Corion’s Bacher on Feb: World booms but SA falls – same old, same old

Investors who’ve bought a “local is lekker” marketing message by SA asset managers will grind their teeth a little harder after another huge underperformance by the JSE in February. In our weekly review of the past month, Corion’s David Bacher unpacks the key numbers and shares why international stock markets continue to significantly outperform the JSE. The continued slump in resource shares is only part of the story. He spoke to BizNews editor Alec Hogg.

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Edited transcript of the interview

Alec Hogg: Well, at that time of the month again, we’re only on the second trading day after the end of the month. The team at Corion Capital have put together the month in a nutshell. David Bacher of Corion Capital is with us to go through all of this information. David, I’m enjoying the way that we look at the month, and I’ve added a couple more graphs courtesy of Kevin Lings from Stanlib, which I think will just elaborate a little bit more and help our community to get an even better picture of what has happened in the past 29 days regarding CSA and the axeing of the u19 Proteas captain David Teeger.. It is interesting that a picture always tells a story more than words.

David Bacher: I had lots of people from the public call me and close friends of mine, and despite all their differences in the views of their decision making, gave me a lot of positive feedback, just trying to work out how a cricket organisation can give in to threats of violence and live by the values of honesty and integrity, which without transparency, how can we know that they are being upholding to their own values? So, I think Cricket South Africa has painted themselves into a bit of a corner. I can’t understand why they’re not actually just answering some simple questions.

Alec Hogg: Yeah. And thanks for doing that, David. It hasn’t been easy. Over the past few weeks, we’ve had a number of asset managers now finally coming out and saying it’s been 10 lost years for South African investors because of the poor performance of the JSE. But for the previous nine years, nobody was saying that it was all going to rebound. I guess, you know, we’d be able to hire a lot more people at Best News. But anyway, that’s not the purpose of this conversation.

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David Bacher: Agreed. It’s not like Corion or myself are taking a political view. All we’ve been asking for is transparency to explain your decision making. So, you know, on that basis, we stand by the questions we have asked.

Alec Hogg: The world has changed, David, and it’s changing even more. The old days of politicians and those in power dictating what happens in a democracy are over. And the fact that we’ve put the second 11 into the governing positions, not just here, but pretty much all over the world in democracies, is something that is now seeing a reaction. So well done to you, and I applaud all others in the private sector who are asking the questions and not appeasing. But let’s move on to the last month.

David Bacher: Yes, it certainly was, Alec. International markets again performed strongly over the month. It was a rather broad equity market rally with emerging markets, developed markets, Europe, Japan posting all similar gains.

Alec Hogg: However, South Africa doesn’t seem to be participating again in this boom.

David Bacher: It was a dreadful month for South African equities, down in Dollar terms by 5.5%, one of the worst global markets for the month. Our local market was hit by the sell-off of the resources sector and the appreciation of the Rand. So that made South African equities not the place to be in February.

Alec Hogg: We’ve got the year-to-date numbers for 2024 so far, and South Africa really is lagging badly, as you say, not just against the US markets, but elsewhere for the year so far. But if you compare it with Japan, there’s been a lot of action there. Japan’s stock market has shown quite a lot of value in terms of metrics with other markets. A lot of value managers have been moving exposure to that region. Another catalyst is there’s been a lot of good rhetoric coming out of the government trying to make boards more efficient and really look to making companies who are holding a lot of cash look after shareholders a little bit better. Plus, good valuations and a currency that hasn’t done well for a significant time. So you put that together and you got quite a pleasing investment mix. Japan has gained 19%, outperforming NASDAQ’s 9% and South Africa’s -5% year to date. NASDAQ performing, tech performing, and Nvidia.

David Bacher: Nvidia’s net income for the fourth quarter grew by 770% year on year, a massive gain. Their one-day increase in stock price was the biggest increase in market cap of all time, about a $247 billion gain in one day. To put that in context, using our currency, that’s about a 4.7 trillion rand gain on one day, significantly higher than all the savings in South Africa and our collective investment scheme. Our biggest savings pool was the gain that Nvidia put in in one day in terms of their market.

Alec Hogg: That’s astonishing. Looking back at the numbers, they are spectacular. But is this justified? As an asset manager, when you don’t own Nvidia, are you climbing aboard now or saying, well, I missed this one, let someone else enjoy the benefits?

David: Bacher: There’s a lot of articles going out there. Are we at the repeat of the 2000, 2001 .com episode? I think they are different. Here you’ve got lots of earnings coming through. But valuations of these mega caps, not all, are on the expensive side. The possibility of these shares outperforming going into the future is becoming less and less.

Alec Hogg: Moving on to a focus area that you’ve raised here about managers not liking concentrated markets. The US market, for example, their top 10 stocks are about 33% of the S&P 500. That’s high concentration. But the US compared to other markets, developed markets, that picture is even worse. It’s a particularly difficult environment for large-cap managers where active managers have a benchmark which is so heavily weighted to big stocks. So tough being an active manager at the moment, but when it turns and often turns quite quickly, you could be in a much better position going forward. Another tough month when it comes to South Africa and cash outperformed. Sibanye Stillwater doing worst, but resources and then Sasol are coming under pressure. Also, MTN. Do you think that had anything to do with the chief rabbi claiming that they’ve been naughty?

