At the BizNews Investment Conference BNIC#1, Cy Jacobs, CEO of 36One Asset Managers, painted a promising picture for South Africa’s investment landscape. Emphasizing the country’s renewed potential for growth, Jacobs highlighted key factors including government initiatives like Operation Vulindlela, Eskom’s improvements, and the evolving financial market. While cautioning against pessimistic media reports, he underscored a rising interest from global investors and opportunities in domestic equities. With a well-balanced strategy of local and offshore investments, Jacobs shared why 36One remains confident in South Africa’s future amidst shifting market dynamics.
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Edited transcript of Cy Jacobs’s keynote address at BNIC#1 in Hermanus
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Thank you, Alec, and thank you, everyone, for coming to listen this afternoon. First and foremost, I need to apologize for falling into the same trap I was warned about in all three of the earlier talks today, and that is to never believe the press. I received a press release that Pravin Gordhan had passed away, followed by numerous messages saying he was still on life support and hadn’t passed.
So firstly, my apologies for that. It just shows you shouldn’t jump to conclusions based on what the press tells you. Secondly, a thank you to Alec. The last time I was here for BNC6, I had brought a presentation. I was sitting over here in the front rows and was told there were no facilities for presentations, so I had to wing it for 20 minutes.
This time, I have some form of a presentation, so I’ll refer to a few slides. But I do feel more comfortable following a presentation. Many of you may have heard me speak before, but for those who don’t know 36One, like Piet mentioned, we’re a smaller asset manager compared to the larger names you’re used to, like Coronation,
Ninety One, Allan Gray, etc. We probably manage about 10% of their assets under management (AUM), so we’re a lot smaller. But we have our own track record, and the people who started it are still managing those assets. There’s been no turnover of managers. It’s the same team, so when you see the track record, it’s genuinely ours. Our approach is quite diverse. We’re not strictly value or growth managers.
We like to stay nimble. We believe in South Africa as much as we can, but if we feel we shouldn’t, we’re happy to move money offshore. We try to move flexibly to ensure we’re doing the best for our clients. Our product offering is diverse, as we’re one of the two largest hedge fund managers in the country. We manage long-only and balanced funds, among other things. We don’t tell any client they should be in a hedge fund or long-only fund. Each investment has a time and place.
I found it interesting when I last spoke here in March. There’s been a general sentiment to take money offshore and maximize offshore exposure, as Piet mentioned earlier. Today, I thought I’d focus on our South African (SA) equity-only portfolio, which is a long-only portfolio fully invested in JSE stocks.
Instead of focusing on performance, I’d like to highlight how the domestic equity portion of this portfolio has changed over the past few years. About a year ago, we had roughly 32% in domestic equities, meaning banks, insurers, and local retail companies, and around 70% in Rand hedges like Richemont, Anglo American, and British American Tobacco. We stood here, much like Piet and Professor Cronje, and spoke positively about the election outcome.
We also looked at valuations a year or nine months ago to see when South African equities had been this cheap before. Not just small- and mid-caps, but even larger companies. We found that big South African stocks like FirstRand, Standard Bank, Old Mutual, and Sanlam hadn’t been this cheap since the weekend of December 10, 2015, when Nene was removed as finance minister.
That’s where we believed we were. The outcome of the election was positive, as expected. But the truth is, at the time, there was an incredible opportunity to buy South African equities. The general sentiment was that the ANC would rule forever, and who knew who would be president. It seemed like everything was going to collapse. But as much as we all like to criticise I think we’re now at a point where we can say it’s been a very successful year for South Africa. The Government of National Unity (GNU) has just started. And although we continue to read negative things in the press about the education bill, we’re finding small pockets of improvement across the board, and we’re actually quite excited. Another thing my esteemed colleague here in the front has often said is that we should have as much money offshore as possible.
