The world is changing fast and to keep up you need local knowledge with global context.
Credo’s London-based chief investment officer Deon Gouws applies his mind to the rise of the Tree People; the potential impact of a President Donald Trump (“nuclear war isn’t good for business”); Europe’s ticking pension fund time bomb and other issues that global investors are fretting about right now. In this interview with Biznews.com’s Alec Hogg and Jackie Cameron he offers sanguine advice…as ever.
Alec Hogg and Jackie Cameron are with Deon Gouws, the chief investment officer of Credo. We’ve been following Brexit together, subsequent to the decision by the British public to leave the European Union. The Pound hasn’t fallen out of bed. The stock market in fact, has gone up. Property prices have recovered somewhat. Is all of this what you anticipated?
We have a fairly, sanguine philosophy in our firm and we generally try to avoid the short-term noise and short-term uncertainty. We rather focus on the fundamentals of good businesses that we find in the market and try not to overpay for them. I think if you have that kind of approach what’s happened in the last month or six weeks or so becomes largely irrelevant. In fact, what happens in the next year or two is not that relevant either, because the kind of businesses that I described that we searched for and that many managers like us search for, in service to their clients shouldn’t really be dependent too much on political events. Even ones that are as fundamental as this one.
The Pound it hasn’t really recovered from where it was pre-Brexit. Perhaps that was a function of anticipation, which didn’t happen.
The reality is the Pound today, I want to take out the time just before the vote happened because the Pound went up from, essentially, and I’m talking against the Dollar obviously. From essentially the low $1.40’s to about $1.50 on Brexit day, and then of course, immediately after Brexit it came into the $1.30’s and today it’s at $1.30. Bearing in mind that the last small leg down certainly it links to the interest rate decision that we saw last week because that’s economics one-o-one, that interest rates defend currencies and when the interest rate goes down the currency will go down accordingly. The bottom line is that the Pound today is trading very close to a 30-year low, against the Dollar. If you ask my prognosis for that and it’s not because I’ve got any special insight into what’s going to happen in the economy in the next couple of years. It’s simply looking at long-term averages and believing some sort of reversion to the mean. Ultimately, even though I didn’t expect Brexit. I’m a glass half-full kind of person. I believe that the capitalist system will respond to the challenges that new businesses will start up. Other businesses will find opportunities, in terms of Brexit. In spite of all the perceived doom and gloom and the bottom line being I’m not suggesting that there will be a huge contraction in the longer term in the UK, (quite opposite). You may actually argue as Charles Gove did validly on your site in an article that was published around the time of Brexit. You could say that many industries will benefit from Brexit and once that becomes obvious we’re talking a few years in the future here. I think there’s a very good argument that the Pound should strengthen accordingly.
That Charles Gove article was fascinating because it gave a different view completely to what was being peddled it was very anti the fear campaign and very pro free enterprise.
That is true and even though I’m on record in a piece that I wrote for years. Well, I said that ultimately, I wanted to Remain and I motivated it accordingly. In the build up to the referendum, I did meet some interesting people and there’s an individual, for example, Lord David Young, a very senior policy advisor to David Cameron until recently. He’s in his 80s now and he’s got a history as an entrepreneur and a businessman and not as a career politician at all. I’ve been fortunate enough to meet him on two occasions, once before Brexit and once after Brexit, and he was a very vehement Brexiter. His argument in a nutshell was that career businessmen, captains of industry, managers of large corporates will typically support Remain because they don’t want to upset the applecart in the next 5 to 7 years, while they’re trying to earn money from their share options. Their vested interests are very important. Entrepreneurs, on the other hand, who have a much more long-term vision, who will be handing over businesses over 10 to 20 years to their offspring, he says, “From their perspective he was very clear in his mind that Britain, over that kind of period will be better off.” Those businesses will therefore be stronger, over the longer term and that was his reason for backing Brexit. Take the short-term pain for the longer-term gain.
