Sean Peche on power of executive culture: Japan’s corporate advantage, SA Govt’s obvious deficiency

Leading global fund manager Sean Peche has a rational perspective on why the Rand has tanked in the past week – it lies primarily with the deficiency in the SA Government’s executive culture, laid bare through the arms-to-Russia scandal. Peche explains that to use an investment analogy, the “share price” of a country is its currency; and “management” the political leadership. He contrasts the disastrous performance of South Africa’s government (and hence the Rand) with the inherent potential of investing into Japanese corporates (and Tokyo-listed shares). He spoke to Alec Hogg of BizNews.

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Relevant timestamps from the interview

  • 01:10 – Sean Peche on the Rand’s fall following allegations that SA supplied arms to Russia
  • 05:18 – Peche compares the running of a government to the running of a company
  • 07:53 – On how well Japan is being run
  • 10:52 – On Japan’s great price-to-book investment opportunities
  • 12:15 – On why you should invest in Japan
  • 16:53 – On South Africans branching out into international investment and learning along the way
  • 19:17 – On the difference in culture between US and Japanese business
  • 21:04 – On keeping an eye on European markets

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Excerpts from the interview

Sean Peche compares the SA government to the executive management of a company

Think of a country as a company and think of the government as your management. And I wrote an article last week for Citywire about [whether] management [is] on your side. Are they doing sensible things? Are they allocating capital correctly? And I referred to the banking CEOs of the three failed banks in the US and I referred to Bed, Bath and Beyond and just how much those CEOs have taken off the table. And in [the] case of Bed, Bath and Beyond, how they acted in their own [self]interests. And I look at the [South African] government and I’m going, they are shooting themselves in both feet. 

The problem is that if a CEO does a bad job, you can fire him [at the] next AGM, you’ve got an election every year essentially. So [the SA government] is a management team [that] is in place for at least four years. And then a lot of the shareholders are not voting at the AGM.

Read more: Sean Peche – How balanced are your bets?

On the investment opportunities in Japan

The jewels are in Japanese stocks and smaller- and mid-cap stocks. If you look at the fact sheets of the largest offshore funds and the feeder funds in South Africa available to locals now: 67 or 68% is in US equities and very little in Japan. Japan has been cheap for a long time and they’ve been cheap because when the bubble burst back in the late eighties, the companies got quite concerned and hoarded cash and kept their cash on the balance sheet and had these things called lazy balance sheets. You had your money hoard sitting in cash. And of course, the problem was [that] the cash rates in Japan were nothing. So you had this money sitting in the bank earning nothing. And that depressed your return on equity and [your] return on capital employed. And of course, we know that the companies that have done the best and the funds that have grown the most [put] all their focus on return on equity, return on capital employed, the quantity businesses, etc.. But if you actually strip that cash out, some of these businesses are doing extremely well. What has changed is that you’ve got a new head of the Tokyo Stock Exchange and they are on a mission to unlock [this] value and they’ve sent letters to thousands of companies where the price-to-book is below one.

Read more: BNC#5 – Size anchoring growth, Sean Peche on whether investments do better in speedboats or tankers

So now the head of the Tokyo Stock Exchange wants to know what these companies are going to do to unlock value and the government is fully behind them. And the reason the government is behind them is that if you’ve got your your local population invested in the stock market and the stock market is not accurately valued or fairly valued, when those people come to retire their pensions are going to be lower than what they should be. And if there’s a shortfall, they become the state’s responsibility. So you can see that there are huge incentives. The state doesn’t want this with an ageing population [so they want to] make sure [that] these values are fairly valued. We’ve got companies in our portfolio that are trading at less than cash and securities.

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