Best of 2021: ‘Bubbles created by gatvol South Africans create opportunities’ – Piet Viljoen on SA economy

The article was first published on 08 July 2021

It’s been quite a week for the South African spirit with news of Zuma’s arrest – something which many did not believe they would live to see. On the other hand, interviews with Magnus Heystek and Russell Lamberti on yesterday’s BizNews Power Hour may have left our listeners feeling particularly disheartened at the prospects of South Africa – which some are already calling a failed state. Counterpoint Value Fund manager Piet Viljoen joined the BizNews Power Hour as our regular co-host on Thursdays, during which he managed to – very rationally – point out that opportunities still exist for South African who are, understandably, gatvol. Viljoen, while ‘not wearing rose-tinted glasses’, says that the bubbles that these South Africans are creating for themselves – due to an incapable government – also creates opportunities. – Nadya Swart

Piet Viljoen on Jacob Zuma’s arrest:

I think it shows that the Constitution has been upheld. Unfortunately, one could almost say, surprisingly – for where we are in South Africa today. But it’s a good thing that it was upheld. It’s a good thing that the rule of law asserted itself. So [it’s] good news. The market seems to have discounted it, because it hasn’t gone up – it’s actually gone down. It hasn’t had any influence on the market at all.

On whether traders anticipated that Zuma’s arrest was going to happen:

I think [that] what’s happening with the South African market today – there was a bit of a sell off and some resource stocks and the rand weakening a bit – has almost nothing to do with Zuma going to jail or anything like that. It has more to do with a stronger dollar and what’s happened in the US. I mean, we’re the tail and the dog is just wagging us.

On what’s driving Apple’s surging share price given that the antitrust drums are beating very loudly in Washington:

They are. But I think in the short term, what’s happened in the US is that long bond yields have declined by over 20 basis points, which in value terms is quite a significant decline. 20 basis points from 1.6% to 1.4% or even 1.35% is quite significant. So interest rates have come down, long-term interest rates have come down. So the present value of the cash flows that Apple is going to generate over the next 50 years, which is what the market is discounting, has gone up by a lot because of that small movement in the interest rate. So I think that’s probably the simplest explanation for what is happening there with the growth stocks right now outperforming and value stocks underperforming. It’s due to the decline in the long-term interest rate or the bond yield, so to speak.

On whether Apple is going to grow better than long bonds:

I think there’s some of that. And I think Apple is such a big part of any index, S&P 500 or whatever index you want to call. There’s a big flow of money into indices or index investing, and that money is buying Apple at any price. So that flow of funds is increasing, coupled with the increased money printing by the US – both those factors I think play a significant role in that. And also, Apple’s fundamental performance – it is a good business, generating good profits. Whether it is worth $2.4trn – that’s a different argument, but it is inherently a very good business and there is a flow of funds into it.

On the competition between Microsoft and Apple:

It’s actually a fascinating situation. For all intents and purposes, capital for these businesses – Apple, Microsoft, Amazon, Google, Facebook – is free. They can get as much capital as they want for free effectively. So they can effectively compete very strongly with each other, which they are doing in certain instances. And I think that will play out over the longer term, because these companies have generated high returns on their capital, they are good businesses, they are growth businesses – and that sort of attracts capital, it attracts competition. It is busy happening. And we’ll have to see what that does to their profitability going forward in the next five to 10 years.

On how these companies are getting their capital for free:

Well, if you are trading on a P/E (price to earnings) of – I don’t know – 40 or 50, basically the cost of capital is 1% or 2%. That’s basically for free. You don’t have to jump over very high hurdles to generate an excess return on that capital. So capital is effectively free. Whereas if your P/E is high, like many other companies, your capital is costing you 30% plus. You know, so that’s quite expensive capital.

On whether investors’ belief that exponential companies are going to continue growing rapidly for decades into the future is unrealistic in an uncertain world:

That would be my inclination. I think when capital is free, it gets misallocated. It gets allocated to projects with very low returns. And that is what you as a shareholder will ultimately earn as returns on these projects with low returns. Because the hurdle rate is so low, the returns these companies will generate will decline towards that hurdle rate over time. So, yes, I do think that free capital leads to the misallocation of capital over time and it leads to low returns for shareholders on capital.