Deon, that same Charles Gove has got another interesting anecdote…
Alec, yes I read about this the first time a few months ago, at the time of their election for the London Mayor and Charles Gove came with this theory, which he based on a book that he read just before and this book covers a specific period in French history. He said the anecdotes of the so-called Tree People and the Boat People, and essentially it boils down to the following. He said that wherever you go in the world there are two kinds of people. They are the Tree People, and what they have in common is that they like the place where they are. They don’t tend to travel. They always return to the same village where the same trees in the middle of the square in the village, and that’s where they feel safe and that’s good enough for them.
And then you have the Boat People and they look at that same tree and all they want to do is to carve out a boat. They want to take that boat and sail around the world, and they want to have new experiences, learn new things, and maybe they’ll come back and when they do hopefully, they’ll add value to the village because they’ve got all t his additional knowledge and experience. He says ‘that’s the way the world works.’ You’ve got those who want to stay home, and you’ve got those who want to travel and be migrants. He says for decades now, (many decades) he says the Boat People have been in charge.
The Boat People, the clever people, the intellectuals, the educated ones have been in charge and the Tree People were happy to give them the power because it was good for everyone. There was economic growth and everyone was happier than they would have been if the tree people, the less educated, the less experienced, the less travelled had been in charge. He said but if you now look, at what’s been happening in the world for the last few years with arising inequality, with very low economic growth around the world.
The Tree People are all of a sudden saying ‘these boat people may not be that smart, so we’re not going to vote for them anymore – we’re going to vote for our own Tree People and put them in charge.’ If you look at what happened with the election for the London Mayor, Sadiq Khan, the son of a London bus driver – the ultimate Tree Person, who has the Conservative candidates, a son of a billionaire, the ultimate Boat Person and the Tree People won that one hands down.
Subsequent to that and this is long before Charles Gove wrote that article. We had Brexit and we know that essentially a lot of people were voting to take back control and to send away the migrants and the like. The Tree People voted against the Boat People once again. You can extend that to the US and say Trump is the candidate for the Tree People. Even though he’s one of the rich people but clearly, and a relative choice between the two, Clinton is the Boat Person, Trump is the Tree Person.
Then if you have a look at Credo as a house, if you do take a long-term view on your investments then perhaps all things being considered, it wasn’t such a bad thing for your client’s portfolios.
Our Pound clients, which is a large part of our client base, have benefited a lot because they got lots of Dollar exposure and given the currency movements, it’s translated into very healthy Pound gains but even the UK based companies that we’ve bought, across portfolios, regardless of the measurement currency have essentially been some of the UK exporters. Most of those have gone up post-Brexit, once again because of the currency. Most of our companies are actually, not only have there been translation benefits in the form of the Dollar-based companies, but there’s been actual economic benefits as far as the Pound-based companies are concerned. I want to qualify this by saying it’s not because we were so clever that we anticipated the result of the Brexit decision. We are actually on record as saying before and after the event, and in fact, I think it was in the piece that I wrote for you straight after the event as well. That we essentially ignored Brexit because, as I said before a few minutes ago, if you focus on good quality companies that you understand and you don’t overpay for them then I think you can ignore a lot of the political risk in these kind of decisions.
By the same token the cut in interest rates in the UK to just about nothing. That’s happened since we last spoke. How do you interpret that?
Clearly Mark Carney is playing a huge role to try and induce stability. I cast my mind back to the morning of Brexit, Friday, 24th June where at 08:15, on a Friday morning on the BBC David Cameron stood up in front of Number 10 Downing Street and resigned.
