Sanlam says LVMH better bet than Richemont; Phillip Morris over BAT – sadly not for exchange control sick SA

Sanlam’s operation in London has the advantage of being able to consider the entire world – so it’s interesting to see a research note pointing out that its favourites of the moment are LVMH and Phillip Morris – direct alternatives to Richemont and BAT which are so popular with SA investors. Popularity that has clearly been stimulated by their listings on the JSE which means that even though the SA contribution is fractional, they qualify as SA-based assets. Apart from illustrating the hypocritical nature of “prudential requirements” imposed on local financial institutions, the London office’s preference for shares not available in SA over their direct JSE-listed alternatives highlights the absurdity of the artificial system. One day someone will work out the cost to retirees. Until then we live with the insanity stemming from exchange control. This reminds me of the sentiments expressed by Nobel Prize winning economist Prof Friedrich von Hayek in his 1944 classic “The Road to Serfdom”. It’s worth republishing the segment in full:  “The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is in fact the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape not merely for the rich, but for everybody.”  Yet we in SA persist with this “tyranny” half a century after the Apartheid Government introduces us to the sickness. – AH 

Pieter Fourie
Pieter Fourie – Head of Global Equities at Sanlam Private Investments in Lo

To watch the full interview on CNBC Africa Power Lunch click here. 

ALEC HOGG:  Samsung, Phillip Morris International, MasterCard and Louis Vuitton are amongst the multinational stocks favoured by international wealth manager Sanlam Private Investments. Pieter Fourie is Head of Global Equities at the company. He’s based in London. He joins us now to talk a little about those stocks. I suppose the interesting thing, Pieter, just to begin with is there are alternatives on the Johannesburg Stock Exchange but the advantage you have is that you don’t have to invest in BAT – you can in fact go for something like Phillip Morris; or instead of Richemont you can look at Louis Vuitton. So it’s good to be in London.

PIETER FOURIE: Yes, indeed. If you look at Louis Vuitton and Richemont for that matter they actually both trade at a discount to other stocks within the luxury group like Prada International or like Remy Cointreau or Pernod Ricard. So we like both of them, but for our overseas clients we like Louis Vuitton. And as it turns out this month has been a very, very strong performance, the stock was up 14% this month. So some of the short-term value that we saw in the name has been diminished but we still like the balance portfolio of the assets that LVMH have in the long-term and the exposure to Asia in particular.

ALEC HOGG: And the comparison between British-American Tobacco, (or BAT as we know it here in Johannesburg), and the one you favour – Phillip Morris?

PIETER FOURIE:  Phillip Morris; the stock’s been going sideways for roughly a year now and we like the name because it’s more exposed to areas like Indonesia and the Philippines where there’s been some short-term negative news flow on excise duty increases. So in terms of the valuation we actually find that for the first time in quite a while Phillip Morris, which also has large emerging market exposure like BAT, is actually trading at a slight discount to BAT and that’s the reason why we prefer Phillip Morris right now.

ALEC HOGG: Pieter, Glencore will be listing on the Johannesburg Stock Exchange soon. There’s a lot of pent-up demand for the stock here. Is it one that you’ve spent much time looking at from London?

PIETER FOURIE: Glencore is not an easy stock to value. We like to invest in businesses which have a very clear business model. In terms of Glencore of course, a large part of their profit comes from the trading side of their business which we find difficult to value. So in terms of the earnings profile clearly, along with the Xstrata exposure from the merged business, you have potentially quite a cyclical business so it’s important that you get your timing right when you buy into these names. I think the jury is still out on how the integration is going. Although from memory, the management did confirm that they’re targeting more cost-savings than what they originally aimed for. If however I compare a stock like Glencore to something like MasterCard; MasterCard to me, is clearly in a secular growth industry dominated by two or three big players, along with Visa and American Express. And we just find the long-term secular growth opportunity much more compelling than for instance a stock like Glencore which is ultimately exposed to the commodity cycle.

ALEC HOGG: Sitting in London, you have an opportunity to play different markets around the world and you said that you’ve been switching a little out of the United States – looking for opportunities elsewhere. But what about Africa? Are there many non-South African business opportunities that you look at, that appeal?

PIETER FOURIE: We continue to prefer to get exposure through Africa on an indirect basis. Of course, for South Africans; they can get that through the Shoprite’s and the Remgro’s. But if I look at some of the names we own, like Nestlé of course, and MasterCard for that matter; MasterCard still has massive potential in areas like Brazil, Africa and India to essentially bring a business model to those areas of the world where cash transactions still dominate, versus the likes of the developed world where credit card transactions are already quite the order of the day. So in terms of our African exposure we’re very happy owning names like Colgate, Unilever and Nestlé to get our exposure in Africa. And of course Africa and places like India will continue to be growth drivers for them in the long-term, although in the very short-term of course, when you look at earnings revisions; at the moment that’s negative because of their emerging market exposure. But as these stocks pull back as we’ve seen in the last week or so, it will create an opportunity again to pick up the stocks for those investors who believe in buying for the very long term.

ALEC HOGG: You made some interesting points in the research report that you sent out, not least that you’re moving out of America where price growth this year has averaged 20% and looking more at a market like Hong Kong where it’s virtually unchanged from the beginning of the year. The stock in Hong Kong that has the whole of South Africa enthralled is Tencent which his 38% owned by Naspers and has helped the Naspers share price surge. Have you done much research into that one and would you consider investing there?

PIETER FOURIE: For Sanlam Private Investments we did and we continue to like Naspers, of course. The CIO in South Africa has spoken about that quite often, so from our point of view Tencent is a great business, very good return on capital and great management team. It always just seemed a little bit too expensive for us to take the plunge. Instead, what we found in Asia is a name like Samsung Electronics where we think there’s big value support with the stock trading at close to book-value levels. They still have a large opportunity in China where they’ve taken the lead by quite a distance from the likes of Apple and Nokia, so that’s how we get our exposure. We think that if you own a name like MasterCard – and perhaps Visa, one day, if it gets to a level where we could buy that – that gives you enough exposure in a portfolio for valuations that are never that cheap but where you don’t want to end up with a portfolio that’s very expensive. So as I said, Tencent just didn’t quite tick off for us on the valuation parameters.

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