Piet Viljoen: Opportunities and risks in SA’s rebounding market
In this interview, Piet Viljoen, portfolio manager at Merchant West Investment Management, discusses the recent surge in South African stocks following the election, highlighting their continued undervaluation and under-ownership. He explores opportunities in local property and second-tier consumer stocks while cautioning against offshore investments. Viljoen emphasizes the importance of a diversified portfolio, remaining optimistic about South Africa despite political risks, and underscores the need for pure local exposure in investment strategies. Viljoen spoke to Nielsen Network CEO, Bronwyn Nielsen.
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Extended transcript of the interview ___STEADY_PAYWALL___
Bronwyn Nielsen (00:01.644)
Piet, always good to chat to you and we've been talking about value in the local market for many years now. These must be exciting times for you because everyone's saying the local market is gaining momentum and showing no signs of stopping.
Piet Viljoen (00:21.165)
Yeah, it's true. I think local stocks have been on a run over the past few months, basically since the election. After the election results came out, they've been on quite a bit of a run. But they're still cheap. They're still undervalued. And I would argue they're still very much under-owned.
Bronwyn Nielsen (00:44.056)
Where would you be looking for value in the current market environment? We have seen some of the players, Calgro M3, out with results. The property players, I was talking to Magnus yesterday, and he certainly sees value in the property environment. Is that an arena that you would be hunting in?
Piet Viljoen (01:06.295)
Yeah, look, the property stocks have had quite a strong rebound, basically because they're so closely linked to the interest rate cycle, and bond yields have come down by 250 basis points since the election. There was a big risk premium priced into interest rates from bonds, which came out after the election, bond yields declined, and property yields declined in sync with that. So the property stocks had quite a good run.
And I think looking forward, you could probably make an argument that maybe the earnings will start to increase as vacant space fills up, as rents escalate, and that sort of thing. I think property makes sense; local property makes sense. I do think that I would stay away from the offshore property guys still. I think that, you know, the guys who manage properties in South Africa know what they're doing. But if you're buying Eastern European properties out of South Africa, I'm not sure you're fighting in a fight that you can necessarily win.
Bronwyn Nielsen (02:11.612)
Everybody's been waiting for interest rates to start coming down. We've started that cycle now, and there's a lot of attention on consumer stocks, stocks that will benefit from consumers achieving reprieve in terms of the pressure they've been under. Is this a space that you are looking at, or have they already run?
Piet Viljoen (02:38.161)
They've run. So the large-cap consumer stocks have run quite a bit. If you look at them, Mr. Price and the like, they've run quite hard. But there are some second- and third-tier consumer-related stocks which have not run as hard yet. Mainly because they're small and illiquid, and the large fund managers don't buy those stocks; they just stay with the big ones. So I think there's still opportunity there. And also, you know, if the consumer stocks start doing well, they are going to start wanting to buy more stock for their stores. So you could see the industrial companies in a second-order type effect playing catch-up with them, and they have not run as hard by any stretch of the imagination. So I think there are still opportunities in that part of the market as well — the suppliers to retail.
Bronwyn Nielsen (03:24.994)
I know that you don't play macro themes. You are very specific when it comes to stock picking. Can you talk to me a bit about those stocks that stand out head and shoulders above other plays in the market right now without giving away any of your intellectual capital? Peter, I always need to…
Piet Viljoen (03:44.749)
Yeah, one has to be cautious here. You know, it's not really about giving away intellectual capital. It's not that there's much of that around. The thing is, you know, if you name one or two or three stocks, there are so many company-specific risks that are unforecastable and incalculable. You could name a couple of stocks, and something could hit these companies from left field that nobody could forecast, and the stock could do badly.
