Corion’s Bacher on market’s ‘’Red October’, BHI, FFM and what’s next

For South African investors, October was a month many would prefer never happened. Apart from the collapse of the R3bn BHI Trust Ponzi scheme, the only places to hide in legitimate markets were Bitcoin, Gold and Bonds. In our regular catch-up with David Bacher, the author of the Corion Report shares his insights into the reasons for what he had dubbed ‘Red October’. He spoke to Alec Hogg, editor of BizNews.


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Edited transcript of the Interview between Alec Hogg and David Bacher

Alec Hogg: Well, it’s just gone the end of the month. Who’d believe we’re in through the 11th month already. David Bacher from Corion is going to bring us up to date on what happened last month and where we might be going in November. David, that’s a little bit of an open question. What happened last month? My goodness. We’ve had a month, haven’t we? You’ve had the October 7th invasion into Israel, stock markets worrying, fretting like crazy, and then suddenly starting to boom in the past couple of days. Of course, that came too late for October, but generally, October through the years, through the decades hasn’t always been a good month, hasn’t always been a happy month for investors.

David: Correct. In fact, I think the saying “sell in May and go away” would have actually worked out quite nicely this year because the tail end of the year has been difficult. Markets are down to the end of October, close to 10% probably across the board in terms of different regions. So that’s pretty close to correction territory. It’s been a very difficult three months. If you looked at our Korean video, the month’s theme was the month of Red October, a play on the famous wartime film, “Hunt for Red October.” It was indeed a month of red, a month of blood in the Middle East, and a month of red for the equity markets.

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Alec Hogg: Well, we are going to talk about the Fantasy Fund manager at the end of this conversation because that’s now also come to an end, or just about there. But before we get to that, maybe let’s talk about the month as a whole. Was there much difference between what happened in South Africa and elsewhere in the world?

David: No, we’re pretty much down the same amount as all markets were. I think it was actually quite a unison pullback, same concerns globally. The war in the Middle East in October rates higher for longer was the theme that has changed quickly over the last few days. But that affected markets across the board.

Alec Hogg: When you say it’s changed in the last few days, we can’t ignore the fact that, like when you talk about company results, post-balance sheet events, they’ve been quite dramatic if you consider what’s happened in November, and we’re only into the third day.

David: Correct. I think a lot of emphasis these days is looking at what the Fed is doing in interest rate policy, and that drives a lot of asset allocation decisions. What we said on this program last time was, as I said, people were concerned, and the Fed gave indications that interest rates would be higher. And then on, I think it was Wednesday night, you had a slight change in the rhetoric. The Fed chairman alluding to concerns also about financial restrictions. And the market took that as a change in theme from rates higher for longer to maybe rates not much higher for much not longer. So that’s enough to signal a policy change, and interest rates are crucial for valuing all instruments, hence the big rally in the last few days.

Alec Hogg: It certainly came at a brilliant time for the BizNews portfolio. Two of our more speculative counters, Palantir and Cloudflare, both released results, which were good, but that hasn’t really helped. It wouldn’t have helped anyone during October. But because of that new environment, Palantir was up 20% last night, and Cloudflare up 6%. So at least there’s some happy people in the BizNews tribe.

Just looking at October itself, let’s go through these major asset classes. If you were in bonds, you were okay in Rand terms, but the Rand was a bit weaker. Global bonds were down, global equities were down quite sharply, and emerging markets as a whole are more than 4% lower. Just unpack that for us, if you would, David, why?

David: Sure. Actually, the Rand was very sensitive to its starting point, was actually pretty much one of the few currencies that were marginally better relative to the dollar. So our currency was actually reasonably strong. It’s actually gone nowhere over the last three months, despite all our concerns. But I think Bonds was a standout performer at 1.7%. And if you remember on the show last time, that was the asset class we thought offered you a very good real return given the risks in the portfolio. And there are risks in South Africa, but you must also understand you get paid to actually evaluate what those risks are. You can’t avoid risks. And a yield of 10-year yield was close to 1280, 1290. That’s significantly above inflation. So I think that was a reason why you saw our bond market really rallying relative to other asset classes. And then I think the other standout for the month of October was gold. Gold generally shields portfolios or supposed to shield portfolios in times of uncertainty, in times of war. And it rallied. The gold in spot prices rallied by 7.5%.

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And that was a major catalyst for our gold shares in the market. If you look at Harmony, gold was up 22%, gold fields up 21%. Gold certainly glittered in October.

Alec Hogg: And so did Bitcoin. I had a chat yesterday with Stafford Masie, who’s all excited about Bitcoin, which has been one of the top performers in the month. He says, well, it’s digital gold, which is even better than normal gold. But in the more traditional investment markets, normal gold, as you’ve pointed out, did very well.

David: Yeah, I mean, they deemed it, I don’t know, I think they call it the digital gold or the liquid gold. Yeah, that certainly had the same kind of tailwinds. And in addition to that, there were some rumors and investors betting on promising regulation in the US, which was a further catalyst. And that rallied, I think, close to 27% for the month. So very volatile asset class. I wouldn’t put all your eggs into Bitcoin. I personally don’t understand it as much as other people. So please stay away from it, but just know that you’re going to be in for a ride with that kind of volatility.

