Jean Pierre Verster drives investment insight: Bullish on EVs and tech titans

Explore the dynamic world of investment through the keen insights of Jean Pierre Verster, founder and CEO of Protea Capital Management. From navigating the evolving landscape of global tech giants like Nvidia and Tencent to uncovering opportunities in luxury goods and traditional industries such as Trigano, Verster’s perspective offers a unique blend of strategic foresight and market wisdom. Join him as he discusses the shifting tides of international markets and the potential avenues for growth in an ever-changing economic environment.

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Highlights from the Interview

In a recent interview with Bronwyn Nielsen, Jean Pierre Verster, founder and CEO of Protea Capital Management, shared insightful perspectives on the current investment landscape. Verster highlighted a strategic preference for companies like Trigano, the leading European manufacturer of motorhomes and caravans, emphasizing their resilience amid market fluctuations and the enduring appeal of traditional consumer goods. He also underscored his interest in luxury brands such as LVMH and Kering, noting their strong positions in the market and potential growth with the resurgence of the Chinese consumer.

Discussing the tech sector, Verster addressed the contrasting fortunes of Nvidia and its competitors, highlighting Nvidia’s dominant role in driving market indices like the MSCI. Despite missing out on Nvidia, he pointed to other semiconductor stocks like ASML and KLA as promising investments, leveraging their critical roles in chip manufacturing.

Verster also delved into the implications of Chinese regulations on investment strategies, advising a nuanced approach that respects the political landscape while identifying profitable opportunities. His balanced insights into global markets, from China’s regulatory environment to the strategic positioning of multinational corporations, offer a comprehensive view for investors navigating today’s complex economic climate.

Edited transcript of the Interview

00:00:11:15 – 00:00:37:23 Bronwyn Nielsen:
I’m joined now by Jean Pierre Verster. He is the founder and CEO of Protea Capital Management. Jean Pierre, we go back a long time, right back to your 361 Asset Management days and then Fairtree. And I’ve been dying to get you into a conversation to understand your take on markets right now and how you are playing the market.

00:00:38:00 – 00:01:11:15 Bronwyn Nielsen:
So perhaps let’s start on the local front with the news flow around the government of national unity, the halting news flow, and the fact that the DA is not going to be part of the governance within the largest economy in South Africa. Helen Zille, earlier this week, chatted to Alec Hogg and said that they will become the opposition if that’s the way the ANC wants to play it.

00:01:11:17 – 00:01:23:06 Bronwyn Nielsen:
And she also said that it’ll be interesting to see if Premier Panyaza Lesufi receives a vote of no confidence at this juncture. What are your thoughts?

00:01:23:08 – 00:01:41:06 Jean Pierre Verster:
Yes, thanks, Bronwyn. It is a pleasure talking to you again. It’s been a while since we have chatted. It’s fascinating, the politics in South Africa or in other countries. We might get to that a bit later, but it just shows us, you know, this GNU is going to be two steps forward, one step back.

00:01:41:08 – 00:02:08:12 Jean Pierre Verster:
We must be careful not to get too optimistic. We had it with Ramaphosa a few years ago. So now with the new dawn, hopefully, we can have things like this not really happening in other places in the country. So it’s going to be interesting to see how it plays out. It’s, in a certain way, good that the DA’s got certain principles, and they said they are not just going to be co-opted; they’re going to stand firm on those principles.

00:02:08:13 – 00:02:29:03 Jean Pierre Verster:
So from an investment perspective, it does mean that maybe Gauteng will deal with shenanigans for a while longer, which isn’t great for people living in the province as well as businesses that operate here. But, at least we’ve taken those two steps forward in the rest of the country and maybe then one step back.

00:02:29:03 – 00:02:54:16 Bronwyn Nielsen:
And just in terms of your view on the enlarged cabinet, the additional portfolios that we’re seeing, as I’m sure to get the negotiations over the table, that was President Ramaphosa’s way of saying, well, you know, let’s add a couple of ministries. How do you feel about the lives of land as it has played out at the national level?

