Foord’s Nancy Hossack explains why SA is a harbour in current global market storm
With stock markets tanking around the world, including a 12% plunge in Japan yesterday, things are relatively calm on the Johannesburg Stock Exchange. At times like this, a house like Foord Asset Management is a go-to source, given its top priority is "don't lose money". Portfolio manager Nancy Hossack explains how the firm protected its clients from the wealth wipeout sweeping the globe. She spoke to BizNews editor Alec Hogg
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Highlights from the interview
Alec Hogg opened the discussion by highlighting the dramatic downturn in global stocks, with Japan's market plummeting by 12%, and contrasting this with South Africa's relatively mild decline of under 2%. Nancy Hossack, a portfolio manager at Foord Asset Management, provided insight into why South Africa appears to be a relative safe haven amidst global market turmoil.
Nancy, a chartered accountant with a background at Investec and 91, elaborated on her transition to Foord, a firm known for its value-driven investment approach. She explained that Foord's strategy is not strictly value-based but rather focused on making sensible investments while being cautious of highly volatile businesses.
The conversation delved into the political landscape's impact on financial markets. Nancy emphasized the necessity of understanding political dynamics in South Africa, which has a broader range of policy outcomes compared to developed markets. The recent election results indicated a shift towards the MK party in KZN, which posed concerns due to its radical policies and corruption allegations. However, a deal between the DA and ANC was seen as a positive outcome, leading Foord to increase its holdings in South African assets.
Despite global market challenges, Nancy believes there are still opportunities in South African stocks due to their lower valuations and high cost of funding. She remains cautious about the overheated US market but sees potential in undervalued sectors like China, particularly Tencent. Alec concluded by advising patience and caution in navigating the current market environment.
Edited transcript of the interview
Alec Hogg
(00:12.846): Well, I know Nancy looks quite relaxed, and so do I, hopefully, but this has been an extraordinary day for stocks around the world. In Japan this morning, the market is down 12%, double digits, 12%. Nancy Hossack is with Foord Asset Management, where she's been a portfolio manager for some time. Fortunately, she's been focusing on South Africa, which does look to be a little bit of a calm harbour in the storm of the moment, but we'll find out more in a moment.
Alec Hogg
(00:49.965): Who would have thought going back into the election on the 29th of May that we'd be saying just a couple of months later that it appears as though South African equities are calm relative to what's going on elsewhere in the world? Just to unpack that, Amazon down 8% on Friday night, ASML down 8% on Friday night. They're both stocks in the business portfolio and now a 12% plunge in Japan this morning, which anticipates even worse coming in other parts of the world. And yet South Africa, relatively speaking, under 2% decline. Nancy, you've been focusing on South African stocks, and we'll unpack the relationship between the political side and the equities. But maybe just give us a bit more about your own background before we go into this. I know you did study accounting and were at Investec.
Nancy Hossack
(01:47.886): Yes, it's a really weird day when South Africa is a safe harbour, and Japan's down 12%. Financial markets are fascinating. We can probably talk about it later, but it's been a very long bull market. Maybe these are signs that that's starting to change globally. Not something we've benefited from in South Africa, unfortunately, over the last 10 years or more. My background is that I'm a chartered accountant by training. I did my articles at Investec Bank, then went to what was the old Investec Asset Management, now 91, for a few years. I had a fantastic time in both of those businesses but have been at Foord for almost 10 years now. Investments are really my passion and love.
Alec Hogg
(02:56.236): And Foord is one of the stalwarts of the South African industry and very much a value house. Was it much of a switch for you coming from 91, which sometimes likes the growth story, to Foord, where it's always been a company that looks to protect your capital and get you good bargains? Presumably, this is a market now which you'd be flourishing in.
Nancy Hossack
(03:27.768): I think Investec Asset Management, or 91 now, was a fantastic place to start my career because they had a boutique way of managing a very big asset manager. You had different portfolio managers and strategies within one house. As a young analyst, I got to learn from all of those people. My decision to join Foord was driven by the fact that people perceive us as value because we talk a lot about protecting capital. But we are pretty agnostic from a style perspective. We are just here to make money in a way that makes sense at the time. We do have an overlay of risk, being cautious around highly volatile businesses like resource businesses.
Alec Hogg
(05:57.642): I've been boning up again on my Warren Buffett knowledge. Rule number one, don't lose money. Rule number two, never forget rule number one. It's like what you've described. In South Africa, politics is greater than economics. How much time nowadays are you spending on trying to understand this volatile political situation?
Nancy Hossack
(06:39.928): Way too much. There's no point in doing a lot of bottom-up research and not understanding what's driving the politics. Politics drive the fundamentals. We have to pay attention to big election cycles and market-moving events. South Africa has a much wider range of policy outcomes compared to more developed markets. The range of outcomes is very big here, and that's something we've been focused on.
Alec Hogg
(08:23.721): How are you reading the consequences of the 29th of May?
Nancy Hossack
(08:29.942): When you look at the election results, we spent a lot of time at Foord trying to understand what would happen. We did a lot of by-election analysis. The by-elections showed a big shift happening in KZN, with voters moving to the MK party. If we had seen a better outcome from the IFP, it would have been good news. Seeing voters move to the MK party, which has radical policies and corruption allegations, isn't great news. The DA and the ANC striking a deal was the best outcome we could have hoped for, considering the election results. We started to shift more into SA Inc assets and bought some local bonds and banks, which have rallied. But it seems like there's limited interest from foreigners at this point.
Alec Hogg
(12:11.599): So it's not pent-up demand waiting to be unleashed. There are still questions about South Africa's future, primarily political.
Nancy Hossack
(12:24.366): 100%. The ANC and DA have an overlap in policies, which is positive. But the history of coalitions in South Africa has been disruptive. We have to be cautious based on history, and I think the markets have priced that in.
Alec Hogg
(14:37.012): South Africa being a calm harbour in a stormy sea, why would that be right now?
Nancy Hossack
(14:58.99): It's a base effect. South African Inc assets have low valuations and a high cost of funding. In contrast, Japan has the lowest real rates, and the US market has high valuations and earnings. South African stocks haven't seen the same growth and valuation uplift, so we are in a different cycle. The JSE's all-share index has 60% offshore earnings, so it's a mix. Resources are not indexed to South African GDP but to global prices and the Rand-dollar exchange. We have some stocks like Richemont that could be impacted by a global slowdown, but overall, we're very bottomed out.
Alec Hogg
(17:50.48): How are you positioning yourself right now, considering the political issues and global market conditions?
Nancy Hossack
(18:22.252): In our offshore funds, particularly our balanced and flexible funds, we've underperformed the last two years on the S&P making new highs. We've taken out a lot of downside protection, which hasn't been the right call so far. But given the high earnings cycle and multiples, we remain cautious. There are still places to hide, like China, which we think is very cheap. We think Tencent is good value. In contrast, we are cautious about the US markets, which have extreme signals of an overheated economy. We believe it's time to be cautious from a portfolio manager perspective. South African stocks are not in the same stratosphere as global markets, so there are still opportunities for managers.
Alec Hogg
(21:43.953): So take a deep breath, let the noise carry on around you. Just stay away from those extremely expensive stocks in the United States, and tomorrow the sun will shine again. Nancy Hossack is a portfolio manager with Foord Asset Management. And I'm Alec Hogg from BizNews.com.
Nancy Hossack
(21:57.998): Thank you so much for having me, Alec.
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