You can see how well American markets have done and how poorly South African markets have performed. But even in a long-only SA equity portfolio, if you’d been able to switch between international and local stocks, as we’ve done at 36One, this is how we’ve performed in US dollars…
Year-to-date, one year, three years, and five years, compared to global indices and the S&P 500 in dollars, this is dollar-based net performance. A lot of people have believed they should take their money out of South Africa as quickly as possible over the past five years. But had you been with the right manager, and we’re not the only one, you could have kept pace with offshore markets in US dollars by being correctly invested in the right sectors of the JSE.
So what’s happened now? We’ve seen a good rally. Markets have performed well. Shoprite is up 40%, and many companies have continued to rise. Over the past decade, however, GDP growth has averaged around 0.8%, which is mediocre. So you were right in needing a lot of money offshore. But things have started to turn.
We now have growth initiatives, a new government, and a general centrist view that people want to fix things. We have a potential growth forecast, and though I won’t dive into the numbers, 2% was mentioned by Dr. Cronje. If you look at South Africa in comparison to other emerging markets, this market is still very cheap.
We don’t believe the market has fully factored in the possibility that South Africa could become a growth market again. Many of you might not have heard of Operation Vulindlela. It’s a complex initiative, started by National Treasury, aimed at fixing bottlenecks in our economy. It focuses on issues like electricity, which we’ve seen being handled efficiently, water, and proper digitisation of the economy. These initiatives have been put in place and report monthly.
Unfortunately, the media often misses these developments, just as it did with the Gold Financial Continuity Reserve. The press made it seem like South Africa was throwing in the towel and destroying its balance sheet, but it was actually a well-thought-out program. Additionally, with DA ministers on board, things are moving in the right direction. So, the message from us is that the situation has significantly changed from a few months ago. South Africa has, for now set itself up for a new era of potential growth. While there are still risks, we’re seeing increased interest from international institutions looking to invest in South Africa for the first time in a decade. Whether it’s equity investments into local fund managers or acquisitions of assets from listed or private entities, we’re hearing positive signals that we haven’t heard in years.
Earlier, Mteto spoke about Eskom’s improved energy availability factor (EAF). I’d like to share a story about that. Mteto didn’t speak much about his predecessor, but when his predecessor left Nampak to become CEO of Eskom, I tweeted that Nampak might finally improve. The difference between these two leaders is clear. Mteto builds businesses from the ground up, whereas his predecessor had a completely different approach.
We were frustrated that the government allowed his predecessor to stay in the role for so long. The improvement under Mteto has been immense, and I don’t think he gets enough credit. He’s softly spoken, kind, humble, and effective.
What South Africa needs now is improved logistics, which is part of Operation Vulindlela, focusing on Transnet. While it will take time, we’re already seeing improvements. At 36One, we measure these improvements monthly. Additionally, a new two-part retirement system has already seen billions of rands withdrawn, boosting consumption and lowering debt levels in the country.
Billions of rands are being withdrawn from retirement funds and used for spending and consumption, which will help the economy. One of the big challenges we’ve faced is high interest rates for a prolonged period, but we’ve now hit the peak. So, we have all these factors that look very positive. Rates are going to come down, and we’re expecting a rate cut this month. I think, with all five of these factors…
South Africa is well-positioned and in a good place to continue progressing. Another development during this period is that foreign ownership of South African equities has dropped from 40% to 28%. This refers to foreign ownership of JSE-listed companies, and you can see a small change around election time. Looking at the right-hand side of the graph, even after the rally, South Africa is still relatively cheap compared to other emerging markets.
It’s clear that we are still on the inexpensive side compared to other emerging markets.
I’ve spoken a bit about our exposure. After the GNU (Government of National Unity), our long-only fund is 60% invested in domestic equities versus 40% in Rand hedges. It’s been over a decade since we’ve had more than 50% of our investments in local domestic shares on the JSE. Previously, it was all about the growth of Rand hedges. So, for us to have this type of exposure reflects how confident we are that, for the first time in many years, South Africa is well-positioned for growth.