00:02:54:18 – 00:03:33:01 Jean Pierre Verster:
So, again, from an investor perspective, I think the key ministries that investors were looking at were the ones that had to do with the levers of power and the levers of money. So it was good to see consistency and continuation in the municipal finance position. We have a new minister in trade and industry. It’s going to be very interesting to see, with that ministry, which sometimes made some interesting decisions that weren’t necessarily business-friendly and effectively empowered the Competition Commission as well to make some decisions that weren’t business-friendly. We might see a change there.

00:03:33:01 – 00:03:56:07 Jean Pierre Verster:
Yes, the larger cabinet is going to cost us, taxpayers, more money. But with the same Minister of Finance, I think investors are hopeful that there will be a conservative hand, so that the budget will hopefully, at some point, balance and we can peak in our debt to GDP ratio in the next two years.

00:03:56:07 – 00:04:16:14 Jean Pierre Verster:
From then on, we need to bring it down. That’s why you see our senior government bond yields are still high relative to the rest of the world, but they haven’t spiked further. And in the local stock market, the part of the market that is most sensitive to these types of political changes is the banks. The banks rose quite sharply in the last month.

00:04:16:16 – 00:04:34:00 Jean Pierre Verster:
So that was one area where it indicates that as investors, there’s renewed optimism that the formation of the government went as well as it could be. And the banks have risen. And now the question is, what’s going to rise next or the other options in this market that we believe in.

00:04:34:01 – 00:04:59:08 Bronwyn Nielsen:
And the rand. Jean-Pierre, I know that it’s crystal ball time when I ask you for the forecast on the rand. But we are seeing a stronger rand, and maybe that’s just a sigh of relief as Gauteng hasn’t imploded to this point. But where do you lie with the rand going forward? Volatility is one thing we know.

00:04:59:10 – 00:05:05:13 Bronwyn Nielsen:
Do you think perhaps we could have found a new solid direction to a firmer local unit?

00:05:05:15 – 00:05:24:21 Jean Pierre Verster:
So the rand has been quite volatile again the last two weeks. As we have these two steps forward, one step back shenanigans happening, it is still above 18, which isn’t great. I think a lot of people said that if we do get this type of outcome where we are now, maybe the rand could have strengthened to well below 18.

00:05:24:23 – 00:05:47:17 Jean Pierre Verster:
Now, there are some reasons that that hasn’t happened, which isn’t just to do with South Africa, some international factors as well. But if we continue taking a few more steps forward, I wouldn’t be surprised if the rand strengthens to below 18. Taking a longer-term view, we must still remember that structurally we have a higher inflationary economy and environment versus a lot of other countries.

00:05:47:18 – 00:06:06:15 Jean Pierre Verster:
And that inflation interest rate differential is an indication over the long term of the type of weakness you can see in the currency with the higher inflation rate. This is compared to one with a low inflation rate. So with inflation still running higher than other countries, I would expect over the long term for the rand to weaken.

00:06:06:15 – 00:06:23:08 Jean Pierre Verster:
So yes, maybe a strengthening in the short term below 18. And in the long term, I think as South Africans raise again, it makes sense to take some money offshore by virtue of all your investments. And, the rand over the long term will probably continue to weaken because of this interest rate differential, at least against the US dollar.

00:06:23:10 – 00:06:38:01 Bronwyn Nielsen:
Before we move off the South African environment, what stocks do you believe we could be playing in South Africa for longer-term positivity in the markets?

00:06:38:03 – 00:06:48:07 Jean Pierre Verster:
So I’ve mentioned the banks because they have so far indicated the biggest move after the relief and the positivity regarding the government of national unity.

Read more: Magnus Heystek: Why I am investing in South Africa again

00:06:48:07 – 00:06:48:21 Bronwyn Nielsen:
There.

00:06:48:23 – 00:06:49:04 Jean Pierre Verster:
Some of.

00:06:49:06 – 00:06:52:09 Bronwyn Nielsen:
The banks still trying to get in so that.

00:06:52:11 – 00:07:14:22 Jean Pierre Verster:
Yes, that’s an interesting one. So even though they’ve rallied quite sharply, the banks fell off a cliff just after COVID in early 2020. And for the next two years, they recovered to mid-2022. And then they went sideways for the last two years. So the banks are still cheap. They’re still trading around net tangible asset value per share.

