FFM podcast ep21: Hawks, doves or uncertainty; Tencent doused Bob-less Naspers; Retailers kicking back

Central banks are meeting worldwide; the United States kept interest rates on hold, while the United Kingdom raised them by 25 basis points. Governor Lesetja Kganyago kept rates steady in South Africa while our Turkish counterparts got a five percentage point increase. But what does this all mean for investors and, more importantly, Fantasy Fund Managers? Join host Stuart Lowman from BizNews as he explores week 21 insights in the Fantasy Fund Manager podcast with guests making sense of it: David Bacher and Garreth Montana from Corion Capital. There’s also a discussion on a Bob-less Naspers and the rally in retailers. Remember, each dawn of Monday is your chance to pitch your winning stocks. With enticing prizes awaiting, the game is on. Rally your comrades and head to www.fantasyfundmanager.co.za to register—big thanks to our platinum sponsors, Sharenet, Terebinth Capital, ClucasGray Asset Management, and MoneyBetter. And mark your calendars: Subscribe now to our podcast to keep up with every episode.

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Stuart Lowman: It’s that time of the week again, and you’re listening to the Fantasy Fund Manager podcast. I’m Stuart Lowman from BizNews, and we’re into week 21 of a 27-week, six-month competition. Today’s guests, Garreth Montana and David Bacher from Corion Capital, need no introduction. Thanks for joining us. So, on week 21 of 27, almost the business end of the game. Are you playing the business end or floundering as we come to the end of the competition?

David Bacher: From my side, I have been in the same position as measured by the closest hundred for a few weeks. I’ve tried to do some different things in my portfolio, but I’m pretty steady now. Not by design, though.

Stuart Lowman: And Garreth?

Garreth Montano: They say you’re only as good as your last week, and I’m beating David in the last week. Things are good.

Stuart Lowman: Where are you sitting this week?

Garreth Montano: I’m down a bit on the portfolio, down 40 basis points, but given what’s going on in the market, I suppose it’s not terrible. It’s about one week in 20 that I’ve beaten David, so I’m happy.

Stuart Lowman: Hold on to those little victories. You mentioned the market’s down. We see South Africa under pressure again. Any insights as to why, David?

David Bacher: Yes, in the next 36 hours, we’ve had or will have 11 central banks communicating their monetary policy. And last night was the Fed. The Fed is a central bank that everyone watches. They generally set interest rate policies and have a significant influence worldwide. They came out last night saying interest rates are likely to be higher for longer or inferred it. And that sent a risk of trade across the globe. And South Africa was no exception. And you look at your screens, and seeing a lot of green is tough.

Stuart Lowman: You mentioned interest rates and monetary policy. We are saying terms like hawkish and dovish monetary policies. Should we just start there? Can you explain what the two are and the difference?

David Bacher: Sure, as one would expect, it comes from birding terminology, and a hawk is quite an aggressive bird. So by nature, when you’re talking about hawkish monetary policy, you’re talking about aggressive interest rate policy, a policy where they are concerned about inflation, likely to have rising interest rates, and that generally is negative for the market. And contrary to that, a dove is seen as a gentler bird. A bird of peace and that terminology refers to interest rates that are likely to come down, and that’s generally good for the economy and share markets.

Stuart Lowman: Is the concern that we’re still determining where we’re going with interest rates because we saw in the US expectations of a 25 basis point hike is probably the next and last upward movement? It may be the concern that there might be more; they’re not quite sure. And that’s why the markets, because ultimately, if you hit the top, you would move towards a dovish environment, which is better for stock markets.

Garreth Montano: The Fed did little to aid credibility over the last few years concerning the inflation outlook. There’s a general perception that there needed to be a greater range of expectations of what inflation would do. Many people have started seeing the end of inflation and potentially decreasing interest rates. The implication… That rates will be higher for longer is meaningful to equity market valuations. So, first of all, from a stimulatory perspective, if you start cutting interest rates, it should be good for economies, should be good for the consumer, but importantly, it also plays a way in how shares are valued, and especially for growth shares which are factoring in long-term growth. If you have got high-interest rates for longer, those valuations you’re discounting start reducing the perceived value of a share at any time. So it’s very important. And that uncertainty does play on markets. There is no doubt that markets are looking for inflation to have been brought under control and, hopefully, see the end of the rate hiking cycle. From a Corion perspective, we firmly believe we are near the top of the cycle. Whether we’re going to see massive cuts, that’s a different question. But we believe we are nearing the top of the rate cycle locally and globally.

Stuart Lowman: If we bring it to the local market, one thing we are sure of is Naspers CEO Bob Van Dyke is no longer in that box seat. The share is the most held stock in the game; one in five users hold Naspers. At the time of recording, the stock was down 6%. My colleague Alec Hogg interviewed veteran money manager Pete Viljoen. He cheered the fact that Bob Van Dyke had left. He called him the destroyer of 40% of value. I don’t know how you would see it, David.

David Bacher: First, hearing Pete’s views is always nice. He’s nice to get such a, wearing your heart on your sleeve, and what Pete says is always of interest. But that took us by surprise. So firstly, Naspers is down 6%. Is that surprising? The answer is yes and no. Yes, it’s surprising because of the likes of well-known investors such as Pete and other investors have been calling for Bob’s head for a while. So you would have thought there would have been a bit of a rally. But if you look at what drives Naspers, it is Tencent. That’s the big asset in the group. That share is down similar amounts for the week overseas, slightly less. So I wonder why Naspers is slightly more down than Tencent. But the most significant driver is Tencent and the trade risk. Once you have the risk of trade, technology shares come under pressure, emerging markets come under pressure, and maybe South Africa is a little bit high up the risk scale. Naspers took more than the fall of the overseas asset. But long story short, this is primarily driven by a risk of trade globally and not Bob Van Dyke’s resignation.

