BNC London: Peche Q&A – Value investing and global diversification amid market volatility

In a Q&A session at the BizNews London Conference, Alec Hogg and Sean Peche discussed investment strategies, focusing on the potential risks and benefits of current tech stocks and the importance of value investing. Peche emphasised the necessity of evaluating a company’s intrinsic worth before investing and highlighted opportunities outside the U.S., particularly in undervalued European and emerging market stocks. He also addressed the challenges in forecasting long-term growth, the impact of geopolitical factors on investments, and the importance of avoiding speculative narratives.

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Summary of the Q&A session with Sean Peche at BNC London

At the BizNews London Conference, Alec Hogg interviewed Sean Peche, founder of Ranmore, focusing on investment strategies amidst market volatility. Hogg noted their tech-heavy North American portfolio’s significant returns but questioned future strategies as the market pendulum swings. Peche emphasized value investing, suggesting evaluating company worth based on earnings and fair exit multiples rather than speculative narratives. He cited Nvidia and Palantir as examples where taking profits might be wise due to high expectations and potential for disappointment.

Peche discussed AI’s current inefficiencies, noting that soon answers will be cached, reducing processing power needs, potentially impacting companies like Nvidia. He highlighted the risks of overvalued stocks and stressed the importance of considering dividends, earnings growth, and rerating in investment decisions. Peche also pointed to historical examples like Cisco during the dot-com bubble to illustrate the dangers of overvaluation.

He suggested looking beyond the US, finding opportunities in European banks and Hong Kong stocks, which offer attractive dividends and growth potential. Peche advocated for emerging markets and sectors with less capital saturation, like banks, which benefit from technological advancements and are undervalued. He advised against overreliance on speculative stories and emphasised focusing on concrete financial metrics and undervalued opportunities.

Edited transcript of the Q&A session with Sean Peche at BNC London 

Alec Hogg [00:00:07]: Thanks, Sean. A lot to unpack there. Let’s start with our business portfolio, mainly North American tech stocks like Nvidia. Given their impressive returns, what’s your take on potential shifts?

Sean Peche [00:00:57]: As value investors, we focus on earnings and exit multiples. While tech stocks like Nvidia seem promising, knowing when to sell gets tricky. Taking profits, as seen with Druckenmiller and Buffett, is essential. Advancements like AI may impact future earnings. High expectations pose potential downside risks.

Alec Hogg [00:04:23]: Many of our stocks, growing at 25% annually, raise questions about sustainable growth. Buffett’s scepticism highlights the challenge of projecting growth accurately. It’s wiser to invest in trend beneficiaries than the trend itself.

Sean Peche [00:05:25]: Analysts’ forecasting record is poor, and valuations often outstrip performance. Investing in beneficiaries like Amazon and Microsoft might offer better returns. Companies across sectors benefit from AI without hefty investments.

Alec Hogg [00:08:26]: Identifying winners in transformative industries like EVs remains challenging. Oversupply in the EV market post-Tesla’s success shows the uncertainty. Undervalued opportunities exist beyond South Africa, particularly in emerging markets.

Sean Peche [00:10:45]: European and Asian stocks offer attractive opportunities, with companies like ABN Amro and GlaxoSmithKline trading at discounts. Diversification beyond North America is prudent.

Alec Hogg [00:12:47]: Despite North American stock surges, European banks present compelling value. Resilient business models with predictable earnings make them attractive.

Sean Peche [00:13:50]: European banks offer favourable risk-reward profiles, trading below book value. Unlike volatile consumer sectors, banks generate steady income despite low-interest rates.

Alec Hogg [00:15:28]: Considering the potential impact of US-China tariff tensions and economic nationalism, how do you foresee value investing?

Sean Peche [00:19:11]: European banks may benefit from trade tensions, while US tech companies face risks. A Donald Trump presidency adds uncertainty. It’s crucial to remain cautious amid geopolitical challenges.

Alec Hogg [00:20:38]: What’s your stance on digital currencies like Bitcoin?

Sean Peche [00:21:32]: I focus on numbers rather than narratives. Overvaluing stories, as seen with EVs, can lead to losses. Fund managers exploit trends for profit, blurring lines between ESG and traditional investments.

Alec Hogg [00:23:55]: Sean, you introduced the concept of second-level thinking. Could you explain it briefly?

Sean Peche [00:23:55]: Second-level thinking goes beyond initial reactions. It’s like considering companies that benefit from geopolitical events instead of solely focusing on the negative impacts.

Alec Hogg [00:27:28]: What’s your take on the upcoming election from a second-level thinking perspective?

Sean Peche [00:27:28]: Second-level thinking involves considering unconventional outcomes. South Africans’ resilience matters more than political changes. We need unexpected solutions, much like a surprise play in rugby.

Alec Hogg [00:29:40]: Which politicians do you think embody this kind of thinking?

Sean Peche [00:29:40]: Politicians like Athol Trollip and Herman Mashaba show dedication beyond personal gain. We need such leaders for meaningful government changes.

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