00:07:15:00 – 00:07:28:18 Jean Pierre Verster:
And therefore, I believe that even though we’ve had quite a jump now, if we continue with this positive progress we have seen recently, the banks still have some significant upside as well. So we’re not selling our bank shares; we’ve benefited from them.

00:07:28:19 – 00:07:30:22 Bronwyn Nielsen:
Across the board.

00:07:31:00 – 00:07:52:12 Jean Pierre Verster:
We own three of the universal banks. So we own FirstRand, Standard Bank, and Nedbank. Those are our preferred three banks of the four universal banks. And then the next wave we believe in is the retailers. Some of them have jumped, but some of them are in dire straits as well. If you think about Pick n Pay and Spar, they have their own challenges.

00:07:52:14 – 00:08:07:01 Jean Pierre Verster:
So we prefer the likes of Mr Price and Truworths. They’ve done quite well for us. And again, we think there’s a little bit more juice from these two lemons. They are good quality companies. And then it’s the smaller cap stocks.

00:08:07:03 – 00:08:14:21 Bronwyn Nielsen:
So before we move off the consumer stocks, do you believe there’s more upside despite the pressure that the South African consumer is under?

00:08:14:23 – 00:08:35:23 Jean Pierre Verster:
So because of that pressure, we’re not quite as optimistic about the retailers as we are about the banks. For instance, if you look at the balance sheets of the banks, they are conservatively managed, with strong balance sheets. Some of the retailers, like Spar and Pick n Pay are in a bit more trouble. So, still optimistic about the ones that have strong balance sheets, but not across the board.

00:08:36:01 – 00:09:02:08 Jean Pierre Verster:
And then for the smaller capitalization stocks, some of them are exposed to the consumer. We still like the likes of Famous Brands, Cashbuild, and Italtile. In time, if we get growth going in the country because of, hopefully, positive radical moves, that positivity from the consumer getting into a much better space than where the consumer is right now should translate into better sales for the likes of these companies.

00:09:02:13 – 00:09:13:04 Jean Pierre Verster:
So you can sort of start with the banks and the next wave that should benefit all the retailers. And then some of the smaller capitalization stocks. So those are the stocks in South Africa that we like.

00:09:13:06 – 00:09:30:04 Bronwyn Nielsen:
Thank you. A wealth of stocks to play with. Now let’s move to the international space. And again, politics determining economic trajectory and certainly bringing uncertainty to the fore. Talk to me about the UK and Europe.

00:09:30:06 – 00:09:50:22 Jean Pierre Verster:
Yeah. So we’re recording this on US Independence Day, which is also the day the UK is voting. So we’ll probably see a Labour government come in. That’s the expectation. So that’s going to be interesting. And in Europe as well. I mean, we had the first round of the French elections last week and the next round this coming weekend.

00:09:51:00 – 00:10:12:20 Jean Pierre Verster:
So a lot of uncertainty. And you saw that in the last month with, to some extent, the FTSE, the UK stock exchange, but to a greater extent the CAC 40, the stock market in France, and the index dropped quite sharply, the banks and some consumer stocks in France because of this uncertainty about the election.

00:10:12:20 – 00:10:30:19 Jean Pierre Verster:
And is the new government going to be quite a bit more to the right? Maybe not quite as business-friendly? And we see that as an opportunity. So in Europe, yes, a lot of political uncertainty. The UK has been cheap for a while. We’ve liked the UK for the better part of two years, and we still like the UK.

00:10:30:21 – 00:10:40:01 Jean Pierre Verster:
But all of a sudden now France is also on our radar, and we do own some stocks in France and we’ve been picking up a few more because of the weakness we’ve seen in the last few weeks.

00:10:40:03 – 00:10:42:17 Bronwyn Nielsen:
Specifically, what sectors jump out?

00:10:42:19 – 00:11:06:08
Jean Pierre Verster:
So, there are a few consumer stocks we like. For instance, a company like Trigano. It’s the biggest manufacturer and seller of what are called RVs or recreational vehicles in Europe, including motorhomes and caravans. Many French people, who are taking their summer holidays, may need to stay home and vote or might stick around for the Olympics.

00:11:06:10 – 00:11:33:23
Jean Pierre Verster:
And so that’s why we like it. We also like the bigger luxury goods businesses like LVMH and Hermès, which have also had a very strong showing over the last year or so, although they are slightly flagging now. We do think that with the Chinese consumer coming back and hopefully spending more after three tough years in China, the luxury goods businesses are looking strong, especially in France.

