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After the January Jump, fans of US Big Tech stocks have been calling the end of their slump. However, Ranmore Funds founder Sean Peche is having none of it, and in this interview with Alec Hogg of BizNews, he explains why in detail. He also offers some specific examples of where investors can buy stocks at a significant discount – demonstrating why this is preferable to following the crowd into FAANGS, which he reckons have run out of growth so are now cannibalizing each other’s markets.
Listen hereSome extracts from the interview:
Sean Peche on the loadshedding situation in SA
It’s shocking. And I wrote a tweet a little while ago because I looked into what the sources of demand are for South Africa’s electricity. And a huge percentage, I think 28% was due to petrochemical and refining and 13% was to iron/steel and only 7% to residential. And I mean, this is time for out of the box thinking. So if I think if I were writing the shots, I would shut down the iron and steel industry. Yes, we import the iron and steel that we need for now, and we let the light stay on in everybody’s houses. I mean, the iron and steel industry uses twice the electricity of residential, and why wouldn’t you do that.
On the European energy prices falling
Look, those have come down a lot. In fact, I think last week 60% of the UK had a storm, 60% of the UK’s energy was produced by wind, and it’s been pretty mild. Friends I know have just been skiing, and there was no snow last week. It was 11 degrees at the top of the mountain. They’re sitting there at these ski chalets, and it’s been quite mild, prices have pulled back and so often that’s when situations unfold. People think that the status quo is going to happen forever. And that’s what we saw late last year. And if you can just look beyond that and say, well, if this is short-term in nature and is likely to be short term nature, then maybe there’s an opportunity. And I didn’t think that energy prices would come back quite to the extent that they have. But it just shows you that when you get a combination of ingenuity and luck with the weather, you know, Germany’s an amazing country and those people are very innovative and they’re full of engineers. And so you look at what they’ve done on the LNG imports. Couple that with some warm weather, and all of a sudden, they’ve weaned themselves off Russian gas. So they’ve outfoxed Mr. Putin. They no longer need him, and good for them.
On what’s happening with the US mega caps after the January jump
I think there’s a lot of guessing going. You see, what happened is – those large cap tech companies fell when interest rates started rising. And the reason for that is if you think Amazon’s going to give you $100 of earnings ten years out, and there’s no inflation, and interest rates are low, well, those hundred dollars of earnings are worth a hundred dollars in today’s money. But if as soon as inflation starts rising and interest rates are rising, that hundred dollars ten years out, then it’s no longer worth a hundred dollars . So what investors have started doing is saying, okay, what we need to do is we need to guess interest rates. Well, how do we guess? Because that’s the answer. This is what I think is going on; that is the answer to technology. So how do we guess interest rates? We need to get inflation numbers.
And so with CPI having slowed down because many things, gasoline prices and food prices and things like that have pulled back. People said, right, that’s the answer. Interest rates are going to start coming off. Let’s go for the tech. But I think they’re missing the point, and I think the truth is that earnings for technology companies are falling. I mean, you know, you’ve seen these large companies. Microsoft’s operating income was down 8%, EPS fell six, and Google operating income down, 17%, earnings down 18%, you know, I can go on, Meta 49% down, EPS down 52% and revenue growth was either one or 2% down. And so that’s the truth. That’s a bit like we’ve got six nations going on at the moment. It’s like watching the backline, thinking that the fullback is going to intercept and there’s going to be some move in the backline, and then the scrum half runs around and darts the ball in the blindside. And so everyone’s watching the backline, which is CPI. The truth is the Scrumhalf is about to drop the ball on the Tryline. So yeah, those stocks have rallied sharply, but you know, that’s fine.
On if he’s still of the opinion that value will outperform growth this year
Yeah, I think so, it’s early days. The world index is up seven, values only up 3.8%. Organic growth is up ten and qualities up six. Now, if you can be a stock picker, that’s the broader index. But it’s just it’s just look at that Large-cap value is up 2.8%. Okay. I mentioned values at 3.8 large cap only up 2.8%, small cap values are up 8.4%, so that’s the interesting thing, and if you’re a stock picker and can find the jewels in there, well, you can be up more, you know. So we’re up a bit more than those numbers year to date. And I think the interesting thing is that for any world value index, North American exposure is 71%, Japan is only 6% and the rest of the world is 23%. Now North America is up nearly 7%, but Europe is up nine percent and European financials are up 12%. So this really is a stock pickers market.
On his article talking about capital gains and his approach
Yeah, my approach is quite simple. You know, there’s a bit of an arbitrage that people have been able to take advantage of and still can in many places in the world, because if it’s income tax, it’s often at a higher rate than capital gains tax. And I just think that making a decision purely for tax is short sighted because capital gains tax rates can increase. And if you look at the government debt loads out there, it wouldn’t surprise me if they do. And so I think if you don’t want to take profits because you think, well, I’m not going to just sell and have to pay capital gains tax at whatever the number is. I think the marginal rate in South Africa is 18%. That’s the maximum you will pay. Well, focus on the 82% you get to keep rather than the 18% you get to pay. And if you focus on that, then maybe the decisions are a little easier because it would be terrible not to take advantage, pay the 18%, then the investment falls. Okay. And then, of course you get caught in the whole psychological loop we think, well, I should have sold then, but I didn’t, so I can’t sell now, and then capital gains tax goes up, and before you know it, the gains are whittled away and in the capital and then the rate goes up. So I would just say, just focus on 80% that you get to keep. And you know what governments out there, they could do with some money as long as they’re not using it corruptly, fix the roads and you know, pay for the health care and power, nurses and all the rest. So I just think it’s quite refreshing not to worry about this whole, how much tax you are going to pay. It’s mis-sighted, and you likely to pay more in the long term.
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