Alec Hogg: It’s a very interesting view that Stafford Masie has, and you’ll be able to watch that interview on BizNews TV in the course of the day or the weekend. Bitcoin, they’re up 27% in the month, as you guys at Corion have reported. Looking at the individual asset returns, and I guess it also illustrates how the past month has been pretty difficult for lots of areas, except when you go a little bit further, into or a little bit more background. Global equities are still over a year, having done really well. South African equities over three years, good double-digit growth. So I guess this is an argument for being invested and staying invested.

David: I think that’s the key. If you look at market pullbacks, there have been 27 times since World War II that the S&P has had a correction, i.e., it’s gone lower than 10%. Generally, those are good times to not shy away from the market, to invest, and take a long-term view. You shouldn’t look at it from month to month or day to day. It should be seen in terms of your timeframe. Over time, investors get rewarded for taking on volatility and risk. That doesn’t mean that you shouldn’t diversify your portfolios across regions, managers, and sectors. But it does mean that, over time, the risk of short-term drawdowns is probably less of a risk. They’re not beating inflation over the long term. Equities and risky assets beat inflation over the long term.

Alec Hogg: I’m glad we’re delving into this subject of volatility and the ability to outperform in the long term. Thousands of South Africans have been caught up in the BHI trust scam. Craig Warriner sold this idea of removing volatility. He claimed that if you put your money with Investec or RMB, they might give you a 6% return. But if you invested with him, he promised between 12 and 15% a year, every year. He said he had a secret source and was the only one with a special insight. That’s not how investing works, David. Ponzi schemes show that they give consistent returns, whereas investing is volatile. However, in the long term, if you endure difficult times, you’ll come out better.

David: The BHI story is one of the saddest things. People lacking the know-how and knowledge were caught up in that scheme. It’s important to remember that investing is difficult. When things sound too good to be true and offer rates with such low volatility, like the 3% or 4% from the bank, it raises red flags. The asset management industry works hard to get the best risk-adjusted return, so how can an unregulated fund achieve this? It’s important to consider regulation’s role in safeguarding investors. There’s comfort in a regulated world. In South Africa, regulated funds are backed by a financial regulatory body that mostly protects investors. It’s unfortunate that many were victims of an unregulated product like BHI.

Alec Hogg: It’s often the case with these scams, creating a special club or society to make people feel exclusive. But focusing on controllable matters, let’s consider South African equity returns. They’ve been awful in the past months, but over the past year, not so bad. And over three to five years, except for property, there’s been decent growth, despite the volatility of the times following the exposure of the Ponzi scheme.

David: It’s crucial to consider the timeframes and the starting point when looking at numbers. Despite the tough times following the depth of COVID, South African equities have grown by 15%. That’s more than twice what you would have gotten from fixed interest investments.

Alec Hogg: The message seems to be not to panic, and certainly, it’s what the winner of the Fantasy Fund manager should embody. Raymond Stain is currently leading the Fantasy Fund Manager competition, slightly ahead of Grant Morris. The situation is looking good for Raymond to be the victor. This competition shows promising performances from participants.

David: As for the Fantasy Fund Manager, Raymond seems to be the favorite for the win. It’s interesting that four out of the six participants have a connection with us. I’m leaning towards Raymond as the least conflicted winner.

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Alec Hogg: Is he a retail private investor or is he also a professional?

David: I think he’s a financial advisor. I actually tried to get a hold of him today. He did win one of the weeks, and I know I’ve spoken to every winner, but there’s been many. So yeah, I’m actually gonna have a chat to him later today.

Alec Hogg: And in the past month, the top performer was Textane. I had that one, but it didn’t help me because I also had Pick n Pay. I guess that’s the power of diversification. What was the best strategy looking back? If you could start again on Fantasy Fund Manager, how would you have played it?

David: Textane is a great example of how being studious can give you an edge. They released a SENS announcement after the market closed on a Friday. Those who saw the news could have gained an advantage as the game only starts at 9 o’clock. It becomes less of a game of luck and more about hard work and knowing market developments. My tip is to know your portfolio, watch the market, and look for competitive advantages like SENS announcements or early market movements. That would be the biggest learning curve.

Alec Hogg: That’s what the Fantasy Fund Manager was intended for – to educate while playing.

David: Correct. It’s a part of a partnership with UJ University and their finance department, making the game compulsory for one of their courses. It’s about education and introducing people to the market. Having close to 5,000 people playing was an unbelievable success. Tough times can be a great start for understanding investments.

Alec Hogg: David, we’re gonna close on a different note. Last month, we spoke about our Proteas at the Cricket World Cup. Given what’s happened, do you think they can bring it home?

David: I was better at calling the bond market than the cricket team last month. But considering our depth in batting, it’s less of a worry now. Can we win the World Cup? I think we’ve got as good a chance as any of the other four semi-finalists.

Alec Hogg: David Bacher from Corion and I’m Alec Hogg from BizNews.com.

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