Interestingly enough, Piet mentioned earlier that competition in South Africa isn’t as strong as it used to be. This lack of competition is not only true for businesses but also for the market itself. About 10 or 15 years ago, there were 20 or 30 international firms with specialist commodity analysts covering sectors like gold, PGMs, steel, and mining companies. Today, most of them have exited South Africa. Unless you’re a company with those skills, it’s difficult to predict what’s happening in the resource sector. For us, this has become a significant advantage.
Since 2019, we’ve added 30% performance from the resource sector relative to the sector’s representation in the index. For example, if the index was at 20% and grew by 20%, we’ve grown by 50%. This is largely because South Africa has become less competitive in most industries, including the financial markets.
I’m nearly out of time, but I want to quickly mention 36One and our funds. I’ve primarily discussed our SA Equity Fund, which is shown in the top right. We also manage a General Equity Fund, which combines offshore and onshore equities. We’re a multi-asset manager, and some of you may be part of PPS, which outsources its balanced fund to us. We also have our own flexible fund. However, we’re probably best known for our hedge funds, which follow a bi-directional strategy.
For example, we can profit by shorting companies like Steinhoff, Resilient, or EOH if we predict they’re on a downward trend or overpriced. Conversely, we can go long on companies we like, hoping they’ll become 10-baggers like Naspers, which we’ve held for decades. So, on that note, thank you for listening. That’s the update, and I’ll stay to hear your feedback.
Read more: BNC#6: Cy Jacobs Q&A – Why he’s bullish on China, global markets to watch
Edited transcript of the Q&A session with Cy Jacobs at BNIC#1 in Hermanus
Alec Hogg:
You had a very successful election. Tell us about it.
Cy Jacobs:
There was a lot of risk around the election, and every time Helen Zille opened up a Twitter account, we were concerned. But perhaps Dr Cronje will explain that it was all part of negotiation tactics, rather than a genuine threat to pull out of the GNU.
It did dampen a lot of sentiment at the time. However, we felt, even before the election, that all outcomes were going to be positive. We could see the centrist view emerging in the ANC, as opposed to the far-left perspective. We had our own meetings and reached our own conclusions. Luckily, things turned out well. But, as I said, even if things had stayed the same, we believed valuations provided a decent margin of safety. Companies were still earning money and growing. The informal sector in South Africa is also very large, and valuations were simply too cheap.
Let me take you inside 36One. How do we make decisions ahead of the elections? Where do we get our information from?
Well, in the 20 years I’ve been at 36One, and the 30 years I’ve been in asset management, we’ve built a very connected high-net-worth client base from all sectors of the market. Some of our clients interact with high-profile political figures and strategists. Being part of this community has given us access to excellent political analysts. Combining all of this, we come to a collective view.
It’s not just my view. We have a 14-person investment team, and my opinion doesn’t carry as much weight as others in the team. It’s truly a collaborative process, and we aim to make the most informed decision at the time.
Alec Hogg:
It’s also an attitude of keeping an open mind. I see this frequently in the BizNews premium WhatsApp communities, where we get fantastic insights. There are several regular participants in those groups here today. If you keep an open mind, you can learn so much from the conversations.
Cy Jacobs:
One of the worst traits you can have in asset management is stubbornness. Some asset managers fall in love with certain investments and refuse to change their perspective, believing the market is wrong and they are right. I am the complete opposite. What I’m telling you now, I might completely change my mind about tomorrow. As Pitt mentioned earlier, don’t ask for stock tips because information is constantly evolving.
Alec Hogg:
At this point, if you look at South Africa from a broader perspective, the country has a story. In investing, when a company has a compelling story, the market often gives it credit for a while before the numbers catch up. Right now, South Africa has a good story. We have a new government, progress at Eskom, and significant efforts to address water, transportation, and visa regulations.
Cy Jacobs:
Yes, earnings aren’t growing as they should be, and the economy has been sluggish. I also disagree with the reported 0.8% GDP growth because the informal sector, which makes up a significant part of the economy, has been growing much faster. It’s not all bad. If you take a top-down view, this country has a compelling story.
