By Alec Hogg
It was just over a decade ago that I first came across the meaning of the term “unintended consequences”. In 2005, Allan Gray, the value investment house always on the lookout for a bargain, decided to take a stake in a struggling small cap computer hardware seller called the AST Group. The company had been struggling, but the firm so liked the turnaround story it offered to provide almost half of the R116m in fresh funds that AST needed.
Unfortunately, it only came out later that Allan Gray’s chief investment officer Stephen Mildenhall, with 5.5m, and four of his colleagues already owned AST shares in a personal capacity. Mildenhall told me at the time that as he’d gone through Allan Gray’s strict disclosure processes he saw nothing wrong. Indeed, his integrity is unquestioned – he was, after all, shot numerous times in an attempted “hit” because of playing hardball on behalf of his investors with the late Brett Kebble.
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But he never counted on the unintended consequences. While inside the company all the rules had been followed, from the outside the deal looked an obvious conflict of interest. Competitors had a field day, accusing the Allan Gray team of throwing good client money at their personal problem. It mattered not that the facts were different.
Since then I’ve kept an eye out for similar examples. Not just for news value, but because if one gets to discover the unintended consequences before Mr Market cottons on, price dislocations tend to deliver some juicy benefits.
One that is emerging in the US right now is in the wake of the Trump Administration’s determination to overturn laws enacted to fight climate change. Today’s White House believes global warming is a gigantic con trick, and in cases where temperatures might be rising, they are part of a natural long-term process the earth would go through anyway.
Whatever you might think of that is irrelevant from an investment perspective. The unintended consequences, however, are not.
After trumpeting his views on the stump and since moving into the Oval Office, the new US President is set to make some important moves this week. Helping the coal sector is one, but easier to force through is reeling back regulations on tailpipe emissions. US motor manufacturers have been lobbying hard against being forced by law to continuously increase fuel efficiency and drop carbon output. In Trump they finally have a receptive ear.
Mr Market has already targeted the share prices of electric car makers like Tesla (down 10% in the past month). But the unintended consequences are yet to register on the price of platinum and palladium producers – key ingredients in catalytic converters and massive beneficiaries in drive for cleaner emissions. Platinum is up 12% in the past month while palladium has been on a rip, rising 45% in less than a year. Lower emission laws won’t help their prospects. If you own the shares pay attention. Particularly Sibanye, which is in the process of paying top dollar for major US palladium producer Stillwater.
