BNC#6: Cy Jacobs Q&A – Why he’s bullish on China, global markets to watch

Cy Jacobs, co-founder of 360NE, offered a deep dive into investment strategies and market insights during the Q&A session at the BNC#6 Conference in Hermanus. Discussing various topics, Jacobs shared his perspectives on companies like Tencent, Yourplay, Prosus, and Naspers in relation to the Chinese market. He also delved into investment opportunities in emerging markets like India and cautioned about the expensive valuation of companies like Discovery. Jacobs highlighted the risks and opportunities in Chinese tech companies, the impact of geopolitical tensions on investments, and the challenges and strategies involved in managing a hedge fund for consistent returns. His insights provided a comprehensive view of navigating global markets amidst geopolitical uncertainties and market dynamics.

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Summary of the Question and Answer session with 360NE co-founder Cy Jacobs at BNC#6 in Hermanus

Cy Jacobs, co-founder of 360NE, provided an in-depth analysis and insightful perspectives during the Q&A session at the BNC#6 Conference in Hermanus. His discussion covered a wide range of topics, from investment strategies to market trends and geopolitical risks.

One of the key points Jacobs addressed was the investment landscape in China, focusing on companies like Tencent, Yourplay, Prosus, and Naspers. He expressed caution regarding Discovery’s valuation, noting that the stock had been a short position for his firm for almost a decade due to its high valuation and lack of strong cash earnings. However, he also mentioned a potential reevaluation of Discovery due to its continued business growth.

Jacobs highlighted the challenges and opportunities in Chinese tech companies, mentioning the potential impact of geopolitical tensions on investments in the region. He discussed the emergence of new indices excluding China due to poor market performance, leading to outflows from Chinese markets. However, he expressed optimism about the underlying performance of Chinese companies and the potential for earnings growth.

Read more: BNC#6 Cy Jacobs – Huge investment opportunities in SA and China

The conversation shifted to investment opportunities in emerging markets like India, where Jacobs emphasized the need for local knowledge and understanding of the market dynamics. He mentioned the risks associated with investing in India, citing the example of Adani as a company that faced fraud allegations but still saw a recovery in its stock price.

Jacobs also touched on the topic of hedge fund management, explaining the strategy of 360NE’s hedge fund to produce an absolute return above cash while using the market for investment opportunities. He discussed the balance between long and short positions, noting the importance of protecting capital in volatile markets.

The discussion extended to global market trends, with Jacobs sharing insights on European and UK markets, which he viewed as offering reasonable value compared to the US market. He mentioned specific companies like Sanlam and FirstRand as potential investment opportunities.

Geopolitical risks were a significant part of the conversation, with Jacobs discussing the impact of conflicts in regions like Israel and Gaza on market sentiment. He expressed hope for a resolution to geopolitical tensions and highlighted the market’s focus on global liquidity, interest rates, and quantitative easing.

Overall, Jacobs’ insights provided a comprehensive view of navigating global markets amidst geopolitical uncertainties and market dynamics. He emphasized the importance of understanding local markets, managing risks, and maintaining a balanced investment approach to achieve consistent returns in both bullish and bearish market conditions.

Edited transcript of the Question and Answer session with Cy Jacobs at BNC#6 in Hermanus ___STEADY_PAYWALL___

Bronwyn Nielsen [00:00:07]: I want to talk about China for a while. You mentioned Tencent, Yourplay, Prosus, Naspers. I’m also looking at other South African companies with exposure in China. Does Discovery feature in this context? They have Ping An play from a health perspective. Is that another entry point? Are there any other entry points you can discuss?

Cy Jacobs [00:00:26]: Unfortunately, Discovery has been a short of ours for about a decade. We entered the short around 140 or 150, and it’s now at 135 almost a decade later. The stock has always seemed really expensive to us, especially in terms of cash earnings. While we’ve become moderately warmer towards it recently due to ongoing business growth, the cash earnings haven’t been strong.

Bronwyn Nielsen [00:01:27]: Interest in Ping An hasn’t picked up?

Cy Jacobs [00:01:29]: No, it hasn’t. There was a potential capital rethink with Discovery, but it hasn’t been too exciting.

Bronwyn Nielsen [00:01:47]: Let’s focus on other entry points into China besides Prosus and Naspers. Are there any?

Cy Jacobs [00:01:57]: Yes, there are. JD Group is an interesting opportunity. We owned a stake in Ping An Dao in the past. It’s an interesting centralized buying group, similar to Amazon. However, Chinese tech hasn’t performed well due to global managers’ concerns, creating indices excluding China. We hope this trend ends soon.

Bronwyn Nielsen [00:02:58]: Is the regulatory environment in China a concern for you?

Cy Jacobs [00:03:23]: It’s always a risk as the Chinese regulatory landscape can change. However, we’re more comfortable now as companies are performing well, buybacks are in place, and recent regulatory issues were quickly resolved.

Bronwyn Nielsen [00:04:41]: Let’s shift to South Africa. Can you provide insights into the market here?