Next thing you know, earnings start growing, GDP hits 2%, and we’re off to the races for a few years. It’s a good point you make there. Gigi Alcock, who attends our annual conferences, points out that when you consider the informal sector, which is where he works, unemployment is closer to 12%, not the 32% or 33% often cited. So, we can get baffled by numbers sometimes that aren’t always accurate. But how do you make sure you don’t get sucked into that sentiment? Well, I think it’s about being practical and staying nimble.
It’s one thing to change your view, but it’s another to be able to practically adjust in the market. If we managed 500 billion or a trillion, or like Ninety One, which manages 2 trillion (though much of that isn’t in South Africa), and we decided tomorrow that we didn’t like the banking sector, we wouldn’t be able to move quickly. It could take months. You need to stay nimble, stay niche, and be able to adjust your investment universe swiftly. If you can do that while keeping an open mind, you still have the ability to adapt.
Alec Hogg:
I’ll go back to the idea of not getting sucked in. You didn’t buy into the Steinhoff story, unlike most others. You didn’t buy into African Bank either, and in fact, you made a lot of money going against the crowd in both cases, by selling short. You sold shares you didn’t own, anticipating you could buy them back later at a much lower price. Where does that ability to see things differently come from?
Cy Jacobs:
It’s a combination of experience and, probably, my best strength—which I’m not bragging about, as I have my share of flaws—is my ability to read people. Marcus Jooste was a classic example. He avoided me, probably on purpose. I also happened to be the lead auditor for JD Group, an asset they bought before 2009. I just enjoy spotting those kinds of people, though I won’t name others. And I won’t speak ill of the dead, so sorry, Marcus. But it’s about identifying things that just don’t make sense.
Steinhoff’s balance sheet and the industry they were in never made sense to me. There’s no way they could’ve achieved that kind of growth, and they had no cash flow. Whenever there’s no cash flow, there’s always some underlying issue. The same could be said about the property sector a few years ago. In 2017 and 2018, property stocks were booming, but I couldn’t understand why. There was no cash flow, they were raising equity every few months, and earnings didn’t add up. The country wasn’t growing, so how were these sectors thriving?
You need to take a practical approach—understand the balance sheets and the people involved. That’s how you find those opportunities.
Alec Hogg:
So, what about Bitcoin?
Cy Jacobs:
I’m not an anti-Bitcoiner. I agree with the philosophy that if you’re wealthy, you should put 1% or 2% of your money into Bitcoin. Stafford Masie was right when he told me, back in March, that Bitcoin would reach $400,000 by the first quarter of 2025. I haven’t forgotten that comment. Maybe he’s right, maybe he’s wrong. What concerns me about Bitcoin is how it’s being used—terrorism, fraud, money laundering, and lost tax revenue are definitely happening via the network.
I understand its appeal, especially the anti-inflation argument because of its limited supply compared to fiat currencies that are printed endlessly. But it’s not a business. It doesn’t pay dividends. You’re relying on someone else’s confidence in the system to buy your Bitcoin at a higher price. It only works as long as there’s confidence. That’s why we don’t invest in it through our funds, though I think people who do are brave.
We have a license to trade equities—that’s what we understand and analyze. But if someone asked for my personal view, I’d say, sure, put a small percentage of your own money into Bitcoin. It won’t harm you in the long term, and if Stafford Masie is right, you could make 8 times your investment by next year.
Alec Hogg:
What might you be missing in the South African story?
Cy Jacobs:
There’s always risk in South Africa. For example, the education bill was recently signed in, possibly without proper consultation by the DA. Maybe it’s not as bad as the press makes it out to be, which is what Dr. Cornier told me during the break. But there are risks. As we know, there are still bad factions within the ANC driven by greed rather than by a desire to improve the country for all its people.
The risk is that the bad can outweigh the good. There’s a lot of money out there. You might not see it down here, but in Johannesburg, where I live, you see flashy cars escorted by armored vehicles and private security with blue lights controlling the areas. It’s frightening, and we need to get rid of this gangsterism that’s above the law.
