Golden March sees SA share market top global performance tables – still cheap says Bacher

In our regular recap on the past month’s investment market performance, Corion’s David Bacher puts the SA share market run in perspective. Like the China v India story for Emerging Market investors, to have won you needed to be on the right horse – resources – and avoided supporting the month’s donkey – financial services. Bacher spoke to Alec Hogg of BizNews.


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Summary of the interview

In the interview with Corion’s David Bacher by BizNews founder Alec Hogg, they discuss market trends, investment opportunities, and economic outlooks. Bacher notes the contrasting performance of resource sectors versus financial shares, attributing it to underlying commodity prices and economic conditions. They also analyze the potential impact of China’s rebound on South African shares. The conversation touches on banking sector dividends, strong balance sheets, and future profit growth forecasts. They explore the complexities of asset management, highlighting the challenges and rewards of investing in gold shares and other commodities. Bacher emphasizes the importance of diversification and valuation-driven investment strategies, suggesting opportunities beyond US large caps. Overall, they expressed cautious optimism, acknowledging risks but also seeing potential in selected markets despite uncertainties surrounding elections and global economic conditions.

Full transcript of the interview

00:00:08:13 – 00:00:35:02
Alec Hogg: Well, we just entered April, indeed the second working day of April. And David Bacher from Corion is with us. David, good to be in your company again. We’re looking back on the first quarter of 2024, which has way outperformed anything most people believed was possible for the investment markets. And indeed, we’re looking back at the month of March, we’re going to go through a presentation that you’ve put together for us.

00:00:35:02 – 00:00:48:00
Alec Hogg: Thank you very much. But before we go there, just from your perspective, did you anticipate Q1 24 to be anything like what we’ve just experienced?

00:00:48:02 – 00:01:26:19
David Bacher: I think the actual makeup of the market returns surprised us. It was a continuation of mega-caps, the big stocks driving global returns, particularly in the US. From our side, we’re starting to go much more into other parts of the market. So the short answer, I think the distribution of the returns did surprise us, and it was largely carried by those, you know, all but say, the fabulous four, I suppose the Magnificent Seven, given what happened last quarter, is probably less relevant given what happened to Tesla and Apple.

00:01:26:21 – 00:01:30:18
David Bacher: But certainly MEGA-CAP shares drove the US markets.

00:01:30:20 – 00:02:00:09
Alec Hogg: Yeah, you mentioned Tesla. We’ve not added that to the business model portfolio. We thought under $200 was a good price. Unfortunately, there it’s purchased in one-third, one-third, one-third because the second lot of shares we bought, the share price was down below $180 and as it’s now below $170. So it just shows trying to time purchases is a foolhardy game, isn’t it.

00:02:00:11 – 00:02:21:21
David Bacher: That is indeed. I mean Tesla came out, I think yesterday or the day before, saying that it missed its production targets. I think it’s getting a lot of competition from China where there’s a price war happening. So, you know, you buy into the story is one thing but as you said, you never know exactly where the bottom is.

00:02:21:23 – 00:02:27:05
David Bacher: So Rand cost averaging is something that I think any sensible investor should follow.

00:02:27:07 – 00:02:43:16
Alec Hogg: Explain that Rand cost averaging, because I know we have a lot of newbies to investing who watch and listen to this discussion and try to pick up some insights. That’s a very, very important part of one’s whole investment strategy.

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00:02:43:18 – 00:03:10:18
David Bacher: I think so. Rand cost averaging, and when you’re investing in volatile assets such as equities, just missing one day’s return could make a big difference. So, you know, you might, over the very long term, believe in the story of the share delivering the earnings that you expect, but buying that share at, let’s say, 100 rand versus 102 or 95 on any particular day is quite meaningful.

00:03:10:18 – 00:03:37:20
David Bacher: So, you know, what most people do is try and eliminate the noise. They try and eliminate the actual exact timing of when you buy that instrument and rather on the way in and on the way out, rather do it in stages. It gives you a less volatile return and your ability to pick the stock is more going to do with it’s a skill as opposed to the exact timing of the entry points.

00:03:37:22 – 00:04:05:15
Alec Hogg: You try and eliminate the spikes in share prices up or down. And we’ve been doing that in our web-trader portfolio now for nearly ten years and it really has worked out for us where in certain instances you can kick yourself because when you buy in month two and month three the share price has gone up a lot and I know we had that with Nvidia, for instance, but in other instances when it goes down, you win on that side as well.