On whether America is ‘wasting’ its wealth on meme stocks and cryptocurrencies, etc:

There’s no doubt [that] there is a lot of speculative activity happening. Meme stocks, crypto possibly, SPAC’s, IPOs. There’s a lot of initial public offering over there – companies that come into the stock market to list and being well received by the market. So there’s a lot of that. So, yes, I think animal spirits in certain markets – not in the South African market, but in the American market – animal spirits are very high because asset prices are quite high. So, yes, that is very much the case at the moment.

On whether animal spirits are very high in South Africa:

No, it’s almost the converse. I mean, when last did we have a new listing in South Africa? I can’t remember when we had an exciting new listing here. And many, many companies are trading in P/E multiples of three, four, five, six – good businesses are getting at very low multiples. So it’s almost the opposite here. We’re on the opposite end of the boat.

On South Africans being gatvol about our decline into a failed state and a potentially different perspective that can be adopted:

Well, I think that’s what people are doing. They are living in this environment where they have to do things for themselves. They are forced to do so by an incapable state – unfortunately we are governed by an incapable state who happens to think they’re capable. And that’s probably half the problem. And so people are left to their own devices and they’re doing these things for themselves and they are seeing that they can’t rely on the government for anything. And that does lead to negativity. It leads to pessimism and it leads to people being gatvol. There’s no doubt that that is the case. You just have to speak to any of your friends. That is the case.

But it also leads to resourcefulness and a lot of companies that are listed on the JSE today are offering services to people who want to do it themselves and they’re making money out of it, and they’re creating alternative economies and alternative ways of doing things and they are making a living by doing that. So, you know, there’s that aspect to it as well. I mean, education; some of the very successful stocks on the stock market are education businesses delivering a service where the government has failed a large portion of the population. Security services, health – all those things are happening in a parallel market. And I think it creates opportunity as well. So it creates pessimism, it creates negativity – but I think one should also look at the opportunities it creates.

On whether South Africa has hit rock bottom:

I’m not sure that they’ve hit rock bottom -they can always get worse. You know, by no means am I trying to paint a rosy picture about our tremendous future that we have as a country. Until the government can sort out the backbone of the country’s infrastructure, the supply of infrastructure to the country – it will be a hard place to do business and it will be a hard place to create jobs, and it’ll be a hard place to create services. So I’m not looking at the world with rose-tinted glasses here. What I am saying is that if your multiple is five (a P (price) of 5), that means your earning is 20% – that means [that] if you just stand still and don’t grow every year, you earn 20% on your capital. That’s a fantastic return.

So you don’t have to do much. You just continue operating the state you’re in now – you generate a good return. That is how cheap businesses are. You don’t have to put on your rose-tinted glasses and say, ‘I think the government is going to approve, I think things are going to get better. Therefore, you should invest.’ I’m saying there are opportunities out there where you can have – and I’m not sure what the opposite of rose-tinted glasses is – but you can have those glasses on and you can still make money.

On Nedbank’s announcement that at any time a maximum of 40% of staff will work from their offices:

I think it’s a global trend, it’s not only a South African phenomenon, and I think we will learn how to be as efficient if not more efficient through portions of the staff complement working from home from time to time. And you can rotate that out and certain teams can be at home, other teams can be at work. So I guess what I’m saying is that you’ll learn how to work with that, and I think we will claw back some of the efficiencies we might have lost in this initial period where we’re still learning how to deal with the issue. I think humans are quite capable of learning and improving over time. I do think [in] the office market one can see some long-term negative revaluations happening for quite a while in the office market. I think they do face trouble.

But again, as with anything negative – there’s positive. Just think how [much] less traffic there will be for those who are going into work and how much more efficient your commuting time is going to be on those days that you actually do go into work. So that will, in itself, increase efficiency. So, you know, there’s always positives to every negative. I don’t think one should be too negative about that situation. I think it’s a natural consequence. The pandemic has changed our behaviour in many ways. And this is one of those which I think will turn out to probably be slightly more permanent than we might have expected initially.

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