Alec Hogg:
Despite all that, your ownership of South Africa Inc. has increased. But foreign ownership, which you mentioned earlier, has decreased from 40% to 28%. What are they not seeing that you are?
Cy Jacobs:
Well, it’s not about what they haven’t seen over the last few years. We’ve spoken to quite a few foreign investors. Some of them are even invested in our South African funds. These global fund of fund investors don’t like to make decisions based on chances or predictions. They wait for the final outcome. The Government of National Unity (GNU) had to be in place before they really started to look at South Africa. They aren’t in the business of making speculative bets.
Since the formation of the GNU, we’ve seen more interest. For example, Bidvest is in talks to be acquired by Middle Eastern players. I think many more assets are being looked at from abroad, and foreign participation will likely increase. It’s understandable why so much money left South Africa in the past—there were simply better opportunities elsewhere, like in the US, which has been booming for two decades. But that trend may reverse if the positive momentum in South Africa continues.
Alec Hogg:
You read the South African election brilliantly. With more than half of investable assets sitting in the US, how are you reading that one?
Cy Jacobs:
I’m terrified of the US election, to be honest, because I think both outcomes are bad. We’ve lost the centrist approach. On one side, Trump wants to slap tariffs on everything and “Make America Great Again,” which is like a bull in a china shop. On the other hand, the Democrats aren’t being practical either. What does this mean for markets, especially the overvalued US market? It’s concerning.
We’ve reduced our net US long exposure. In our hedge fund portfolio, we’ve cut that exposure down significantly. We don’t have much exposure to the big tech names like Nvidia anymore, though we hold a bit of Microsoft and Amazon, but we’ve also added put spread options to protect against a downturn. The US market’s outperformance relative to the rest of the world is at a level that’s unprecedented, and we don’t think that’s sustainable.
Interest rates in the US have remained high, supporting the market, but once rates start to come down, the US dollar could weaken, and we might see a slowdown in the US economy—maybe not a full-blown recession, but a slowdown. Valuations there are in trouble, and that’s before we even factor in the election. So, we’re cautious about US valuations in general.
Alec Hogg:
Europe’s also looking shaky, the UK’s in a rough spot, and China has had its issues. How does all this shape your view on South Africa?
Cy Jacobs:
Well, if the US crashes, the South African stock market will follow, but the correction here would likely be much smaller because we’re already starting from a lower valuation base. During global corrections, there’s often a flight to cash, especially US dollars, as it’s still the world’s reserve currency. But the South African market is more rand-hedged than domestic-focused, so we get some insulation. Our exposure to commodities like gold and platinum, which tend to rise in times of uncertainty, also helps.
So yes, South Africa is a safer place to be during a global correction, but it’s still not a good place to be. In that case, you’d rather be in cash, gold, or—though I think it will collapse eventually—Bitcoin.
Alec Hogg:
You mentioned resources. Anglo Platinum’s share price has fallen dramatically—it’s trading at levels we saw 20 years ago. How can that be?
Cy Jacobs:
Platinum Group Metals (PGMs) are unique, and most of these metals go into combustion engines for traditional vehicles. With the rise of electric vehicles (EVs), which don’t require PGM metals, the entire basket of these metals has seen a sharp decline. That’s hit companies like Anglo Platinum hard. Interestingly, we’ve been short the PGM sector for a while, and we’ve made a lot of money betting against companies like Sibanye and Anglo Platinum. Just yesterday, Anglo reduced their stake in Amplats, which caused the stock to drop even further.
What’s strange is that none of the major players—Sibanye, Amplats, Northam, or Impala—have cut production. They’re all keeping output high, despite the falling prices. Sibanye, for example, had been in financial trouble, potentially facing a covenant breach in six months. But today, they announced they’d be cutting half of their Stillwater production, which is a big step, though it’s something we anticipated.
