The world is changing fast and to keep up you need local knowledge with global context.
Counterpoint value fund manager Piet Viljoen shared his thesis on energy stocks, from which he’s been profiting handsomely in recent months. Environmental, social and governance (ESG) considerations have become increasingly prominent, especially environmental concerns, as investors look ahead to the green economy. However, according to Viljoen, these concerns have been overdone, which has led to underinvestment in the energy and commodity sectors. While demand has remained robust – most notably in the energy sector – supply has been constrained owing to underinvestment over the last few years. This has led to surging prices, with Brent crude nearly reaching $90 a barrel earlier this week; many Wall Street investment banks are looking for a triple-digit number of Brent crude this year. In local business news, food retailers Woolworths and Shoprite are looked at from an investment proposition perspective. – Justin Rowe-Roberts
Piet Viljoen on his energy thesis
So, I think we need to take a step back. To understand how cycles work, you have to understand the supply of a commodity and how the supply comes to the market. Demand for most commodities is pretty linear and straightforward, and it goes bottom left to top right at a certain gradient growth rate. It is easily forecastable. Too many people focus on demand. To determine how the commodity cycle plays out, you should focus on supply because it takes a long time to discover and build an oil well. It takes a long time to discover and build a copper mine, a gold mine and a platinum mine; we’re talking five, 10 to 15 years. And what’s happening in most commodity markets right now is that owing to ESG considerations, capital expenditure (capex) is being curtailed. These companies are not spending capex on exploration, they’re not spending capex on building out new mines. Therefore, as the global economy demand grows over time, as it will because the global GDP grows by 2% or 3% per annum, at some point in future – and I think we are getting dangerously close to that time in some commodities – there will not be enough to meet demand. I believe we are seeing that in many energy markets within Europe at the moment where energy prices have gone through the roof. That could spread out to other commodities going forward, mainly because of ESG considerations. I think the ESG lobby – and it’s not to denigrate what they are doing – is important, but one of the things that they are very hard on is this whole transition to clean energy. Transition is necessary and we should be going down that road. But it entails many trade-offs and nuances, which a lot of the proponents are not taking into consideration. So, I think we have to bear a lot of those things in mind. That’s why when we say ‘your ESG is my alpha’ as they constrain the capital to these mining companies and oil businesses – as they stop them from exploring and developing new sources of the commodity – the price of the commodities will go up. And we have seen this happening in many commodities, specifically oil and energy right now. And that is where the alpha comes from.
On Woolworths as an investment proposition
Woolworths consists of the good, the bad and the ugly. The good thing is the food business. I think it’s a fantastic business. The bad is their clothing and home divisions; those have never really done very well. And the ugly is their Australian acquisition (David Jones). If we had true activist investors in South Africa like Elliott Advisors and others in the US, they would probably be taking a stake in the business and forcing them to break it up into three parts. Because at the moment, what you have is the food business subsidising an average clothing and home furnishings business and subsidising a very bad Australian department store business. Yeah, so I think if we had true activist investors, they would be going for a breakup of this business. Of course, management doesn’t want that because the bigger the businesses, the higher management remuneration is, so it is in the interest to keep everything together.
On whether there are any SA food retailers in the Counterpoint value fund
Yes, Shoprite is a significant holding for us. We think it is one of the best managed businesses in South Africa. It continues to take market share across the spectrum, from the top end to the low end. Also, longer term, I think food retailing is a very good inflation hedge owing to the negative working capital cycle. I like owning a food retail business and I like being able to own the best managed retail business in Shoprite.
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