Piet Viljoen: Re-rating of SA’s stocks, bonds and assets has only just begun.

Veteran money manager Piet Viljoen of Merchant West has been bullish on SA assets for some months, primarily because he believes they had been too heavily discounted by a sceptical global investment community. Despite this relative optimism, he warned ahead of May 29 that were the post-election ANC to partner with the EFF “all bets are off”. In this discussion with BizNews editor Alec Hogg, the investment guru says despite a strong rally in the past few days, SA assets (the Rand, bonds, stocks) are still far too cheap – offering exceptional value right now, ahead of the coming wave of global interest.

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Highlights from the interview

In a compelling dialogue with BizNews, veteran money manager Piet Viljoen from Merchant West underscores his bullish stance on South African assets. Viljoen contends that global scepticism has unduly discounted these opportunities, making them particularly attractive. However, he cautions that a potential ANC-EFF alliance post-election could disrupt this optimism. Despite recent market rallies, Viljoen maintains that South African assets—the Rand, bonds, and stocks—remain remarkably undervalued, presenting a unique investment window amidst anticipated global interest.

Edited transcript of the interview ___STEADY_PAYWALL___

Alec Hogg (00:10.99): Well, the South African popularity, as far as assets are concerned, have, well, transformed its trajectory over the last few days. A while back, Piet Viljoen, who manages the Merchant West Value Fund and is one of our favourite market commentators amongst the business community, suggested that the right kind of election outcome could spark a revival in a very waterlogged South African share market. Could this be it? We are catching up with him now to find out whether what we’ve just seen is sustainable.

Alec Hogg (00:53.742): Well, nice and early, unfortunately cold here in the Western Cape today, isn’t it, Piet? But not cold on the stock market. Stock market’s hot.

Piet (00:58.685): Yeah, it is a bit chilly out. Now the stock market seems to be quite warming up, warming up to some good news for a change.

Alec Hogg (01:07.63): It’s early days. I chatted yesterday with Kokkie Kooyman, who you know very well. He reckoned that we missed a bullet here. Had the election gone the other way or had different partners been chosen in the government of national unity, we would be off to Zimbabwe. He put an 80 % chance of that happening, but it didn’t happen that way. And it does look certainly for the moment that we can hope, but you’re a rational man. Are we hoping too much?

Piet (01:36.189): No, hope is never a good strategy. So I don’t think we should be hoping or basing our vision strategy on hope. But I think if one stands back and looks rationally at what has happened over the past two weeks, I think it’s significant. It’s more significant than just another election outcome that happens to be positive for the moderate centre and not positive for the far left, far right.

I think it’s much more significant than that. And I think if one looks north of our borders in Africa, there are very few liberation movements that have lost an election and then subsequently willingly given up power or shared power with other parties in a peaceful manner. I don’t think that has happened. I can’t think of anywhere in Africa. It probably has happened in one or two places, but it’s not part of the course of Africa.

This is something different and I think it’s something significant.

Alec Hogg (02:38.638): What would happen though if the government of national unity were to collapse?

Piet (02:44.061): Look, the odds of it collapsing are probably quite high. I think you’ll see a lot of noise, sound and fury coming from the coalition members in the canoe, as it’s termed. But I think in the back rooms, lots of compromise are being made. I think Helen Zille told the BizNews community about the sort of compromise that had been achieved and the negotiations that had gone through.

And I think that continues in the back rooms whereas in the public sphere you see lots of sound and fury and arguments. That will be par for the course going forward. If it collapses, I think we’ve taken a step in the right direction. I think we are moving that direction and even if it collapses, I think there will be other coalitions formed which will carry on that momentum going forward. It’ll be hard to turn this around because this is what…

This is what the people want and this is what the markets want and I think this is a good outcome for the country and I think everyone, every rational person probably realizes it.

Alec Hogg (03:48.59): When you say what the markets want, can you just recap on the way that asset prices have improved in the run -up to and after the election?

Piet (03:57.213): When I say what the markets want, actually what I’m saying is before the election, there was a significant risk premium on South African assets because of the potential adverse outcome of the ANC tying up the EFF, the MK or that sort of thing. I think I spoke about it at the BizNews Conference a year or so ago that if the ANC tied up the EFF to form a coalition government, all bets were off and you would not want to expose to SA at all.

That has not happened, but that had been priced into assets via an elevated risk premium. And you can see it on government bonds, bond yields were 13%, long dated bond yields were 13 % before the election. Yesterday, they closed around 12%. So there was a 1 % risk premium that came in after the election. Now, if you discount the cash flows and you reduce the discount rate by 1%, the present value of those cash flows go up a lot.

And that’s simply what’s happened over the past week is that discount rates or the risk premium has come in as narrowed. Therefore, for the same business with the same profile of cash flows going forward, the value of the business has gone up. They’re not selling more widgets. They’re selling the same amount of widgets at the same margin. It’s just the present value of cash flows has increased because the risk premium has declined.

Alec Hogg (05:19.63): Let me understand this in terms that perhaps most people will be able to relate to. If you are borrowing money from a bank and you’ve got a good surplus in your account, the bank will give you a lower interest rate. In other words, the bank’s more confident that you’re going to be repaid. But if you don’t have much money in your account and you’re always running out, you always have the difficulty come the end of the month, then the bank is going to charge you more.

Piet (05:38.397): Exactly.

Alec Hogg (05:49.422): So when the international community looks at South Africa, what has happened from what I understand you told me, what you said now, is that the international community is saying, okay, South Africa, you’re not as high a risk as we thought before the election. We’re going to charge you less for the money that we’re going to lend you. And indeed, South Africa needs that money because the economy cannot grow. We can’t fund our own growth internally. We need outside capital to support us. Is that about accurate?

