If you follow the news at all, you’ll know that one of the most notable developments of the last few years has been the dramatic outflows from emerging market (EM) stock and bond markets. South Africa has proven to be no exception – in the first quarter of 2014 domestic bonds saw a net outflow of R18bn and domestic equities saw a net outflow of R13bn, an amount that is almost double the net inflows of 2013. While this is broadly in line with what’s been happening in peer countries like Turkey, it’s still rather alarming.
The strong outflows are a key factor driving the weakened rand, and as the election approaches, jittery foreigners are likely to further divest themselves of SA assets. This could lead to further rand weakness, and even (in an unlikely worst-case scenario) to troubles in our balance of payments. – FD
ALEC HOGG: Well, let’s see what’s happening in the markets. Kimon Boyiatjis is with us in Cape Town. Hi there, Kimon.
KIMON BOYIATJIS: Greetings. How are you doing, Alec?
ALEC HOGG: As always, it’s nice to have greetings from the Mother city, as it were, from a man who’s so plugged into the markets today. Did you follow the Advanced Health listing?
KIMON BOYIATJIS: No, it’s not one of those that I would watch, but I was actually quite interested to see what you said. Now you did spark some interest, so I’m going to go and do some work on it this afternoon. Ordinarily, we don’t look at anything on the AltX board and we rather tend to focus on the top 60 stocks, really.
ALEC HOGG: Well, he’s done even better. It was between R1.25 and R1.35 to start with. It’s now at R1.45 and Carl Grillenberger is an interesting guy. He brought Presmed to the market in 1986 and eventually sold it off to Afrox Health. He was telling me this morning, he’s going to do something similar. He has a big stake at the moment – about 49 percent – but dilute it through acquisitions, make it pretty for somebody in maybe ten years’ time and well, shareholders did good last time It’s always good to follow a winner.
KIMON BOYIATJIS: Yes, I recall Presmed and I think that kind of strategy does work well. What I do like from the little I understand and know from what you said, it appears that there will be some organic growth as well as some acquisitive growth, so it would be nice to follow. I might actually go and read up on it.
ALEC HOGG: Another little tip – I hope this one isn’t off your radar as well – was Petmen, where Investec are actually reducing. Is it on your radar or is it off your radar?
KIMON BOYIATJIS: No, it’s off. We tend to look at some of the heavyweights really, things that will influence the index more.
ALEC HOGG: All right, Kimon. Okay, I get the picture on this one. Impala Platinum falling about two percent today – that has to be one, which you watch.
KIMON BOYIATJIS: Yes, no surprise. If I’m not mistaken, the last time we spoke I kept saying that we would be avoiding the single miners and this is one of the reasons why we do. We don’t like the fact that the cost structure in South Africa isn’t that conducive for us to actually even think of owning these types of stocks. Again, I also recall mentioning that while we do like the resource sector – we favour it quite strongly – we prefer to go the diversified route, purely because we’re going to get access to other mines outside of the country.
ALEC HOGG: A very sensible approach, given the difficulty one has nowadays to pick winners. A winner in the banking sector – at the moment, anyway – is Nedbank. It’s going against the trend, up two-and-a-half percent…very strongly this morning. We are going to be talking a little more about the credit amnesty coming in. I wonder if there isn’t a little bit of a hidden bomb there for the financial institutions. I haven’t gone through it in enough detail and we’re going to get the National Credit Regulator. Is that issue one with which you’ve occupied your mind?
KIMON BOYIATJIS: My concern always has been as to the level of unsecured debt that the commercial banks have in South Africa. I believe it’s quite high. I don’t know if this is one way of getting them off the hook. I think they went through a spate of just issuing debt I think, below twenty-five thousand Rand, which was unsecured, and I think they’re unlikely to get a large portion of that back. I’m not quite sure as to how it will unfold, but it appears that it may be positive for the banks. Again, they do go about their business often…globally, we’ve seen this trend of almost indiscriminate lending, and then they go running cap-in-hand to the authorities to help them – bail them out. Maybe it’s not at the same level in South Africa, but I do think their unsecured debt books aren’t as pretty as one would like them to be.
ALEC HOGG: Indeed. Well, 2008 of course, was the red-letter year for that kind of behaviour. I’m sure you picked up earlier in the week that ABIL, out of nowhere, had a ten percent improvement. We couldn’t get to the bottom of it. Have you been able to?
KIMON BOYIATJIS: No, but again, it fared so badly. There was going to be something that was actually going to make it bounce a bit. Again, in that sector, it’s been pounded. We saw them having to go offshore and borrow money at quite steep rates in the offshore capital markets. I think many of the provisions that were put in, were factored into the market and it’s not a surprise that there was a bit of an upside bounce. As to where exactly it came from, I’m not aware, but the fact that it was there is not a surprise at all.
ALEC HOGG: Talking about rates generally, is there anything we can read into the way that interest rates are behaving at the moment and what to expect for the election? This price of money or interest rates can tell us so much about so many things. Is it even able to tell us about the way we might be voting?
KIMON BOYIATJIS: Well, I don’t know if it’s going to tell us too much about the election. I think, as always, there’s a bit of nervousness surrounding that and the reason why the markets would be a bit more volatile. I don’t think it’s anything to be concerned about. I’m more concerned about the numbers that came out of the Reserve Bank for the first quarter of this year with regard to the outflows. I’m sure you aware. If I’m not mistaken, the number was eighteen billion that flowed out of the bond markets in the first quarter of this year, and to a lesser extent, I think the number was thirteen billion in equities. Overall, we saw a massive outflow. In fact, almost double the inflows we saw last year, so that would concern me more. However, I think that’s in line with the global trend and if we see the bond markets internationally, I think they’re going to be under pressure. I don’t think there’s any prospect of rate cuts anywhere and if anything, we’re going to be seeing rates hiked. In my opinion, we’re going to be having more pressure on the bond market, so yields will go up. I prefer to only be invested in the short end of the yield curve. I think the risks of going too far out are high. It’s global trend and that’s really, what’s driving our market, which also in turn, doesn’t bode particularly well for the Rand with those types of outflows. I don’t know if the tail’s going to wag the dog or vice versa, but what we are going to see is pressure on both the currency as well as interest rates, so I’m not too positive on that sector of the market right now.
ALEC HOGG: Some pretty good insights. Kimon, before you go, 1994 – 20 years ago – where were you today?
KIMON BOYIATJIS: In the markets. I did go and vote. I was actually in Cape Town and I recall voting in Camps Bay. It’s something to be proud of. I think where we are, stability-wise, is a place where not too many people envisaged us to be and it’s really good to see where we’ve come to with respect to our voting. It’s going to be quite interesting. The only disappointing thing I heard (or read) recently, was the fact that there are apparently one million voters born since 1994, who won’t be voting. I think that’s really disappointing and discouraging, really.
ALEC HOGG: One in three for the ‘born free’s’ of this election, the 18 to 20-year olds will in fact, be voting, so two-thirds of them couldn’t care. It’s a pity. When you think about the way…
It’s a pity.
ALEC HOGG: I remember what I did on this day 20 years ago. I went to all the polling stations, which were so full in our area – I lived in the south of Johannesburg – you’d have to spend a whole day and in fact, many of the polls were kept open longer. Eventually, we had this bright idea to go into the middle of Johannesburg to Braamfontein, to the Civic Centre where we walked straight through, because everybody seemed to be in the suburbs – interesting. Anyway, Kimon Boyiatjis bringing back memories… Let’s hope that things do settle down after the election, and the outflows you spoke about are not a heralding sign of worse to come, but just in line with global trends. That was Kimon Boyiatjis, the Director from Trident Capital.