The next person who was interviewed on the BBC 10 minutes later was Mark Carney, and he was a safe pair of hands and he said ‘we will do what it takes’. Essentially, over that next week or two, he was the only voice of reason, while there was political turmoil and a political void across the spectrum. Mark Carney was making very positive noises, even then. It’s taken him two policy meetings before they came up with the interest rate cut. Some people expected it at the previous round but if you go and listen to his interviews last week, if you read the articles. I think they’re doing what it takes and what they believe it will take, in order to provide stability. They still anticipate the unemployment rate to go up from about 5% to about 5.5%. They’re talking about 250 thousand jobs. That’s in spite of their stimulus. It would have been more they say if they didn’t have the stimulus. I think from that perspective, from a market point of view, I think it creates or it engenders confidence and I think you’ve seen that in the market subsequently.
What do you make of the new Prime Minister Theresa May?
I think she’s an excellent choice. Certainly, in the build-up to the decision I did support her, so at least I got wrong right this year. I was wrong with Leister. I was wrong with Brexit but at least I got May right. I think she’s doing a good job. She’s making the right noises, saying that Brexit means Brexit, even though she was not a Brexiteer. I do believe she’s got her work cut out, in terms of ultimately delivering Brexit in a form, which works for all concerned. I think it could take much longer than people anticipate but ultimately, the future is unknown. We have a good Prime Minister and I’m very happy.
The other big bet that you might have made at 50/1 was Donald Trump becoming President in the United States. It doesn’t look like a good bet at the moment, but who knows – it’s still a long way to go until November. How are you reading that one?
I’m a bit scared to make forecasts given my recent track record but I just take some heart from the fact that I’ve been wrong with most people, with most respected commentators being in the same boat as most of them. I was very worried about this until a few weeks ago. I was actually in the States about 3 or 4 weeks ago, which was at the time of the Republican Convention and that was his high point, when the odds actually swung in his favour, briefly for a few days, maybe for a week or ten days. I was in the States then and it was amazing for me to see the level of support he had. Although I was in New York and in New York, you don’t really meet many Trump supporters. Then, more recently, now that the Democrats have had their convention and I think some of the statements and some of the problems that Trump has had in the last week or ten days or so, it looks very unlikely now. The odds for him becoming it, are something like 10% now, so I think the noises that he’s made, as far as financials are concerned, are simply not going to count in his favour. A large number of respected Republican businessmen, economists and others are backing the Democrat candidate now. I think its best summed up by Warren Buffett, who else? The best quotes always come from him, where as you probably know he was, asked what he thinks about Donald Trump. He answered it in six words. He said, “Nuclear war is bad for business.”
Just coming back to the UK and Europe and the uncertainty that might prevail as a consequence of this whole negotiating process, is it big enough to affect the way you look at investing around the world?
Not really, I think if you go and look at what markets I’ve done in the last couple of months. The two days after Brexit were the worst days that we’ve seen since 2009 or 2010, and then subsequently the market shot up and except for perhaps the UK house builders and maybe some of the banks and a couple of other sectors. For the most part, UK companies have either recovered practically all the ground or have exceeded their previous levels, if they are exporting companies.
Yes, there will be specific issues for specific companies that need to be considered, so when I say that you need to buy businesses that you understand – think whether Brexit will have an impact or not and if it will then clearly that needs to be considered and that needs to be priced. For the rank and file companies, for the vast majority of companies I will remain as saying before, saying that this will be ultimately be a blip for many of those companies. Therefore, I wouldn’t consider it too much, unless the specifics, as I say, are Brexit dependent.
Lots of investors in the UK are wondering: where can they put their money now, with the interest rates at an all time low, and low yields? Where would you be putting your money?
I think people have been asking this question of themselves for a number of years now, given low rates, and of course, people have been calling rates at all time lows for some time now, believing that rates are likely to shoot up. Those bonds would suffer accordingly and for the last number of years that has been the wrong view. I’ve been of that same school because if you base your analysis on five thousand years of interest rate history there are actually records going back that far, if you go back into battering, to the time of Mesopotamia. We are at five thousand year lows of interest rates and we’ve been there for seven years and they brought rates down further, and they are likely to bring them down further again before the end of the year, to something like ten basis points. The point being, and I say from my own perspective and this is certainly the way that I manage my own money and the way that we manage client’s money.