00:04:05:15 – 00:04:28:12
Alec Hogg: So a very sensible approach trying not to pick a particular day. Let’s go into the presentation for the month of March and it really has been, as we mentioned earlier, a month to remember for many sectors of the market but not least the gold bulls.

00:04:28:14 – 00:04:52:22
David Bacher: Yeah, I mean gold is up 10% since the start of the year. That’s roughly on par with the S&P 500. So eventually those gold bears are bulls. Have you got something to smile about? And I think you have to ask what drove that gold rally? I think there’s a number of reasons: the prospect of monetary policy easing by major central banks is certainly one of the reasons.

00:04:52:22 – 00:05:08:18
David Bacher: And there are elevated tensions in the Middle East and Ukraine. But I think the strongest reason is probably central banks, particularly China, starting to buy gold and increase their reserves. I think that’s probably the main catalyst behind the surge in the gold price.

00:05:08:20 – 00:05:22:01
Alec Hogg: And younger people doing even better because they’re not buying the old man’s investment or hedge against inflation. They’re being in Bitcoin and boy, that’s had a particularly good month. But overall equities haven’t done badly.

00:05:22:03 – 00:05:41:13
David Bacher: Yeah, it was nice for one month, at least to see South Africa on a dollar basis outperforming. Even that was slightly the rest of the markets. But given what’s happened over the last year, we’ll take. Its pretty much a broad-based rally across the globe with most markets ending up positive.

00:05:41:15 – 00:06:04:18
Alec Hogg: South Africa helped no doubt by the resource shares, in particular gold shares. But when you look back over a period of time at the asset class returns, it’s quite interesting to see that South African equities now on a five-year basis haven’t done that badly, not as well as global equities, but certainly outperformed bonds.

00:06:04:19 – 00:06:47:15
David Bacher: Correct. Over the longer term, you hope that equities outperform bonds, given it’s a lot more volatile and the riskier assets are investors expect to get compensated for that. But if you look at that one-year number, global equities are up 34% and South African equities are up one and a half percent. So that’s a major dispersion of returns, and you know, the rand only depreciated 6%, so the majority of that underperformance is actually the equity market, unfortunately, which is being up against that in terms of a depressed economy and, as you said, a resource sector that has been under pressure.

00:06:47:17 – 00:07:03:09
Alec Hogg: Also the concerns about the election or uncertainty rather about the elections, it’s still binary, isn’t it, David? If the election goes one way, we could see this market in South Africa rocketing. If it goes the other way, it’s probably fully discounted anyway.

00:07:03:11 – 00:07:34:12
David Bacher: Correct? Yes. I think the market’s been very, very quiet. I read an article the other day that 74% of South African fund managers think our bond market and our equity market are undervalued. So, you know, locals are buying and believe in the story, then obviously the foreigners aren’t. So I think it’s a bit of a wait and see, before we get some big price movements and I think you will get price movements one way or the other after the election.

00:07:34:14 – 00:08:08:00
Alec Hogg: Well, we’ve got quite a good news story for South Africa that we’re going to be giving to our community in London with the event that we’re holding, a conference, a one-day conference that we’re holding there. And on the 15th of May, be interesting to see if many of the asset managers come along and actually have any interest in South Africa, because it has to be now at a point where if you’re looking for an outlier globally, it surely has to be giving you some very good perspective or opportunities.

00:08:08:00 – 00:08:22:05
Alec Hogg: But the big play, I guess, has been China V India, hasn’t it, where a lot of fund managers have been going short China, long India. And that strategy for the last four years has certainly worked out.

00:08:22:06 – 00:08:52:23
David Bacher: It’s been an amazing rise of India relative to China. If you look at the three-year returns, China is down 18% per annum and the Indian market is up almost 18%. So if you invested a million rands, you know your one asset in India would be worth almost 1.5 million rands while your Chinese assets would have halved.

00:08:53:01 – 00:09:15:19
David Bacher: So it’s a big dispersion of returns and you know, when people say they think emerging markets are a place to be, you know, if you go to the two biggest weightings, China and India, and you can see the dispersion of returns within that market, you know, it teaches you a lesson that you can’t really paint such a broad brush in investing.

00:09:15:21 – 00:09:36:13
David Bacher: You’ve got to be a little bit more specific these days. And now you’ve got India, which used to be 8% of the emerging markets index now being 18% and China being was 44% and four years later, you know, gone to 25%, I think your makeup of where you want to invest in emerging markets is very different from what it was a few years ago.