And it happened just the day after Anglos placed a very large portion of Amplats into the market as well. I think yesterday was a great opportunity, so we actually took some of the placement in Amplats at 5.11 and bought more.
We did some structured trades as well, where we sold puts, etc., but I won’t get into that. We also closed our shorts yesterday. We were expecting a production cut, and we did get one, though probably not as large as needed. It’s still 200,000 ounces; I would have preferred for all of Stillwater to shut down. But I do think this could be an interesting entry point for Amplats, particularly because it sits lower on the cost curve.
It would survive the longest. Even though it’s a tough industry, I don’t believe that electric vehicles (EVs) are taking over permanently. We’ve already seen some interesting stats from major accounting firms showing that EV penetration is slowing and not growing as fast as predicted.
People are sticking more to internal combustion engine vehicles because, in the long run, when you try to sell your EV years down the line, you’ll realize that what you have left is essentially a shell needing a new battery. And that battery might cost more than the car itself, so no one wants to buy it. There are significant issues with EVs that are only now becoming evident.
Alec Hogg:
By “us,” I mean internal combustion engines. That’s an interesting point you’ve made. Do you think now that one producer has blinked, others will follow? Or will they hold back, reasoning that 200,000 ounces out of the system will bring the demand-supply equation closer to equilibrium?
Cy Jacobs:
I don’t think 200,000 ounces is enough. I believe half a million is closer to what’s needed. But it’s a start. The basket of platinum group metals (PGMs) required for catalytic converters costs a third of what it did a few years ago. The price has dropped significantly.
You can imagine a mine’s selling price being down by two-thirds while their costs—due to electricity, labor, etc.—have gone up. Those businesses are losing a fortune unless they’re on the low end of the cost curve. We need more cuts, but this is a start. Prices have dropped a lot, so I caution people against shorting at these levels.
The Chinese are also moving towards hybrid models instead of purely electric vehicles, which is something to consider.
Alec Hogg:
Bruce Dakers asks, “Given US debt is at an all-time high and their propensity to print money, are we not facing another financial meltdown?”
Cy Jacobs:
I think the world has become accustomed to this. Debt is never coming down, and there’s no way to repay it. Whatever trillion-dollar number we’re at now, in 10 or 15 years, there’ll probably be a new word, like quadrillion, to describe it. The printing of money won’t stop, which means inflation likely won’t return to the low levels that the US wants, like below 2%. We’ll probably have to accept a higher level of inflation. But I don’t think this signals a massive crisis; it would need a trigger event, like in 2008. It’s not the debt itself that causes a crisis.
In 2008, the problem was the repackaging of mortgages into AAA securities. They thought they would never default. We would need similar reckless behavior to cause another crisis. I don’t think we’re seeing that right now, but who knows—with Democrats or Trump, anything is possible.
Alec Hogg:
And what about South Africa’s debt situation in comparison?
Cy Jacobs:
Well, on a relative basis, we’re higher. I believe our debt-to-GDP ratio is close to 80%. It’s over 70% and trending towards 80%. While this seems large compared to where we were in the past, many other countries have seen similar increases. Overall, I think it’s manageable.
Alec Hogg:
Chris de Lange asks, “Hi Cy, if you’re willing to disclose, what are your current short positions and why?”
Cy Jacobs:
I probably wouldn’t disclose any South African shorts. They might be shorts simply because we believe they’re currently overvalued relative to something else. For example, and this is not a current short, but if we were shorting Nedbank and long Standard Bank, it doesn’t necessarily mean we dislike Nedbank. It just means we think there’s an arbitrage opportunity between the two. By shorting Nedbank and going long on Standard Bank, we take no market or banking risk. If the gap between the two closes, we make money.
Alec Hogg:
Musk is an extreme entrepreneur. With SpaceX, for instance, he had three rocket failures before the fourth attempt succeeded. He bet everything on that last rocket, sleeping on couches and selling everything to fund it. He’s now doing something similar with Tesla, betting on robo-taxis. If he gets it right, would that change your view?