00:11:34:01 – 00:11:36:18
Bronwyn Nielsen:
Which companies are in play with LVMH?

00:11:36:20 – 00:12:04:11
Jean Pierre Verster:
I don’t know about LVMH, but I know they would love to have Richemont, specifically Cartier, as one of their maisons. But the other company we recently bought is Kering, which is the French luxury goods business that owns Gucci. There’s a case to be made that Gucci is going through a slump at the moment, so maybe it makes more sense for Richemont to partner up with Kering, rather than being sold to the big conglomerate LVMH.

00:12:04:13 – 00:12:29:12
Jean Pierre Verster:
Johann Rupert made some changes recently in the senior management of Richemont to ensure proper succession and is taking a bit of a step back from day-to-day management of Richemont. So I would say either Kering or LVMH could be potential partners, but Richemont is probably not in play right now. We also own Richemont because we do think, in the fullness of time, it makes sense for the Rupert family to hand over the business to one of those two.

00:12:29:12 – 00:12:30:14
Bronwyn Nielsen:
You mentioned the Chinese consumer. What about Chinese regulation? Is that on your radar from an investment perspective?

00:12:30:16 – 00:12:39:03
Jean Pierre Verster:
Yes, in a country where politicians play a leading role, like China, you always need to keep an eye on regulations. There’s this plenary coming up in a few weeks’ time. The politicians will get together again and make some new rules and laws that will be swiftly implemented.

00:12:39:05 – 00:13:11:14
Jean Pierre Verster:
Previously, we’ve seen swift implementations of laws, such as those limiting video game play or compelling large tech stocks to give back some of their profits for common prosperity purposes. These regulations can have a significant influence on Chinese stocks. So, you definitely need to keep an eye on that. A lot of people have said recently that China is uninvestable. We don’t believe it’s uninvestable; it’s just different. You need to get your head around the fact that you need to partner with the government there and can’t be too antagonistic towards them.

00:13:11:16 – 00:13:28:15
Jean Pierre Verster:
But if you can operate within these constraints, there are profitable opportunities in China.

00:13:28:17 – 00:13:33:00
Bronwyn Nielsen:
Can I push you on those profitable opportunities?

00:13:33:02 – 00:14:05:10
Jean Pierre Verster:
Sure. Stocks that we’ve liked for a while in China, which have taken two steps forward and one step back in terms of economic recovery, include Tencent and Meituan. Meituan is like the Uber Eats of China, the leading food delivery platform. Recently, we’ve also bought some consumer stocks like Anta Sports. They are the leading sports apparel retailer in China.

00:14:05:12 – 00:14:27:01
Jean Pierre Verster:
They own Fila in the West and are one of the sponsors of the Olympics. They sell apparel and sneakers in China and are one of the top five biggest sports apparel businesses globally. For a while, we’ve also owned BYD, a leader in the EV market, competing with Tesla for being the biggest seller of electric vehicles worldwide.

00:14:27:03 – 00:14:41:04
Bronwyn Nielsen:
Just chatting about Tesla, market players are very divided on where to go with regards to Tesla. Its recent performance has been very good, but some, like Cy Jacobs think that Tesla is near implosion. What is your view?

00:14:41:06 – 00:15:02:19
Jean Pierre Verster:
I basically share Cy’s view. We were colleagues for many years, in the hedge fund space they say you should never be cynical, but you should be skeptical. hedge fund managers, by their nature, are quite skeptical. If you look at Tesla’s financials with a skeptical eye, there’s a lot to be concerned about, including about Elon Musk.

00:15:02:21 – 00:15:22:10
Jean Pierre Verster:
We have a short position in Tesla and a long position in BYD. We’re quite comfortable with that. We believe that BYD is bringing out EVs at a much lower cost with later technology, while Tesla is struggling and making promises that they have found hard to fulfill in the past.

00:15:43:17 – 00:15:50:06
Jean Pierre Verster: So, yeah, we aren’t bullish on Tesla. Our preference in the EV markets is more like…

00:15:50:08 – 00:16:08:13
Bronwyn Nielsen: We saw results from Prosus recently. And obviously, their e-commerce business moving to profitability. You mentioned Tencent. I’ve got to pick up on Tencent. Is that an entry point for you into China and the gaming environment technology?

