There are many gloomy views about the goings-on in South Africa at the moment, with widespread labour unrest, decreasing GDP figures and increasing inflation. It is therefore a wonder to watch the JSE, as it keeps rising to new heights, in what seems to be the opposite direction of everything else. There has been much speculation as to the sustainability of our strong exchange, and when the run is going to end. George Herman of Citadel, has a very upbeat perspective toward the numbers and their potential for growth. This is especially based on the fact that only a third of the revenue generated by the JSE’s Top 40 originates in South Africa. So, if anything, as global markets slowly regain momentum, the JSE is likely to perform much better than SA inc. For some sterling insights into the complexities of what is making our markets tick at the moment, as well as some steady stock picks, Herman is the man to lend an ear too today. – LF
ALEC HOGG: Well, we’ll get more insight on that view and how the market’s trading today from George Herman, who is with Citadel. He’s in our Cape Town studio. George, are you a fan of Naspers?
GEORGE HERMAN: Yes, indeed, and if you haven’t been a fan of Naspers, you’ve been crying over the last couple of years.
ALEC HOGG: Do you still stay though? Listening to Bob van Dijk, as he says one of their secrets/advantages is that they keep an open mind, and now they’re going even more aggressively into the Internet market. Do you think we could see yet another growth surge from the already quite significant base they’ve created?
GEORGE HERMAN: This is a standard better than they are; the market was a little bit negative when Mr Bekker took a sabbatical. Let me tell you: when he comes back, he’s going to have a head full of plans again. Nobody understands this new world better than they do, so I reckon they will find new opportunities, yes.
ALEC HOGG: I was just listening to what Bob had to say. There’s a lot of the Bekker kind of thought process that comes through, isn’t there?
GEORGE HERMAN: I think they planned the transition to the new management well, so I don’t think there’s any change in the strategy of that company.
ALEC HOGG: It’s been a couple of good days for gold shares. Gold shareholders are celebrating a rare little victory, but I have to ask. Is this maybe a turning of the tide against the poor old mining, downtrodden yellow metal?
GEORGE HERMAN: The gold shares and the gold bugs must be very happy. They get excited very quickly these days because the moves are pretty small for them. Unfortunately, in the big scheme of things, I’m not bullish on gold. I think all the effects that you require to have gold be really strong is not present yet. You don’t have the Dollar under pressure. You don’t have huge inflation globally, so I won’t get too excited about the gold price in its own right. The shares might recover a bit more, though.
ALEC HOGG: Well, I guess the fact that it’s unlikely they’re going to go through a debilitating strike like the platinum sector, might maybe be giving some people some encouragement.
GEORGE HERMAN: The South African market’s very nervous about anything labour-related right now. Hence, those shares, as you quite rightly say Alec, do get the benefit of not getting the negative swipe.
ALEC HOGG: Before we look at a broader picture, today I saw a report from JP Morgan about Aspen – very bullish on Aspen. It’s had an enormous run. It’s been a fantastic success story, but it is one of those shares that is now at an area I suppose, like Naspers. You have to ask where’s the next growth spurt coming from? Is it one that you like?
GEORGE HERMAN: Alec, I’m not a stock specialist, so I don’t know the answer to that, but I can tell you that the lay of the land is obviously not as positive and as bright in that sector and in that industry for Aspen, as it is for Naspers. The fact of the matter is that they have brilliant management and they would be good to find opportunities, yes, but I don’t think the future’s as bright as it is for Naspers.
ALEC HOGG: You made a point there about management. It’s something David Shapiro talks about continuously. The South African managers really have done us proud, haven’t they, in the global arena.
GEORGE HERMAN: They’ve done spectacularly, but it’s interesting that very often we’ve stepped into mud when we’ve tried to extrapolate out of South Africa into the international arena. Very often, that hasn’t covered us in glory, but our South African managers have been brilliant. Foreign investors like investing here and that’s one of the reasons why they do.
ALEC HOGG: What about the message that you’re giving to your clients right now? We see the JSE’s in record territory. Are you comfortable staying in shares?
GEORGE HERMAN: Alec, the toughest message to give to clients right now is that despite new records the equity market is more than likely to go even higher still. There’s currently a disconnect between the feeling that people have on the ground of all the negative economic and political news. We find consumer sentiment – the low-income consumer – under some strain, so that feels tough but that is disconnected to where the JSE is; only a third of the revenue generated by the Top 40 shares are actually from South Africa. If anything, if the Rand goes weaker, then those foreign revenues just become worth more. The JSE, despite the feeling that you have on the ground, can still go quite a bit higher. Yes, that’s the toughest message to get across to our investors at this point in time.
ALEC HOGG: You make a very interesting point, that only a third of the revenues of the Top 40 are exposed to South Africa Inc. so I guess you have to keep a very close eye on what’s happening in the world, generally.
GEORGE HERMAN: That’s exactly the point, and our feeling is that the global economy is recovering. It is slower than what we had in the early 2000’s, but slow does not equate to weak. The global economy has to tread through some loose sands. It has to work through unemployment. We have to normalise interest rates. Yes, there are a lot of headwinds, but it is growing. The U.S. is growing/recovering. Japan is positive. The Euro area, although small, is recovering so the global economy is improving slowly, but surely. Some profitability is still there and hence, as you say the South African companies and the Exchange benefit from that.
ALEC HOGG: Are there any pockets in South Africa itself or in the country itself that are appealing to you – that are offering value?
GEORGE HERMAN: Well, the value managers have had a tough time and some of that is only unlocking this year. The themes we’ve been seeing is that of a safe type of yielding investment, things like dividend policy and dividend strategy that has paid off pretty nicely. Is that still the place to go? I’m not so sure. We are seeing some rotation taking place. The South African economy overall… you saw the IMF downgrading our growth expectations and they’re still coming down to something like two-point-three. We think we’d be lucky to get to two percent for this year, so the economic growth story is going to be slow. There’s going to be a lot of risk ahead and if anything, we prefer from an emerging market perspective, to rather invest in global emerging markets, more so than in South Africa.
ALEC HOGG: So at the moment, we’re bumping along but we have a program that’s going to be focusing on some good news. We have the BRICS Development Bank that’s now on its way. It will start lending only in 2016, but that’s coming and then secondly, we’re going to be crossing a little later to Port Elizabeth where a Chinese truck manufacturer is putting in R600m. Maybe that’s where the salvation, if you like, of the S.A. economy could come from.
GEORGE HERMAN: Yes, we really hope so and it would be fantastic if the government adds to that perception that investors are welcome and that we’re open for business. That would be really good because right now, there’s just a little bit of a negative feeling, but please don’t get me wrong. The fact that we might have a negative feeling about some things on the ground does not mean that you have to be negative about equities or negative about South Africa overall. On the other hand, the currency – very worried about the currency. There are some imbalances, which are still not rectifying itself, so overall unfortunately; the currency could still be under further pressure. Once again, that does not mean that it’s negative on South Africa.
ALEC HOGG: Yes. It’s all complex, isn’t it, but in the longer term you’re staying here. I’m staying here. We have 58 million other people who are staying here. We have to make the best of it and hopefully we will in the future, see happier or brighter skies.
GEORGE HERMAN: Absolutely. Our markets are still a fantastic place. We’ve been rated as some of the top financial sectors around the world many times over, so this is still a magnificent investment destination.
ALEC HOGG: This too, shall pass – the turbulence of the moment. That was George Herman and he is with Citadel.