David Bacher: No, I don’t think so. I think they got a big exposure to Nigeria, and Nigeria has some macro headwinds. They had a big sharp devaluation of the currency, the Naira, against the US dollar. So that impacted MTN’s Nigeria’s financials. And then a big part of their investments, obviously, in South Africa. And South Africa has been a region that’s had little growth. So those two factors I think have been the driving force behind MTN’s underperformance.

Alec Hogg: And Sibanye Stillwater has been affected by the Palladium price, which has been on a downward track for almost the last two years. Is there any upside there? Is there anything that you know about Palladium that is saying, hang on, Sibanye Stillwater might be offering value now because this could turn?

David Bacher: These companies are heavily geared to the underlying commodities and the basket commodity prices declined about 33% in the last year. That’s a significant fall in terms of their revenue numbers. Then you take into account that platinum companies like Sibanye are probably more geared than some of their peers, Amplats or Implats. You have a balance sheet that’s probably not as sound, plus decreasing commodity prices, and then you get your share price under significant pressure. Going forward, things generally do find a bottom. Although there’s been a big move to electric cars, there’s still a need for platinum in the manufacture of other engines and other utilities. So I’m no expert on the platinum price, but naturally, these things do tend to find a bottom and when it turns, as I said earlier, it can turn quickly.

Alec Hogg: Sibanye being a big palladium producer now through its acquisition in the US of Stillwater. There was something interesting about this, David, just to put in the back of our minds, the Toyota share price has doubled because Toyota has gone a different route to many of the other companies. They believe in hybrids and hybrids, of course, use platinum and palladium. So it’s worth wondering or putting that into the back of our minds. On the good news side, a very good month for Richemont, Nepi RockCastle, the Gold Stock AngloGold Ashanti, and Reinet investments. They were the best performers on the top 40.

David Bacher: I think all three of them, for different reasons, but one common theme there is the Rand hedge theme playing out. So with a depreciating currency and assets in South Africa under pressure, that was the fuel that really gave them a catalyst to outperform.

Alec Hogg: We also had a piece during the month about rumors coming from Europe that LVMH and Richemont might find each other willing partners sometime in the future. Let’s see. As for class returns as a whole, I like your tables where you go through one month, three months, one year, three years, five years. You can see there though that property has done really badly over five years, but not badly in the past year, or even the past three years. Perhaps it’s oversold?

David Bacher: Correct. I think that’s one thing that we got right on this program. I think four months ago, we said that property looks cheap and was due for a rebound. Property has rebounded by over 25% in the last three months. And I think that was just a valuation play relative to, let’s say, South African bonds where you’re getting high dividend yields or income yields on these property shares relative to other investments. And if you were there at the lows, you could have got a good return.

Alec Hogg: But before we get excited, most people in South Africa, retail investors, their property investment has been actually really poor. The numbers have just come out. South African house prices have done their worst in the last 15 years, up 1.5% year on year, according to FNB, and they’ve got a big index to lots of data to work from. What’s going on there, David? We do know that the property sector that you’re following at Corion is the investable property sector, in other words, commercial office and industrial property. But house prices are just in such a slump.

David Bacher: Correct. There are lots of reasons. Rising interest rates haven’t been good for the property sector. Debt financing costs do not bode well for increased property prices. But I also think it’s a service delivery issue. In areas where property prices have been significantly impacted, it’s where service deliveries are weakest and municipalities are weakest. People don’t want to live in places where basic services aren’t being rendered. Additionally, with an economy that hasn’t been growing, the demand side of property is under pressure as people can’t afford houses anymore. Basic economics dictate that if demand is reducing, then residential property prices are going to be under pressure.

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Alec Hogg: Contrarians would say go to those areas where property prices have fallen the most. You can think there about Ethekwini or Durban, Johannesburg. Pretoria does seem to be on the upgrade or on the improvement and many other parts of the country where the service delivery, that’d be it. Okay. So, you staying with it, David, you staying with it in Johannesburg.

David Bacher: Correct. We are a contrarian investment house, so generally, that will be our mantra.

Alec Hogg: You can’t be staying with it if you’re invested in the taxi industry. Most of the time when you invest in income funds, it’s because they’re safe and offer a high yield. But now there’s at least one big fund exposed to the taxi industry, facing a potential write-off of R800 million. This means investors in that income fund will likely suffer a capital loss. We haven’t seen that for a while.

David: Bacher Yeah, it’s a very sad event for the industry. I don’t think the full R800 million will be written off. There may still be some value there, but it’s subjective at this stage. The fund manager recently announced they are repricing some of those instruments, expecting an average 30% reduction, which reflects their best estimate of value. So investors in funds with exposure may be disappointed. Defaults aren’t uncommon. Even if all companies default, and you only recover 50%, you can still earn above the risk-free rate with diversification. The problem for some income funds was not the default itself, but rather an overweight exposure to these instruments in what’s supposed to be a low-risk fund.

Alec Hogg: Good reminder that nothing is risk-free. ABSA took a hit in Ghana not long ago, affecting its share price. Shifting to the budget, what are your thoughts on its increasing size to service debt?

David Bacher: The government talked about fiscal responsibility, which is positive, but the reality is our significant debt will hinder future growth. Currently, about 20% of our revenue is spent on debt service, double the global average of around 9%. This is concerning and requires urgent action. Populism and excessive spending are not the answer. If we don’t address this quickly, we’ll pay the price in the future.

Alec Hogg: Your wishes for the future as we sign off today?

David Bacher: We hope South Africa’s budget deficit narrows and South Africans find true happiness. Despite optimistic speeches, action is needed for real progress.

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