Read more: Magnus Heystek: First light of dawn? SA moving away from the abyss 

00:16:09:12 – 00:16:41:21
Jean Pierre Verster: Definitely, Naspers and Prosus combined is our biggest holding in our South African funds. In the past, we’ve also owned it internationally because you can buy Prosus listed in Amsterdam. But at the moment, we prefer to have direct Tencent exposure, and depending on the discount and sometimes and thinking sometimes, process. But the fact that it got to profitability with the rump, the rest of the business, the e-commerce business is positive and shows that with the new management team, hopefully they are done throwing spaghetti against the fridges. Most of the spaghetti is not being very valuable. And from here on out, they’ll work hard to create value for shareholders. So we definitely still like Prosus as an entry point to Tencent, but also in its own right because of the rise of e-commerce.

00:16:55:15 – 00:17:15:15
Bronwyn Nielsen: I also just want to switch to the US and anything that strikes your fancy in that space. You do, of course, have the growth managers like the Paul Therons. Nvidia, they’re still stacking up on Microsoft, Apple, you name it. I am anticipating that you’re not in the same camp.

00:17:15:17 – 00:17:38:11
Jean Pierre Verster: Not quite. So we own two of the Magnificent Seven, we own Alphabet, and we own Meta. But we effectively missed the boat with Nvidia, and that’s a big shame because The Magnificent Seven as a group have really driven the stock market in the US and the world markets as well, year to date. It’s a very large proportion of the MSCI World’s weight and the S&P’s returns because of The Magnificent Seven. It’s more than half. And then within that Magnificent Seven, Nvidia has really driven the index even further. If you look at the comparison of the S&P equally weighted index to the S&P market cap-weighted index, for many years, the movement was very similar. And all of a sudden, in the last month or two, the market cap-weighted index has really pulled away from the equally weighted index. And that is all about Nvidia. So we’ve missed that boat, but at least we had some other semiconductor stocks. So, the likes of ASML, it’s listed in Europe, but it’s a big player in the semiconductor industry. KLA is another one that maybe South Africans don’t know, but they are involved in the whole process of creating the machines that create the semiconductor chips, including the chips that Nvidia sells. And in Europe, there’s another one called BESI B-E-S-I. So, a very niche part of the market.

00:18:49:23 – 00:18:50:17
Bronwyn Nielsen: That’s in Europe.

00:18:50:18 – 00:19:08:04
Jean Pierre Verster: Correct. That’s in Europe. Yes, basically. And it’s a very niche part of the whole value chain because they create the machines that create the chips that are used to create machines. But those shares have done very well, not quite as well as Nvidia, but at least we have those names.

00:19:15:05 – 00:19:49:05
Jean Pierre Verster: We still own them. We’ve sort of trimmed them as they’ve doubled and gone up even a bit more over the last 12 to 18 months. But we prefer them from a valuation perspective when we compare it to Nvidia? Nvidia at the moment there’s literally an arms race or they chips. But the likes of AMD and a few others are really coming to the party and also improving their chips so at some point we think they could be a reasonably competitive alternative to just the Nvidia. And when this arms race ends, we think that the profitability of Nvidia could turn out to be quite cyclical. While these other companies are a more structural play on semiconductors because if you look at the long term nature of semiconductors, every year there’s more electronics. So that’s for us, a more defensive part of this.

00:20:25:19 – 00:20:48:10
Jean Pierre Verster: So if all the stocks I mentioned, I like the old school, bricks and mortar, kicking the tires, company like Trigano. So making motorhomes, making caravans, you know, people can’t sit in front of computers all day, and, no, AI has done very well. But hopefully we’ll still need humans. And I feel humans will still need to take a break every now and then. So we do think there’s an opportunity with the ructions in the French market that a company like Trigano is as good an opportunity as any other in a very expensive market.

00:20:58:11 – 00:21:09:09
Bronwyn Nielsen: Appreciate your time as always. Jean Pierre Verster is the founder and CEO of Protea Capital Management. Joining us here on BizNews. Thank you.

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