The world is changing fast and to keep up you need local knowledge with global context.
Value investor Piet Viljoen applies Second Level Thinking to SA’s electricity crisis – and shares some fresh twigs in his bundles of riskier but potentially high-performing stocks. The way Counterpoint’s money manager sees it, fixing the problem is a non-negotiable. And as investments are made to address it, some JSE-listed companies are sure to enjoy strong demand for their products. A checklist for the far-sighted investor. He spoke to Alec Hogg of BizNews.
Piet Viljoen on what happened in January this year
I can only speculate about what happened, and it seems to me that a lot of people were anticipating recessionary events during the course of 2023, and I think a lot of people went short, and hedge funds went short on a lot of stocks because they sold them short with the hope of buying them back lower down. As you know, that’s one of the activities hedge funds do. To add to that, long-only investors sold a lot of stock during 2022, anticipating a negative economic environment. And then when inflation started coming off in November-December and things started looking a bit better, and the interest rate expectations moderated somewhat, it took a little bit of buying, and I think a lot of people were caught short, and they had to cover their short positions. That’s generally the reason why stocks move up so aggressively. I mean, Meta was up one day by 17% or something. I mean, that is not a normal move. There’s something going on in the background, some technical aspect going on in the background. And I can only speculate that that is the reason why it’s a short covering, and maybe some long-only guys are getting back into the market.
On if it’s a good time to move away from passive investing
So I think where they’re coming from is they’re saying that the indices have become highly concentrated in South Africa. The two stocks that makeup 20% of the index and the top five stocks make up close to 40%. Indices, you know, are highly concentrated, and it’s not as concentrated but also concentrated in the US where the FAANG stocks make a big percentage of the index and the same in Europe and in other markets. And I think there is a sense that the second and third-tier stocks, and stock markets for that matter, have been left behind and are far too cheap and undervalued. So I think there are a lot of secular trends coming together at this point in time. And I think I’ve spoken about this before. We think there is a long-term uptrend coming for resources or commodity prices because of a number of factors, chief amongst which is the energy transition, which is happening globally and very rapidly in South Africa, I might add. But what’s happening in South Africa is a microcosm of what is going to be happening globally over the next 5 to 10 years. And that is resource intensive. If you want to move towards renewable energy, it’s highly resource intensive and coupled with the fact that the resource companies, because of ESG and other considerations, have been almost prohibited from investing in expanding their ability to extract resources from the ground. You have a big supply-demand imbalance starting to happen, and this will take 10 to 15 years to sort out.
On if there is still a case to be made for SA stocks vs. Offshore stocks due to SA’s volatility
So we are volatile in South Africa. But I don’t think we are a lot more volatile than other places like Brazil and Mexico or less volatile than Russia, I can tell you that. And Ukraine. and the other thing that’s happening in South Africa, is that even last year they relaxed exchange controls even further. That’s something that we lose sense of, is that South Africa has been through a process of relaxing exchange controls in the past twenty years, and that’s still continuing. Last year in the budget they relaxed by a further five or 10%. So it’s getting less dangerous from that point of view. You can take a walk into Nedbank or whatever your favourite bank is tomorrow and open up a foreign currency-denominated account. So I don’t think it’s so important for South Africans at this point. We might get there. I mean, things aren’t looking fantastic from an economic standpoint, so we might not get there. I don’t think we’re there yet. And in the Western Cape, we are far from there to be honest.
On the state of the markets
Look, while we have this massive loadshedding going for stage four, the stage six, I think it’s tough for businesses. Businesses won’t do well. They have additional costs. Their profits will be under pressure. So you can’t expect fireworks. But again, if you apply second-level thinking going forward, where will South Africa be in 3 to 5 years’ time? I think we will have decentralised, and privatised energy generation. Most of our energy will be generated on a decentralised, privatised basis and that’s very powerful and that’s where the rest of the world still has to get to. That’s where they want to get to. But we are being forced to get there because of our incapable state that can’t facilitate such a transition, and the private sector is doing it for itself. And what you need to bear in mind is that we need additional power generation capacity, whether the state spends 50 trillion rand doing it and taxes us to pay for it or with the private sector spending 50 trillion to do it, it has to be done, and it’s going to cost the economy trillions. And I actually think it’s better that the private sector does it than the state does it, because it leads to a more powerful private sector.
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