHA NARYSHKINE: I think it’s just more of the same. What you’re going to start to see is institutions versus the shorts. That’s what it seems like in the very short term. There are some people who’ve been quite public about their short positions and there’ve been certain releases from institutional money who think that it’s a good, long-term bet. I’d like to think that they’re probably both right, but with different timeframes.

ALEC HOGG: That’s interesting, because at the Met CI conference that I was at two week ago, you had boutique hedge funds – these are guys, who do really well in the institutional companies, go off and form their own business – and their favourite short was Abil.

SASHA NARYSHKINE: In fact, it was raised probably about 18 months or so ago, by a bunch of U.S.-based hedge fund investors as being one of their best shorts in all emerging markets – so they certainly got that right. The only risk to them is if a special meeting is called, people need to vote the shares, and there’s too much of a large outstanding short, they might need to be called back. You could therefore see a knee-jerk reaction there.

ALEC HOGG: Just explain. I’m just thinking, a few people are probably watching this and saying ‘what is this short? It has nothing to do with dress’, so how does it work on the stock market?

SASHA NARYSHKINE: Essentially, what you’re doing is you’re selling the company short and you have to buy them back at some time, so you have to borrow them from somebody. Typically, the institutional guys will lend them out for a modest fee because they’re long-term shareholders. They don’t necessarily worry about the week, month, or day-to-day move, so you’re not closing out that position until you’ve bought the shares back. However, if you’re forced in the case of… There was a classic case – I think it was Volkswagen and Porsche, not so long ago. You can see a massive spike in the share price. Why I don’t think it will happen here is because you don’t have one massive institutional shareholder, and in that case it was Porsche. I don’t know. Whilst the institutions are gobbling up shares in the background here, if the shorts aren’t careful you might well see a squeezes at some point. If you have to call them back and you have to say ‘I have to vote at a meeting’, there could be some sort of problem there for them.

ALEC HOGG: You mentioned Johann Rupert. He started a company called Rand Merchant Bank.

SASHA NARYSHKINE: Yes.

ALEC HOGG: Rand Merchant Bank got involved in the shorting of a business called Union Wine, which was listed on the JSE and it went from 20 cents to R20.00 – something ridiculous – in a very short period of time. It took a lot of people out, but that was some years ago. There weren’t that many shares around in Union Wine, as there seem to be around Abil now.

SASHA NARYSHKINE: For every 100 – if you follow your rights – there are 84 extra shares, so for the shorts it was more at the feasting table.

ALEC HOGG: Yes, but when you get that squeeze – as you said happened with Porsche – and the shorts have got to get in the market and pay anything to get hold of the shares, which is what happened in Union Wine, so there is a local example, as well the one you mentioned on that, as well. I guess that now, we wouldn’t really expect it to happen.

SASHA NARYSHKINE: I think they’re probably both going to be right in their respective timeframes.