Cy Jacobs [00:04:58]: The market has been optimistic, but you need to be selective. Quality businesses outperform others. For instance, Shoprite has outperformed Pick n Pay significantly, showcasing the importance of choosing wisely.

Bronwyn Nielsen [00:06:35]: Two years ago, you were bullish on banks. Is that sentiment still strong?

Cy Jacobs [00:06:35]: Yes, we still hold banks but have adjusted our positions. For example, we are more positive on FirstRand now due to improved prospects.

Bronwyn Nielsen [00:08:16]: Are you concerned about the current challenges facing banks?

Cy Jacobs [00:08:16]: Some challenges exist, but overall, banks are not overly expensive and offer decent dividend yields. Tesla’s stock has had a massive run, but we remain factual and cautious about its valuation.

Bronwyn Nielsen [00:13:35]: There’s been significant manipulation in markets, especially in the US. How do you navigate this?

BizNews Community Member [00:13:35]: Market dynamics have changed, with factors beyond fundamentals influencing share prices, such as options trading and shortage of shares. If you were to pick five Chinese stocks today, which ones would they be?

Cy Jacobs [00:15:48]:, NetEase, Tencent, and maybe Alibaba, although it has some concerns regarding share issuance. The variable interest entity structures for Chinese companies have held up well, reducing the risk of investing indirectly through nominees.

Bronwyn Nielsen [00:19:49]: Do you avoid acronyms like BRICs?

Cy Jacobs [00:19:55]: No, I find China to be a promising market within the BRICs framework.

Bronwyn Nielsen [00:20:19]: Tell us about your hedge fund strategy.

Cy Jacobs [00:20:19]: Our hedge fund aims for absolute returns with lower risk, achieved through balanced long and short positions and hedging strategies. We actively adjust our holdings based on market cycles, such as shifting between long and short positions in various sectors, to capitalize on market movements.

Bronwyn Nielsen [00:24:44]: We’ve got Magnus later this afternoon. And obviously, we’re gonna be focusing very much on the global spectrum and perhaps just laying the groundwork for that a little further. You’ve spoken about the US and China, but you also mentioned in your prior appearance at this news conference that you were beefing up your international desk, so to speak, your research team. You spoke extensively of new hires and pursuing beating the globe or embassies was something that you were determined.

Cy Jacobs [00:25:20]: As I said in my initial story, I’m not sure it’s possible over the long term. We’ve had more professional investment people. We had two ladies join us, actually out of the UK, come back to South Africa. Very qualified. One of them was bold in managing global money. We also have a New York-based manager who works with us in Johannesburg. They’re all good. But has it resulted? We’ve been managing global long-only money for about six years now, and have we managed to beat the index? No, we haven’t.

Bronwyn Nielsen [00:25:55]: So what decision do you make going forward? For the patient game, do you continue?

Cy Jacobs [00:26:01]: So, we’ve told clients honestly, I mean, we believe at some stage there will be some correction to passive investing. Do I believe a South African manager can outperform the passive index over the next decade? Probably not. But maybe some people feel more comfortable about having a balanced portfolio of long ideas that doesn’t carry that kind of risk.

BizNews Community Member [00:27:24]: We talked about China, what about India?

Cy Jacobs [00:27:27]: India is very interesting. I’m taking a trip there in the next couple of months. And we have done quite extensive work in India. It really is exciting. The market has grown to a bigger market cap than China, but the valuations are exceptionally high. You have to be wary and need a lot of local knowledge.

Bronwyn Nielsen [00:28:52]: Are there any more frauds in South Africa?

Cy Jacobs [00:28:57]: Hopefully not. We’ve had our fair share of them, but hopefully, they’re gone.

Bronwyn Nielsen [00:29:04]: Going back to geography other than emerging markets. Europe. Would you look to Europe for any investment opportunities at the moment?

Cy Jacobs [00:29:16]: Europe isn’t cheap. Most of Europe has done rather poorly. There is reasonable value in some UK and European names, and we probably would look into a couple of those.

Bronwyn Nielsen [00:29:45]: If I was to say to you, you had an option to invest either in Asia or the US today, one or the other. What would you do?

Cy Jacobs [00:29:57]: Over the next couple of months, I will choose according to the election. Longer term, no doubt there’s a much greater selection in the US with better liquidity.

BizNews Community Member [00:31:42]: The elephant in the room that we ignore on the geopolitical scale is the war in the Middle East. How do you factor that in?

Cy Jacobs [00:32:10]: That makes us a little more bullish on gold. The approach has been measured, and I think the greater Muslim population in the Western world has stayed exceptionally neutral, which is important. The bigger issue to me is Hezbollah on the northern front and the potential for a larger-scale conflict.

Bronwyn Nielsen [00:34:07]: So in business television, we have a declining viewership. Today is like a dream come true for anybody in the television space. I went from rock star Piet Viljoen to rock star Cy Jacobs. I’ve got rock star Magnus Heystek after our tea break. Thank you very much. I really appreciate it.

*The above transcript has been condensed and paraphrased for brevity and clarity, and may not capture the full context or nuances of the original interview with Cy Jacobs at the Biznews conference, BNC#6.

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