That's why it's always better to put together a diversified portfolio of investments. Because, you know, some of them will do well, and others will do less well. It's just that you don't know which ones will do well. That's why I have a portfolio. I always say that if somebody could tell me which stocks will do well and which won't, then I'll just pick those, but nobody can do that. I definitely can't do that. So I can name a couple of names, but I still think it's best for somebody who doesn't want to spend all day long studying the market — like most people — to invest in a portfolio of stocks that give you exposure to the South African market, like the Merchant West Business Value Fund, which is a South African equity fund. It doesn't hold any offshore stocks; it's only South African stocks, and it's a diversified portfolio. So if something goes wrong with one company, there are other companies that will do well. But to get back to your question, you asked for some names. I mean, Calgro M3 is the one that pops up at the top.
They've just come up with an earnings update, and they say, yes, exactly, yesterday they came out with an earnings update, and it looks like they're going to earn about one rand a share roughly for the six-month period. So if we double that for the full year, two rand a share, and it's trading at a price of six rand, you're paying a P/E of three for a stock that's growing at about 25 to 30 percent. You know, that strikes me as a bargain.
Bronwyn Nielsen (05:42.48)
Has it been difficult to ignore the international arena? Because as I started the conversation, I focused — and you focused — solely on the South African universe, but it must be tempting at some points to say there are opportunities further afield.
Piet Viljoen (06:02.827)
Yeah. So it's always tempting to do all sorts of different things. But at the outset, we said the Merchant West Value Fund would be a South African fund because most of the large fund managers have sort of muddied the waters with equity funds, including offshore stocks and South African stocks to an extent. And if you look at the South African market itself, it is basically dominated by offshore companies which have nothing to do with the South African market.
So if you're buying a fund from one of the large fund managers, you're buying a combination of offshore stocks and local offshore stocks, and you're getting very little South African exposure. That's why at the outset, seven years ago, when it was highly unfashionable to do so, we said the Merchant West Value Fund would be a dedicated South African fund because we knew that these stocks would come back into fashion at some point. So right now there are very few alternatives for investors to get pure South African exposure. And it's a problem because most South African investors have no South African exposure. It's a problem they face, and there are very few funds that solve this problem for investors. So yes, one is always tempted to go offshore because the market is bigger, there are more interesting companies, but we decided at the outset to specialize in South Africa and focus on this market because we think there are some really good businesses with really good management that are significantly undervalued, and this remains true today.
Bronwyn Nielsen (07:36.029)
Just one final question. What is the biggest overriding risk to your South African thesis?
Piet Viljoen (07:43.585)
I think if the politics falls apart and fringe lunatic parties like the EFF and MK get more power, I think that knocks confidence, it knocks economic policies, and I think if that sort of thing happens, all bets are off. Who knows?
Bronwyn Nielsen (08:02.354)
And you're keeping a close eye on the politics. It doesn't sound as though all is smooth running at the moment.
Piet Viljoen (08:10.369)
It would never be smooth running in a government of national unity, a coalition government. There will be continuous jockeying for position at all times. It is one big negotiation, and some of those negotiations happen behind closed doors and you don't know about them. And other negotiations happen out in public and you know about those, and they create uncertainty. But that is to be expected. That is how such a government works. I think one has to look at what they actually do over time.
And the one saving grace of a coalition government is that the government does less than it might have done if it wasn't a coalition. And the less government there is, the better. So as long as they stay together, it's fine. But again, this is a risk. You know, if it all falls apart, that's a risk that is unforecastable. Which is again why if you're running your portfolio, you wouldn't put all your money in South African stocks. I mean, that would be idiotic. You'd probably go overweight on South African stocks. So if your neutral position is zero in South African stocks, you might have 10 or 20%. And you'd have offshore exposure with dedicated offshore fund managers, not some hybrid South African guy who thinks he can pick offshore stocks and local stocks and so on. So I think that's how you would put together a portfolio. You would go overweight South Africa but still have diversified exposure to other asset classes and other geographies. That would be a sensible course of action.
Bronwyn Nielsen (09:53.4)
Piet Viljoen, Merchant West Investment Management, always a pleasure having you here on BizNews.
Piet Viljoen (10:01.483)
Always good to be here, thank you.
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