Stuart Lowman: On the flip side of that, in the game of the 60 stocks, the three best-performing stocks are retailers. When recording the podcast, it was Pepkor, the Foschini Group and Mr. Price. Is there anything in the retailers on this little wind of fires? Gareth, anything from your side? Indeed, a lower interest rate environment would be better for a retailer, but I wonder if the high-interest rates play into it or if it’s just a value of play.

Garreth Montano: It’s such a difficult one. If you look at current conditions this week, should retailers increase? Probably not. But given the sell-off already, priced into these retailers, and you know, we discussed it last week, is that markets look through a cycle. And potentially, you’re starting to see some investors saying, well, these retailers their significant depreciation. It’s time to start picking, time to start buying. Is there anything micro-economic this week driving it? I can’t see it. The retailers still face the same headwinds they did last week regarding spending money on diesel to keep lights on—challenges for consumers with disposable income. Not much of that has changed, but markets have started looking forward. Markets are not looking next week and two weeks. Markets are starting to look one year out and two years out; potentially, people are seeing value in these counters.

David Bacher: And if you look at the margins of some of these retailers, back to levels of 2018, so you’re coming off very, very low margins in the industry. And it’s such a gearing element to these retailers. If you take a three-year view and you think, okay, margins could increase, then you’re going to have not only an earnings bump, but you’re going to have a multiple PE expansion. And is that kind of gearing that I think many investors are… Okay, the environment hasn’t changed, as Gareth has said, but maybe if you take a bit of a longer-term view, we can’t time the bottom here, but that gearing over a long term can change quite quickly and meaningfully, so for the positive.

Stuart Lowman: David, one of the things is where to from here for our beloved SA Inc. We’ve got a Springbok director of rugby who does a 7-1 split. Do we need something special to drive SA shares forward?

David Bacher: I don’t know the answer to that question over the short term. At Corion, as you know, we’re valuation-based. We look at the earnings and the price you’re paying for those earnings relative to our history, relative to what you can get for emerging markets, relative to developed markets. And we think that although there is a lot of dire news out there and the economy is tough, you’re buying these shares in South Africa still at compelling valuations. When it turns, it turns quickly, so it’s been hard, but maybe the bench, the super bench, the 7-1 split might not be the right analogy, but you can get a change to the environment quite quickly, and that can change your fortunes quite quickly

Stuart Lowman: Okay, so you’ve mentioned that value across SA Inc., or is it specific sectors at Corion?

Garreth Montano: It’s worthwhile touching on what Carmen mentioned last week, and a bit more detail on that is that we’ve got to be cautious not to bucket the South African market into SA Inc. It comprises some of our market companies’ specific drivers to South Africa, like our banks and retailers. But the broader South African market, we’ve been mentioning it in some reports back to clients in the last week. 65% of earnings of the top 40 are foreign earnings. So we’ve got to be careful not to make the proxy for SA Inc. and the South African economy, the South African stock market. The South African stock market gives you quite a lot of diversification. We’ve got the resource potential kicker that we’ve discussed. You’ve got companies like Reshmont, the market-leading global luxury goods player. You’ve got the likes of Bidcorp—Bidvest with foreign acquisitions. Yes, SA Inc. is an element. We do need some specific drivers to get that going. SA Inc. is undervalued, but the South African market offers you more than that. Stay calm because of having exposure to the South African market, and it’s why the South African market is, through many decades cycles, one of the better-performing stock markets in the world. It is because of the calibre of the companies in the global nature of a lot of the earnings we’ve got.

Stuart Lowman: If we bring it back to Fantasy Fund, we would like to get a game tip of the week. David, I’d like to know if you’ve got any tips or tricks for the next week.

David Bacher: I think last time I was on the show, I said try, and if you’re looking for competitive advantage, try and wake up early on a Monday morning, see what’s happening off your market, see if the oil prices move to see what’s happening at Tencent and that can give you a bit of a lead in terms of how things are going to open. Now, that works for the first few hours but doesn’t work for the whole week, but you’ve got to start. And that’s that, to me, is still my best pick. I did that the last couple of weeks with why I went into Sasol, which has worked and not worked as well as I’d hoped. But yeah, that’s the most significant words of wisdom I can share.

Stuart Lowman: I know Rene Zietsman is fighting for that overall position with Grant Morris at the moment, and when she was on the podcast, she said that she and her friend would sit down on a Monday for half an hour and go through all the reports and stuff. So maybe there’s something to that. Garreth on your side, a gamer tip?

Garreth Montano: The Rand is an essential bellwether for what is going on with sentiment around South Africa and the market. We feed it all the time. It affects our oil price and importing it, and ultimately what your petrol price is going into your car every month. But in quite a risk-off environment, the Rand is trading quite nicely. We’ve mentioned retailers have performed exceptionally well. So if you’re taking a combination and looking and telling you, the market may hint that there’s a lot in the South African price. It might sound like we’re drumming on about this, but the Rand’s holding up quite nicely today. Retailers have been behaving well. So it could be that SA Inc. plays where we could look at some banks, retailers, and companies with specific drivers to South Africa.

Stuart Lowman: Thanks to Gareth Montana and David Bacher from Corion Capital. And, as always, thanks to the sponsors for making the podcast possible. That’s Terebinth Capital, Sharenet, ClucasGray Asset Management, and Moneybetter. And remember to subscribe to the podcast below to catch all the episodes. And send us your comments on X at Fantasy underscore fund. And from me, Stuart Lowman, until next week. Cheerio.

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