Cy Jacobs:
I don’t think so. First, he’s not a leader in robo-taxis. There are Chinese companies ahead of him in technology. Tesla’s full self-driving is only at level 2, while several other companies are already government-approved at higher levels. Musk controls the narrative on platforms like Twitter, which helps him, but I don’t know how anyone can be the CEO of five different businesses.
To me, Musk represents what’s wrong with the market today. Fundamentals have disappeared. In South Africa, a company like Tesla would have been wiped out by now, but the US market isn’t driven by fundamentals in the same way. It’s fascinating.
Alec Hogg:
The only person I know who managed two huge businesses like that was Steve Jobs, with Apple and Pixar. And it nearly killed him before he went back to Apple, which probably did kill him in the end. So, the question has to be: if Musk dies—through whatever reason—what would that do to Tesla and its share price?
Cy Jacobs:
One of the people on our team—who I won’t name—says the only catalyst that will cause Tesla to collapse is that exact event. And I don’t wish Musk any harm because he is a good man, a visionary, and he’s done a lot of good. But I do question, with the cult following around him, if anything will ever happen to that stock price. It’s extraordinary.
Alec Hogg:
Well, I guess that’s what makes markets different. You made an interesting point about robo-taxis. I have a good friend who was very senior at General Motors. He’s retired now but was head of quality control for all of GM. I recently asked him about Chinese cars.
He said it’s like how we used to regard Japanese cars years ago—”Japs crap,” remember? Toyotas were considered rubbish back then. But today, no one would say that about Toyota; it’s a high-quality product. He says the Chinese cars are at that point now where their reputation hasn’t yet caught up with their quality. And if you extrapolate that to robo-taxis, where the Chinese are ahead, that’s a worrying factor for Tesla.
Cy Jacobs:
I think Musk knows that robo-taxis aren’t the future for him because his most recent statement was that every household would eventually have a humanoid robot. He believes that’s where Tesla’s future value lies. Initially, people said it wasn’t about selling cars, then it became about Full Self-Driving (FSD) and robo-taxis. Now, with Chinese competitors entering that space, Musk is shifting to humanoid robots.
Alec Hogg:
These robots are supposedly going to live in your home, doing everything—washing, cleaning, even your job.
Cy Jacobs:
But for those of you following Boston Dynamics, they are light-years ahead of where Tesla is with robotics. So it’s unlikely that Tesla will suddenly become the leader in humanoid robots. Musk did bring one of these robots on stage at his last event, and it walked around a bit, but it wasn’t very impressive. Still, the cult believes. And as long as the cult believes, nothing will happen to Tesla’s price.
Alec Hogg:
Michael Potts asks, “Cy, given your comments on the property sector and the growth in the informal sector, what’s your view of listed retail property funds with assets in rural and township areas?”
Cy Jacobs:
Great question. We disliked the property sector in 2018, 2019, 2020, 2021, and 2022. We were shorting it the whole time—Resilient, Greenbay, Growthpoint, and others. But in 2023, our biggest attribution in our long-only fund came from the property sector on the long side.
But the sector devalued so much from the end of 2017 to the beginning of 2023—about a 70% decline in equity value over six years—that it became too cheap.
Players in both rural and urban areas have brought down valuations in their financials. Cash flows have started matching their income statements, and dividend yields have picked up slightly as a result of growth in both the informal and formal sectors. The sector had just become too cheap. From pre-election until now, many stocks are up 30-40%. Growthpoint, for example, was at 10 Rand and is now at 14. We own quite a bit of it.
We also own a lot of Fairvest—more than 10% of the company—and huge amounts of Vukile. We might even put out an announcement soon regarding a new level we’ve reached. So yes, we like the sector, and interest rates haven’t even started coming down yet.
Many of the players in the sector have high loan-to-value (LTV) ratios, meaning they are highly geared. When rates do come down, it will significantly impact earnings positively, which we think is a good thing. So yes, we are optimistic about the property sector.
