Corion’s Bacher on September surge: SA investments thrive as global markets recover
In this interview with David Bacher, the Chief Investment Officer of Corion Capital discussed the impressive performance of South African investments in September. Highlighting strong gains in equities and bonds, Bacher attributed much of this success to a recovery in the Chinese market following significant stimulus measures. He expressed concerns about the Reserve Bank of South Africa's decision to cut interest rates by only 25 basis points, suggesting it missed an opportunity for greater economic stimulus. Bacher also addressed ongoing challenges, such as Eskom's potential price hikes, while emphasising that many companies are working to become more self-sufficient. Looking ahead, he forecasted a period of volatility due to geopolitical tensions, particularly in the Middle East, but maintained a positive outlook for South African assets, favouring financials and domestic-focused stocks as the market continues to recover. Bacher spoke to BizNews editor Alec Hogg.
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Highlights from the interview
In a recent interview, Alec Hogg spoke with David Bacher, Chief Investment Officer of Corion Capital, about the remarkable performance of South African investments in September. Bacher noted that South African equities and bonds experienced significant gains, driven in part by a recovery in the Chinese market following stimulus measures. He highlighted the impressive returns of companies like Naspers and Implats, which saw substantial increases due to favourable market conditions.
Discussing valuations, Bacher explained the importance of price-to-earnings (P/E) ratios, indicating that the current P/E for the U.S. market stands at 21, suggesting lower expected returns compared to historical averages. He expressed concerns about the Reserve Bank of South Africa's decision to cut interest rates by only 25 basis points, arguing it missed an opportunity to spur economic growth amid persistent challenges like high unemployment and stagnant growth.
Bacher acknowledged the positive impact of reduced load shedding in South Africa but cautioned against potential energy price hikes from Eskom. He emphasized that many companies are becoming more self-sufficient to mitigate dependence on Eskom.
Looking ahead, Bacher anticipated volatility due to geopolitical tensions, particularly in the Middle East. Despite recent market rallies, he maintained a bullish outlook on South African assets, favouring financials and domestic-focused stocks, suggesting that the market's upward momentum might just be beginning.
Edited transcript of the interview
Alec Hogg (00:09.518)
In one of my newsletters in the past few weeks, I mentioned that it was a stonking September for South African investors. And my goodness, that is something that David Bacher, the Chief Investment Officer of Corion Capital, will be taking us through. Looking back on the month, it was.
Alec Hogg (00:32.204)
Nice word there, David. Stonking. It's not used too often here in South Africa, but of course, the British use it often. It does, though, tell us about a month that was absolutely fantastic for investors.
David Bacher (00:48.822)
It certainly was. And if you just look at it from a South African investor's perspective, where the majority of our savings must be invested—I'm talking about retirement fund savings in South African assets—you had a very strong equity market, a very strong bond market, and a very strong rand. So it was a trifecta of things that you need to get right to see a big, healthy return in your valuation statement. It was a month with certainly a lot of glee.
Alec Hogg (01:18.412)
Well, we've got the presentation up on screen now, and let's kick off with the comparison: South Africa versus other major markets around the world.
David Bacher (01:30.562)
Yes, so as I said, South Africa, in dollar terms, was up over 7% compared to the world equity market, which was up 2.3%, and emerging markets were up 6.7%. So in dollar terms, South Africa was extremely strong. And then our currency appreciated. If you add back the currency, we're looking at returns of greater than 10%. It was a very strong month for South Africa.
Alec Hogg (01:57.62)
Extraordinary! This was also helped along, no doubt, by Naspers and Prosus having such a big exposure to the Chinese market, which suddenly got off its knees and started moving in the right direction.
David Bacher (02:12.238)
Absolutely. I mean, China rolled out a series of economic stimulus measures that included interest rate cuts, enhancements to liquidity, and adjustments to their mortgage policies. These interventions sparked an extraordinary almost 25% surge in the Chinese stock market in just six days—a truly remarkable response.
The magnitude of this market rally and the positioning of asset management houses is going to be the key driver of which managers performed well and which managers underperformed. Just a note of caution: while the immediate impact on asset prices was significant, it does take a while for the stimulus to impact the broader economy. So let's just see what the actual impact will be.
But from a valuation perspective, I remember coming onto the show about two or three months ago, saying it was going to be a big call for asset managers in terms of their positions in China. The market had been depressed for a significant period of time. That was one of the reasons why I spent two weeks in May visiting the Chinese market firsthand as much as I could. From a Corian perspective, the valuations were very low, which is why we are overweight and remain overweight.
Alec Hogg (03:37.678)
It's certainly paid for your Chinese trip.
David Bacher (03:41.366)
It certainly has. I'm going to tell my fellow shareholders that, Alec. So yeah, it was nice to get that right. But there's still a long way to go. We have been overweight probably a little bit too early, as we tend to do with most things. But it was nice to see our positioning pay off.
Alec Hogg (04:01.627)
Justified and then some. And the gold price, with the ructions in the Middle East again over the last couple of days, has reached another new high. There are some who say that it's gone up too much. What's your thinking?
David Bacher (04:20.686)
It's a hard asset class to actually get a hold of. It doesn't provide a yield. It doesn't generate earnings. It's really regarded as a safe-haven asset and is dependent on what central banks do. However, I do think it's a good diversifier in a portfolio. You need assets that can perform well in case things don't go as planned, in case your investment thesis doesn't work out, or in case there is political risk. Gold is certainly one of those. So it's not a bad asset to hold just from a portfolio construction perspective. But when it comes to predicting where the gold price is going tomorrow or next year, I don't think we have a strong competitive advantage at Corian.