For those that can afford the risk, and therefore there will be different answers, depending on your financial status, depending on your age but equities, as far as I’m concerned are always the best bet, in the long-term. When I say equities, I mean risk assets. For some people it won’t be equities it maybe something like commercial property, or something like farmland, if that’s your circle of competence. Risk assets that are within your circle of competence – ultimately the way the capitalist system is arranged and has been arranged for hundreds of years is such that I think economic growth will come from that and you can benefit from that if you invest prudently and you don’t overpay. That doesn’t change. It becomes more challenging when PE multiples are at 20, compared to when they are at 10. Therefore, the markets, we have to concede that markets are expensive, (as we speak) and the bottom line being that future returns in the next number of years are unlikely to be as attractive as what a lot of people have enjoyed for the last 10 or 20 years.
Are there any sectors or specific companies that might buck that trend in the UK?
To be honest with you I wouldn’t consider myself an UK equity specialist, as far as that’s concerned. We take a global focus, so we do have positions within the UK. The ones that do back the trend have backed the trend, the ones that we have positions in. Tend to be exporting companies, exporting companies that clearly will benefit from a relatively weak Pound because even though I said earlier that the Pound, I believe, could strengthen and maybe materially so, against the US Dollar (for example), in the medium to longer term. In the short-term, the reality is we are at least 30-year lows for the Pound and, from that perspective it will benefit exporting companies. That’s a basket of exporting companies.
We take a global view in analysing stocks and for the last three or four years the majority of the companies that we’ve invested in have been in the United States because we’ve seen, on balance, better companies there, stronger growth prospects and enough of those examples that actually trade at decent multiples. People always say that America is the most expensive developed market in the world. That is true, on average but that doesn’t mean that there’s not a number of attractive investment opportunities there and we try and find them for our clients.
Do you agree with Warren Buffett that the S&P 500 then is the best place to be, or would you advocate some active stock picking?
Absolutely, and I think importantly that’s not a function of today’s market environment. That is a consistent answer that we have been giving clients over time, and we’ll continue to give clients over time. As I’ve said before, qualified by one thing, which is important and that is your own capacity, and tolerance for risk, and that’s not the same for all people. We see that with clients. There’s a blip in the market, and some clients phone us and they say they’re worried about their portfolio value. I understand that. It’s a personality trait. It is what it is and we need to respond accordingly. We are obliged to risk, to do a detailed risk assessment of all our clients. It’s a Regulatory requirement and there’s two aspects to it. There’s your attitude to risk, which is ultimately down to your personality, and there’s your capacity for risk, which is down to your financial situation and other demographic factors, like age, etcetera. On the assumption that your risk capacity and attitude are both of sufficiently high level, as far as I’m concerned the S&P 500 will be the best answer. Or, as I said earlier, if it happens to be a circle of competence elsewhere in risk assets, like farmland or commercial property then that could be a good example as well.
Do you think there’s a bit of a ticking time bomb in the UK with the big Pension Fund deficit and how would you advise people to deal with it?
The answer is yes, there is a ticking time bomb, but I will also say that this ticking time bomb has been essentially, it’s been around as long as I’ve been in the industry. For the last 20 years, I’ve been reading about the ticking time bomb. Yes, it’s very much a ticking time bomb. We see companies reneging on pension promises, to fund benefit pension promises.
As recently as yesterday I read an article in the newspaper about that and I think it’s of concern. If you’re a retired individual and you are banking on that check coming from your ex-employer, you’ve got to know that the guarantee is only as strong as the business that gave it to you. If it’s a medium sized company somewhere in the Midlands, then who knows how long that guarantee might last. Having said that it could also be a big, international bank and we’ve seen how some of them have suffered. I think the problem is, you know…
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.