The world is changing fast and to keep up you need local knowledge with global context.
UK-based global money manager Sean Peche returned to his homeland last week to offer his thoughts on the European Banking panic (which isn’t a crisis) and the stalling of support for SA’s Rainbow Coalition (which is). Peche, whose fund is currently among the top 1% performers in its category, applies his rational mind to both challenges. The proposed solutions appear to be both rational and workable. He spoke to Alec Hogg in the BizNews Cape Town studio at the Latitude Aparthotel in Sea Point.
Timestamps for the interview below:
- Sean Peche on being nominated as one of the top global equity funds by Morningstar – 00:40
- Finding opportunities despite turmoil – 01:30
- Credit Suisse and the market being in a panic – 01:50
- Banks going bust because they do not have liquidity – 03:10
- Cheque accounts and demand deposits – 04:00
- Why US banks operate on a far lower liquidity level than European banks – 05:40
- US banking and Silicon Valley Bank – 07:30
- On whether Credit Suisse was a “one off” – 09:45
- The catastrophic risk if a 2024 ANC-EFF coalition is formed – 12:55
- Some ideas on what a South African investor can do to mitigate this cataclysmic risk – 14:00
- Our fragile democracy and the threat of non-voters – 00:18:20
Some extracts from the interview:
Credit Suisse and the market being in a panic
Mr. Market is panicking. I remember the late great Simon Merais once saying to me when we were discussing banks, when I worked at Orbis, he said that some of the oldest businesses in the world are banks. And they are. I think Credit Suisse was founded in 1876, but they’re only good businesses if they control risk. If they don’t control risk, they’re not good businesses. And so, if you look at the banking failures historically, Northern Rock in the UK, they didn’t control risk. They were lending people 125% of the mortgage value on the assumption that you would use the 25% to put in a new bathroom and new kitchen and therefore add value to the property.
Unfortunately, Credit Suisse stopped controlling risk a little while ago, certainly not as effectively as they should have done. I mean, UBS is a Swiss bank. Goldman Sachs manages risk well. So Credit Suisse didn’t.
On banks going bust because they do not not have any liquidity
What happened, essentially, is there was a concern over capital and then as soon as people realized that, they wanted their money back. My brother in law used to work for a bank and he said banks don’t go bust because of a lack of capital. They go bust because of a lack of liquidity. And when people want their money back, you’ve got to be able to provide it. And so what happens is banks will take our deposits and they will invest those deposits and lend it to other people – home loans and that kind of thing. But they should keep some of the cash on the balance sheet as cash in case you want to deposit back.
On why US banks operate on a far lower liquidity level than European banks
So some of that will be in short-term interbank assets, because banks lend to each other based on who else needs money at the time. But the US banks operate on far lower liquidity levels from what the numbers show me than European banks.
There’s a chase for returns. US businesses are run aggressively. It’s a very generalized statement but the return on equity for US banks has historically been higher. And we now know why, because they run aggressively. Why did they go put the money on long term deposits to earn 1.6% – because it’s better than naught sitting in cash? That was the average yield that Silicon Valley invested – at 1.6% and you locked up for ten years. It’s crazy. So European banks have historically had lower returns than US banks, but that’s because they’re managed more conservatively. And right now in this environment, you want conservatively managed banks. So if you have banks that are conservatively managed and the European banks that we own, certainly most of them, they coped with the European crisis extremely well. Book value barely went down because they’re well-managed and they’re conservative and they’re not chasing short-term returns to get the share price up, to cash in the share options and pay the CEOs lots of money, which is what we’re now seeing with Silicon Valley. All these CEOs and CFOs were cashing in share options. I mean, they didn’t even have a risk officer for a year.
On the catastrophic risk if a 2024 ANC-EFF coalition is formed
It’s a massive, catastrophic risk. How do you value that? What is going to happen? People have stuck it out for so long. The problem is, if you look at humans and behavioral psychology in markets, you get weakness, and then you get a blow off. You get an exhaust move. Markets fall, fall, fall and eventually people just give up and they go, right, that’s it.
And if we get that, we are going to have capitulation and with capitulation, who knows where prices are going to go. Who knows? But I mean, substantially lower. What are banks in South Africa going to be worth? What is property going to be worth? It could be a disaster.
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