SA is cheap – but is it a good time to buy Johannesburg-listed stocks? Asset manager Piet Viljoen shares his insights with BizNews founder Alec Hogg.
Hello Piet, good to talk to you. What do you make of this move into gold by Warren Buffett?
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I think it’s interesting. As a percentage of his total assets, it’s very small. It’s not like he’s betting the house on gold at this point. The fact that he is selling banks and buying gold does indicate his thinking. It’s very much in line with the thinking we’ve developed over the past six months of how and where markets are going, which I think ties in to what you want me to talk about, which is local is lekker.
Local is lekker. Why? Why are you going into the crowd here and saying that South Africa offers value?
I think what is happening out there and – by the way, I just want to preface what I’m saying – is that South Africa has been cheap for quite a while and it remains cheap. The big change that has happened is that the global backdrop for financial markets has changed radically over the past six months. If you think back over the past 10 – 15 years, we’ve had financialisation take place. We’ve had low interest rates, low inflation and globalisation.
This has been good for financial assets. The biggest financial asset is probably the US dollar. It’s been good for developed markets. It’s been good for large cap growth, high quality businesses. All those sorts of assets have done fantastically well in a period of globalisation with low growth and low interest rates. That was facilitated by central banks effectively funding the acquisition of financial assets. They were printing money and going to financial assets, not into products, per se. What’s changed now by six months – induced by the Covid-19 phenomenon – was that fiscal policy has been relaxed tremendously worldwide.
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Everywhere in the world, governments are running massive budget deficits. On top of what was a very easy monetary environment, we are now in a very easy fiscal environment. That’s creating massive money supply growth in the world and the potential for inflation going forward. But now governments sit with a problem. Their debt to GDP ratios have gone out of whack completely. South Africa is not alone.
In fact, our debt to GDP, albeit high, looks better than a lot of other countries. But in absolute terms it is a problem and everyone else has this problem. So what do you do? You got one of two choices. Either, you impose austerity measures to get debt levels down again, or you encourage inflation to get nominal growth higher.
And if you have higher nominal growth, your debt to GDP number comes down over time because of the higher nominal growth driven by inflation. That’s what they did in World War II and that’s what they did in the 70s. That seems to be the way governments are moving. They’re sitting with these huge debt situations and they need to print money to get themselves out of this.
Isn’t that what Buffett is telling us? By buying R10-billion worth of Barrick shares? Gold shares?
Yes, and selling banks to fund it. So I think that’s exactly what he’s saying. So if the global financial environment is actually changing, the things that were doing very well might stop doing well and you’ll have other assets doing well. What is the opposite of those things that are doing well? I think that’s the way we need to think about what’s happening in the future.
The opposite of financialisation is financial repression, where governments impose capital controls, trade controls, prescribed assets – all those sort of things to keep capital at home and to fund those deficits. I mean, there’s a lot of talk about that sort of thing happening in South Africa. It’s going to happen everywhere in the world. If this is true, if this big change is true, in the environment of high and nominal growth, I think you will find the type of asset that will respond positively towards that would be hard assets, assets that use lots of fixed investment. Sasol might even start doing well at some point.
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Those sort of assets will do well in a higher inflation, higher normal growth type environment. Emerging markets will do well. Value stocks will do well. Forecasts will do well. All those sorts of assets benefit from higher inflation, more liquidity, higher nominal growth.
I think that’s the mindset change that I think we are anticipating and implementing in our portfolio. That’s a possible outcome. Now, my forecasting is no better. My forecasting ability is no better than anybody else’s. So it might not happen. But I think if this sort of thing happens, I think you want a bigger exposure to South African assets than you otherwise would have had. I think South Africans – these days – the benchmark is probably nought.
But let’s call it a 10% or 20% exposure to South African assets in your global portfolio. Maybe you want 15 or 25% or 30% even. So, I’m saying don’t put all your eggs into this one South African basket, but recognise that the world is possibly changing. As a result of that change, I think the types of assets that are represented in South Africa might do well and in the recognition of that, maybe you just want to have a bit more of that. Not everything, but a bit more in that type of asset – specifically South African assets. And they are cheap, there’s no doubt they are very cheap.
So let’s get back to the point that you made a moment ago about now buying South African shares, or at least adding them to your portfolio. Which ones in particular interest you at their current levels?
I think the first and the first port of call when you want to buy domestically exposed companies, is probably banks, retailers and probably cellphone companies. Those are companies that interact with the retail consumer out there on a day-to-day basis. They’ve got big markets they address.
So I’d be looking at the banks, I’d be looking at the Shoprites of the world, I’d be looking at the MTNs of the world. Something like Discovery would be up there. I would be looking at those sorts of businesses. Of course, if you’re willing to do the work, I think there is a surfeit of more companies that are priced extremely cheaply. The bigger companies I was speaking about now are priced quite cheaply, but if you’re looking at the small caps, some of those stocks are just being given away. If you’re willing to do the work, there are some really good quality businesses out there that are just being given away right now.
Give us some ideas where to start doing our homework? Just some of the small caps that we should be doing our homework on.
So MTN is – I think – cheaper. I think you’re basically getting Nigeria for free right here, just as it was in the early 2000s. For a long time, the market discounted it completely. It’s doing it again. Stocks get cheap because of obvious reasons, and there’s problems there. But, you know, there’s problems everywhere in the world. I think you’re looking at smaller caps, you could do worse than look at something like Bowler Metcalf.
Half the market cap is in cash – or more than half is in cash – the business itself is on a multiple of two or three times. This is a company that over the long term, has generated earnings growth in line with the market. It’s relative to the JSE. It’s an average business and therefore should probably be priced as such. The PE of the JSE is probably fourteen or fifteen at this point in time. So you’re getting a business there, which is at least an average business, for a multiple of two to three time – plus a big cash buffer – no debt at all. It’s that sort of business and there’s quite a few of them out there.
Before we let you go, Piet. Sasol this morning? I know it’s a little early to be looking for a long term investor to make any assessment of it, but the share price is now starting to – well, it’s been a little soft lately. You did mention earlier that maybe Sasol will come back in this new environment. Your thoughts?
The only way Sasol can come back in a new environment is if hard assets go up a lot and commodities go up a lot. Oil is obviously a commodity. That could say Sasol, but otherwise, in the absence of the oil price going up a lot – which is possible – I would say that’s a company in big trouble.
So stay away?
Stay away, yes. Continue to stay away.
- Piet Viljoen is founder and chairman of RECM, which is in the process of merging its operations with Counterpoint Asset Management.