00:09:36:15 – 00:09:47:01
Alec Hogg: Just to correct that or clarify, if you’d put a million Rand into India, is it now worth one and a half million Rand, not, not obviously 150,000 Rand, I’m sorry.

00:09:47:01 – 00:09:59:00
David Bacher: Correct. One and a half million Rand over this four-year period of a three-year period. So if you compare an 18%, you know, up almost 50, 50% over that three-year period.

00:09:59:04 – 00:10:09:04
Alec Hogg: Whereas China is halved. Wow. That really does tell you the story. And then cocoa prices, that was something that was quite big in the month of March. What goes on there?

00:10:09:09 – 00:10:43:22
David Bacher: You know, it’s not a commodity that you generally focus on, but I think it’s always nice to see how demand and supply dynamics can change things very, very quickly when you have almost a 250% increase in a commodity in a few months, it means that there are big things happening with that commodity and you know, you put climate, climate and crop diseases in West Africa is a reason it’s home to about 70% of the global cocoa production.

00:10:44:00 – 00:11:00:00
David Bacher: So when you have a hot tightened supply and you get the prices skyrocketing. And so, you know, I think if I was the Easter Bunny might have considered holding all the chocolates since last weekend.

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00:11:00:02 – 00:11:25:10
Alec Hogg: Yeah, there have been lots of stories about chocolates and chocoholics having a difficult time over the most recent period because of that coming back home, half hawk, half Governor Lesetja Kganyago Well, he has got a new five-year term, which is good news for South Africa. But what do you mean by when you call him half Hawke and I suppose half governor, not half of.

00:11:25:12 – 00:11:58:09
David Bacher: I think we’ve got a very responsible Reserve Bank governor and the terms hawkish and dovish actually originate from the behaviors of the birds and are used metaphorically to describe the attitudes towards monetary policy and interest rate policy. So when someone is described as hawkish, it means they favor a more aggressive stance in economic policy. A hawkish stance typically refers to higher interest rates to combat inflation, even at the risk of slowing economic growth.

00:11:58:09 – 00:12:27:07
David Bacher: And I think that describes a governor’s positioning. You know, while inflation forecasts have not changed materially, know, the tone of all the governor’s comments and rhetoric has certainly been biased towards keeping interest rates at current levels and protecting the rand and protecting what ultimately he believes is, you know, the lesser the bigger evil being inflation, which has a bigger long-term impact on the poor.

00:12:27:09 – 00:12:41:02
Alec Hogg: I’m glad you say protecting the rand. I don’t think too many people are going to believe you on that one, David. But it could be a lot worse. It could be a lot worse. And just generally having a look at the returns of the major asset classes.

00:12:41:04 – 00:13:07:19
David Bacher: Yeah, it certainly was a tale of two kind of halves. The resources sector was up almost 13%, so that carried out equity markets. But if you look at more the interest rates into those shares, the banks, the insurance companies, even our local bonds, that was under pressure and I think that’s got to do obviously with a depressed economy, but also concerns that interest rates are going to be kept higher for longer.

00:13:07:21 – 00:13:34:18
Alec Hogg: That’s funny. We’ve been following this every month and I felt like saying I keep thinking David is the right time to buy resources, not because resources are doing poorly and they’re at the bottom of the pile and they are cyclical. Well, they’ve had a good month in the month of March, but is it too late to get on board that wagon, given that they’re the worst-performing asset class over the last year, down by 11% is the winner buying property at about 20?

00:13:34:20 – 00:14:04:06
David Bacher: Yeah, that’s a hard one to call. It will obviously be driven largely by underlying commodity prices, potentially the impact of a China rebound as well. So I suppose some people might argue if you’re bullish China, you should be bullish South African shares and resources. So there is an interplay there. Now it’s hard to make calls on one factor and one driver of a commodity.

00:14:04:06 – 00:14:22:05
David Bacher: And even if you do think that commodity prices are expensive or cheap, then you’ve got to say, well, which commodity prices are the gold shares in an unbelievable period. While platinum shares, with the exception of last month, you know, have gone completely the other way. So it really depends on which commodities and which resources.

00:14:22:06 – 00:14:28:02
Alec Hogg: And the worst performers are financial shares in the past month anyway.

