Corion’s David Bacher unpacks Feb’s Resources Rout – points us to fresh investment opportunities

In this summary of the latest Corion Report, the company’s co-founder David Bacher explains why resources shares took such a paddling in February – and warns that the worst may not yet be over. He also guides the savvy investor toward areas with exciting prospects and offers some insights into the new Fantasy Fund Manager game that will launch next month. He spoke to Alec Hogg of BizNews.

Find timestamps for the interview below:

  • David Bacher on the reverse in February after the ‘January Jump’ – 00:55
  • On the variables that go into the earnings of a commodity player – 02:10
  • On the international community starting to take account of the real risks in South Africa – 03:15
  • On emerging markets being under pressure – 04:00
  • On whether the markets are still bearish or not – 05:15
  • On the February pullback and the immediate impact on retirement funds – 07:10
  • On the kick up of US bond yields – 08:15
  • On the asset classes that are currently looking attractive – 09:50
  • On whether the big shares in SA have become overvalued and the little shares very cheap – 11:35
  • On the Fantasy Fund Manager and considering the inclusion of the Cape Town Stock Exchange – 12:45
  • On the six sectors that offer a variety of shares to select from in the Fantasy Fund Manager – 13:40
  • On other interesting developments in investment markets and the general industry – 15:50

Some extracts from the interview:

On the reverse in February after the ‘January Jump’ 

Yes, it certainly was. Last month on the show, we did advise our investors and our clients not to get ahead of themselves. We thought the market was going to show a slight comeback and that’s what broadly happened. Global equity markets declined about two and a half per cent. I thought what was interesting this month, was that it wasn’t all equity markets and it was a little bit of a mixed bag. So for example, Europe and the U.K. were actually positive, quite strongly positive, while the S&P was down and emerging markets were actually quite heavily down at about 6%. And you actually saw the mixed bag in South Africa as well. Our market was down 2.3%, but the majority of that decline was due to our resources, which were under significant pressure. Weakening over 12% for the month. 

Read more: Stock market’s January Jump among Top 10 since 1960 – but brace yourself for a probable hangover

On the variables that go into the earnings of a commodity player 

There are a few variables that go into the earnings of a commodity player. Currency is a major driver. The commodity price is also a significant contributor. Then there’s other factors such as your cost base, which is very inflationary at the moment and also the amount of output you produce. So on a whole: though currency did provide some tailwinds, you had the Eskom woes which impacted on possible output. And probably more significantly you had commodity prices coming off significantly, and South Africans commodities are generally platinum, palladium, gold and rhodium – and all of those declined significantly early in the month to more than offset the rand depreciation.

On the international community starting to take account of the real risks in South Africa

I think they are. In our morning meeting at Corion, we showed the Rand relative to emerging markets. And, our currency over the last month, certainly in the period where Eskom woes were heightened, depreciated much more than those baskets. So, it is indicative of what you said, the foreign investors are recognising the risks and it wasn’t so much the dollar appreciating this last month that affected us. It was certainly the Rand’s weakness. 

Read more: Use this two-pronged strategy when investing for your kids

On whether the markets are still bearish or not

At the moment, there are places in the market that I would say, yes, definitely we subscribe to there being tougher times going ahead. US equity markets is certainly one of those places where we think valuations and equity market returns for a while have been so significantly strong that going ahead we don’t think that you can just take the past and trend that forward. So we think that a large part of the market is probably still going to have tricky times ahead. But having said that, there are places in the world where valuations are actually quite compelling. 

Read more: Why your investments can grow in 2023

On the February pullback and the immediate impact on retirement funds

Yes, there’s definitely a strong link between what happens in the equity markets, which most people talk about, and the return you get and what you see in your numbers at the end of the month from your retirement fund provider. But I think it’s not as strong as most people actually think. The reason for that is retirement funds are generally well diversified across many different assets and also have 25 to 45% exposure to offshore markets and currencies. So whilst equity markets might be under pressure, the rand could be depreciating and offsetting some of those losses because it’s such a big part of one’s portfolio. So I suppose that’s the beauty of diversification. I think you saw that last month when despite global equities being down over 2%, we at Corion estimate that most retirement funds would have probably been flat for the month.