Alec Hogg:
Piet spoke about Lollapalooza South African stocks. Would you agree with that? And if not, are there any Lollapaloozas in your world?
Cy Jacobs:
We’re a bit different from Piet. Since AEM is quite a bit bigger, we don’t invest in too many of those very small-cap opportunities, although we do like a few of them. I won’t name names, but you can find stocks trading at five or six price-to-earnings (P/E) multiples with six or seven percent dividend yields, and we’ve been buying some of those.
We also have some that we believe could return to their former glory. One example is Famous Brands. We have a small stake in it. Famous Brands was a market darling a decade ago, but today its share price is a third of what it was. Earnings aren’t growing as fast as they should, even though fast food and food delivery are booming sectors.
Some small fixes could turn it around. We, along with other asset managers, have bought small stakes in it to try to create some change. If successful, businesses like this could become growth stories again. There are some excellent brands within the company.
Alec Hogg:
You know a lot about retail at 36One. Is Evan Walker still with you?
Cy Jacobs:
Yes, he is. He’s one of the best retail analysts out there.
Alec Hogg:
What do you think of Pick n Pay? We had Sean here in March, and he was impressive, but feedback suggests he isn’t turning things around.
Cy Jacobs:
I had dinner with Sean when he was here, and it was my first time meeting him. I think it’s a tough situation. If you ask me about Pick n Pay as a grocery brand, I don’t think it’s ever going to catch up—it’s finished. But as a listed company, it’s different because it owns Boxer.
Most people probably don’t know Boxer or shop there, but it’s growing faster than Shoprite. Boxer is a phenomenal business, and they’re planning to list it. They will sell a percentage of Boxer to raise capital to support the struggling Pick n Pay grocery business.
I don’t think the Pick n Pay grocery business will ever recover. In fact, in some upmarket malls, tenants are refusing to pay rent if Pick n Pay is their anchor tenant instead of Checkers or Woolworths. Shoprite is spending a massive amount on capex every year, and that’s equivalent to about 50% of Pick n Pay’s entire market cap. So it doesn’t stand a chance.
However, Boxer could be worth more than Pick n Pay’s entire market cap. So the listing of Boxer could present some potential for Pick n Pay’s share price. That’s different from the brand’s future, though.
Alec Hogg:
Adam Kethro asks, “Do you like Anglo-American?”
Cy Jacobs:
We are actually buying Anglo-American right now. We bought some this morning and yesterday. We haven’t liked commodities for a while because of the slowdown in China. The housing market in China has collapsed, and unless China is building infrastructure, commodities generally don’t perform well.
I think, based on breakup value and the fact that Anglo American has very valuable copper assets, copper is the way to go. The world is set to build many more data centers, AR centers, and EV charging stations, all of which require copper, and the world does not have enough of it.
However, we think the Chinese slowdown is nearing rock bottom. We saw more stimulus from the Chinese government this morning with a further rate cut.
Looking ahead five to ten years, I believe the copper price will increase substantially and become a significant commodity for investment. Anglo American has a substantial copper portfolio, which I find promising. However, progress will be gradual; it’s a long-term play.
Anglos is in play. BHP made an offer that didn’t materialize, but Anglos knows it’s in play, which is why they sold some of their Amplats in the market yesterday—we picked some up.
As for Anglo Platinum, I’m concerned about the long-term viability of platinum group metals. Although Anglo Platinum is currently attractive due to its low valuation of around 500 Rand, I am not confident in its future. If, in 15 years, EV batteries allow for 5,000 kilometers per charge, demand for internal combustion engine (ICE) vehicles will diminish significantly.
Anglos has valuable copper assets, and copper is going to be essential moving forward. This world will need copper for data centers, AR centers, EV charging stations, etc., and we don’t have enough copper supply.
Thus, while Anglo Platinum is undervalued now, the long-term outlook for platinum group metals is uncertain compared to copper.
Alec Hogg:
Thank you for your clarity of thought, as always. Thanks, Cy Jacobs.
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