Piet (06:17.469): I think that’s a very good summation of exactly what’s happened is that we have become more credit worthy and therefore we are being towards the lower interest rate. And that is a positive outcome. And that’s only the start. I mean, that’s just a week after elections. Let’s see where, you know, what happens going forward, what policies are implemented. You know, the other, I think positive thing one can say is a coalition government or government of national unity as one could, will be a bit of a lame duck government in the sense that…

… Everybody has to agree to do something and it’s hard to get common ground to agree on things and therefore the government ends up not doing very much at all which I think is a fantastic outcome for any country. The less government there is, the better. So I think that is a very, very positive unintended consequence of a government of national unity.

Alec Hogg (07:11.342): That’s an interesting point because there’s already concerns and I didn’t raise this on the record with Helen Zille because we were talking about other issues, but of that antagonism between the DA and the PA and the PA, Patriotic Alliance, you know, McKenzie has been at our conferences. He’s a he’s a kind of all controversial character. They can’t sit around the same fire it appears. Now they’re going to be forced to in the government of national unity. And perhaps the Democratic Alliance will throw all of its toys out the cot and say…

Well, we’re not prepared to have this, but there’s just so much at stake to allow those kind of spats to affect this very, very important step that South Africa’s taken.

Piet (07:54.237): I think so. They say politics is an auto compromise and I think that, as I said earlier, in the back rooms, I think some sort of compromise will be reached to make both parties look good in the public sphere and maintain their positions in the public sphere, but in the back rooms they will come to some sort of agreement. That’s how politics works and I’m sure that should be the path forward in terms of the PA and the DA. But I think that’s that fractiousness that you’ve just described between two of the parties in the government of national unity.

That pertains for all the parties there. I mean, all of them have some sort of some level of antagonism towards other parties, which points to less getting done rather than more getting done. Now, when you talk about the government, like the ANC, you’ve got a lot of rules and regulations implemented and laws and bills implemented over the past 30 years, which have been very detrimental to economic growth.

And to doing business and to living your life easily in this country. And the less rules and regulations and rules and laws that are having passes that interfere with our life, the better.

Alec Hogg (16:11.229)
No, I think stock like CMH, for instance, you know, we buy cars in a similar industry, trading at a very high P .E. after having been sanitized by the investment bankers for public consumption. CMH is a business with management that’s been around the block a long time that is trading at a fraction of the multiple of we buy cars. And I think it’s a fantastic business.

So that’s one investment companies, investment holding companies, sometimes HCI is trading a big disc company as a value and there’s hidden value on the balance sheet in terms of the oil interest and platinum interests. So those are a couple examples. But the biggest bundle of twigs of course is the Merchant West Investment Value Fund. I mean that is the bundle of twigs. Exactly.

Alec Hogg (16:56.822)
Just buy your own, just buy a pet and away you go. You mentioned oil and gas and we’re going to have a lot more of that at the, our very first investment focused conference. I’m so, so delighted that you are keeping up your record of participating in every single business news conference from the first one that we have in the, the BizNews Conference. And you’re going to be here with us on 12 September.

Piet (17:18.237)
Yeah, that’s right. Remember, COVID still under COVID rules.

Alec Hogg (17:23.278)
Boy, did we, we’ve got some stories to tell from, from those years, but, Piet it’s on the 12th of September and we also have the Don Ncube. Now I know you’ve been around a while. You remember real Africa. You remember Don as being one of the great entrepreneurs of South Africa. He’s always preferred a low profile. but he got to a point where he said he felt that real Africa had done its bit distributed billions to thousands and thousands of, of black shareholders.

And hopefully started many businesses in that way. But the point I’m getting to here is he’s going to tell us more about gas because he’s very invested in gas. He’d been doing that for the last 10 years. Is it a game changer, the whole gas story as a little preview? I’m sure you’re going to give us some more of your twigs at that conference. But just as a preview to the BNC, BNIC1 as we’re calling it, how about the gas story

Piet (18:14.013)
Yeah, it should be. It should be a game changer. I mean, natural gas burns at least 50 % cleaner than oil and much, much, much cleaner than coal. So if you are environmentally orientated and are agitating for a clean air policy and a green policy, you should be falling on your feet to encourage the development of natural gas extraction in South Africa or off our coast where they found reserves.

Because it’s just a much better form of energy in terms of environment than coal or oil or diesel or whatever. So I’m very excited about it. I know that there are people that say zero carbon or that is just not going to happen in any realistic future. Zero carbon will just not happen. But I think if you can use a better source of carbon, a less polluting source of carbon, that is a big step in the right direction.

And I hope that is the way we go, thankfully.

Alec Hogg (19:16.974)
Well, we’ve had enough on that subject, both here and in London from James Lorimer, a D .A. MP who is focused much on it. Let’s hope he finds his voice is more clearly heard in the future because it does appear to be another game changer for this new government that we have. Just to summarize the pit overall, you believe that the improvement that we’ve seen in asset prices in South Africa as a consequence of the election is really just a taster that if things go in the right direction, this could be a sustained run.

Piet (19:53.885)
Yeah, so all we’ve seen so far is a reduction in the risk premium. In other words, we haven’t seen it. So the interest rate with which cash flows have been discounted has reduced. So the present value of those cash flows has gone up. We haven’t seen the cash flows themselves grow. And I think that is the next phase of development where you have positive economic developments as a result of a…

political environment and other factors like the two-pot system and so on. So all we’ve had is risk premium coming in, we haven’t had fundamental improvement yet and that’s still to come.

Alec Hogg (20:33.006)
And for those who do not understand markets, what it means is more jobs, more prosperity, and a much happier nation. Piet Viljoen is with Merchant West. He runs the Value Fund. And I’m Alec Hogg from BizNews.com.

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