00:14:28:04 – 00:14:57:18
David Bacher: You know, I think all four of those shares that we show. Standarb Bank, Absa, Bank of Discovery and Remgro came out with with poor results or trading statements absent. Standard Bank came in below expectations. Absa in particular, had an increase in provisions that were higher than the market expected. Remgro announced a big setback with its acquisition of Heineken and its operating performance.

00:14:57:20 – 00:15:10:13
David Bacher: And so discovery came up with poor results. So I think, you know, not directly interlinked, but the general theme is the South African economy. The consumer has been struggling.

00:15:10:15 – 00:15:21:18
Alec Hogg: And on the other hand, the resources share some of them or the highly marginal gold mine Harmony gold mine harmony. It’s not just one mine, many mines having it. Well, shooting the lights out.

00:15:21:20 – 00:15:45:09
David Bacher: Yeah, it’s just amazing how geared these shares are to the underlying commodity price. And there’s a lot of very good asset managers in South Africa who just can’t get their mind around buying gold because, as I said earlier, it’s driven by one factor, which is hard to ascertain. But if you don’t have those shares, when those shares run, you can look very sheepish and that’s what’s happened.

00:15:45:09 – 00:15:58:18
David Bacher: So you know, if you were an asset manager that holds gold shares over the last three months, you would be outperforming. But yeah, there’s many who hit unfortunately didn’t.

00:15:58:20 – 00:16:31:01
Alec Hogg: A little bit like Bitcoin as well, isn’t it? And and overall David interesting with the election coming up in that it must be just about 70 days’ time now are we looking at a time when if the downside in South African shares is so limited because they’ve fallen so far and you really could have upside if the electorate were to vote rationally, which they never do.

00:16:31:01 – 00:16:36:01
Alec Hogg: But anyway, perhaps this time does it not give you a bit of a one-way bet?

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00:16:36:01 – 00:17:01:01
David Bacher: Perhaps one way it’s a bit of a stretch. I mean, investing thing is always priced for risks and returns. So but I do agree with you. I think from the balance of probability, the payoff profile at Corion, we certainly are valuation-driven. And if you look at the risks and where these shares are trading at, I mean, Absa and Standard Bank you’re getting dividend yields of 9%.

00:17:01:01 – 00:17:14:04
David Bacher: And you can argue that, you know, the banking sector is under pressure and it’s a competition, all very valid points, but a dividend yield of 9%, given the backdrop, we think you’re compensated for that risk.

00:17:14:06 – 00:17:36:06
Alec Hogg: Yeah, those banking shares are really yielding incredible returns and the forecasts are for better years ahead. So it’s almost like if you were getting a 9% dividend yield, you would think that’s because they’re going to have a bad year to come. But actually, all of the forecasts sit in the details that I’ve been reading.

00:17:36:08 – 00:17:41:12
Alec Hogg: They’re suggesting that they’ll do even better this year or at least a double-digit profit growth.

00:17:41:13 – 00:18:14:14
David Bacher: And the capital adequacy and you know, the balance sheets are all very strong. So there are no concerns that we see in terms of, you know, solvency or banking crisis, etc. The capital base has never been stronger. So yeah, we see very similarly high, high dividend yields, sound banks, good management. You know, we think that should you buy probably all four of the big banks, you know and you have a five-year view you’ll be compensated.

00:18:14:16 – 00:18:28:05
Alec Hogg: So what do you do right now? Give us your Corion house view and the David Bacher view, which I hope are aligned. When you look at the investment markets after the first quarter of 2024, which was a very good one for investors.

00:18:28:07 – 00:18:51:18
David Bacher: I think it’s still we haven’t changed our thinking, shifting from the US large cap to other areas of the market. I think, you know, China is at a P of ten sorry, although South Africa is cheap. You could also say China’s cheap. So, you know, you’ve got to diversify between different markets. I in China’s obviously got its concerns and its risks.

00:18:51:18 – 00:19:21:21
David Bacher: But once again, that’s why the market we think is trading at a ten PE. So you’ve got more than enough compensation. So I think although equity markets are at all-time highs, you’re going to break that down and you got to realize that 70% of the equity markets are in the US, a large portion of that is the large caps that might reflect global indices are, but it doesn’t really reflect where we see opportunities and that’s pretty much in other markets.

00:19:21:23 – 00:19:26:10
Alec Hogg: David Bacher from Corion Capital. And I’m Alec Hogg from BizNews.com.

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