Alec Hogg (05:10.99)
$2,600 an ounce—gold has doubled in the last six years. It's been a good return, and I guess even better in South African rands. When you look ahead, though, one talks about price-to-earnings ratios, which is a crucial part of your discussions as investment professionals. Just explain what a price-to-earnings ratio is and where you're seeing it go or where it stands historically.
David Bacher (05:44.846)
So the price-to-earnings ratio is one of the metrics that a lot of investors look at. It's probably the most popular, and it really shows the price you're paying for an asset relative to the earnings that that asset or company is expected to provide you. So if a price-to-earnings ratio is 10, it means that if things stay the same, it will take you 10 years to get back your money because you're paying for an asset of 100, for example, and it's earning, let's say, 10 rand. A higher price-to-earnings ratio generally means the asset class is more expensive. You obviously have to take other factors, like growth, into account. But keeping things very simple, you want to buy assets that are cheap, you want to buy companies that are undervalued, and you generally want to look for a low price-to-earnings ratio.
Alec Hogg (06:34.54)
So a price-to-earnings ratio of, say, 16 would mean 16 times last year's earnings to get your money back, while a price-to-earnings ratio of six would mean only six times. It's a nice gauge. And where are we right now, David?
David Bacher (06:58.84)
Correct. It is a nice gauge. Obviously, I've simplified it a lot, and it doesn't take into account the growth of companies, which is a very important factor. But it's a good way to work out where you are relative to history and how markets have responded to buying the asset at a certain P.E. What we show in this graph is that, looking at the S&P, the median price-to-earnings ratio throughout history is about 16 times. So if you had averaged buying at a 16 P.E. ratio, over the next five years, if history were to repeat itself, you would have received an average return of 9% per annum. Currently, we are at a P.E. of 21 times. If you apply the same correlations and regressions—which I won't get too technical about—you'd see that, on average, the following five years would yield a return of only 3%. So what we are saying to investors is to be careful of valuations in the U.S. market. We are specifically highlighting the U.S. market because if history were to repeat itself, your next five years wouldn't yield the same returns. The S&P in the U.S. market comprises a large part of global equities and where investors are focused, and that's why we're highlighting it.
Alec Hogg (08:25.218)
You can only suggest so much using data. If I understand correctly, it means that if you invest today at the current price levels, if the last five years repeated themselves, you'd only make a 3% annual return in the United States. That's not really eye-watering by anyone's standards. Moving on to South Africa and the quarter percent rate cut that we saw in interest rates—what impact do you think that will have on the country?
David Bacher (09:05.326)
Well, firstly, I want to express our deep respect for the governor of the Reserve Bank. His commitment to maintaining the bank's independence has really given him the credibility and recognition he deserves. However, we at Corian looked at last month and believe it was a missed opportunity. We thought the Reserve Bank could have been more decisive in cutting interest rates.
In our view, the decision to only cut by 25 basis points instead of 50 was not the correct decision and certainly not what we think the country needs at this point in time.
Alec Hogg (09:48.11)
Some economists are maintaining that it started in the U.S., where they were a month or two late. They should have cut interest rates by 25 basis points two months ago, and then they would have only had to do a quarter percent this time around. They didn't do it last time, so they did 50 basis points this time. South Africa, based on what you've just said, maybe missed a trick there as well and could have done something similar to what the U.S. did.
David Bacher (10:17.582)
Correct. The U.S. announced the interest rate cut a day before we had to announce ours, so we had insight into their decision. When you look at our key metrics in South Africa—terrible unemployment, stagnant economic growth, and our inflation really well below target, along with our currency performing well—everything was pointing to the fact that this was the time to be brave, to kickstart things in South Africa, and to promote sentiment and growth, etc. While we didn't expect the Reserve Bank to go for a 50 basis point cut, we certainly were hoping for it and believed it was the right decision.
Alec Hogg (11:01.304)
Looking at the performance of the South African market overall, do you have any insights for us on what occurred in September?
David Bacher (11:13.158)
It was just green across the board—properties, industrials, financials, resources, bonds, equities. It's very rare to see everything running at the same time, particularly in South Africa, where often resource shares and financial shares are on opposite sides of the coin. Interest rates coming down, good political sentiment, and improving confidence led to a great outcome across the board.
Alec Hogg (11:44.654)
And as for the individual stocks, who were the standout performers?
David Bacher (11:50.67)
The biggest outperformer was Implats, which rose by 25%, a massive increase for such a large company. However, just a reminder that the share was significantly down in August, so you have to take that into account. It seemed to bounce back as a result of higher PGM prices, especially platinum. As you mentioned earlier, China had a spectacular run, and Naspers and Prosus were positively impacted by that, rising jointly by about 14%. Also worth mentioning is BHP, which was up almost 13% due to the improved stimulus from China and rising iron prices. Big shares posted some significant returns.
Alec Hogg (12:52.014)
In the resources sector, as you mentioned. But platinum has been under pressure for quite some time, so it was just a matter of time before it turned around. On the other hand, not everyone had a good month. We had the results from Sasol. I thought they were quite good, but it doesn't seem as though the stock reacted well enough. I guess the oil price coming under pressure—although in the last 24 hours, as we talk now in early October, it's bouncing back again very rapidly. Sasol had a pretty difficult month. It wasn't the only one.
David Bacher (13:31.522)
Yeah, Sasol, Aspen, and AngloGold were the three worst performers. Pretty much all of them released results that fell short of market expectations, with some write-downs. Sasol faced challenges due to the poor oil price and tough economic conditions. I think Aspen was probably the worst performer, declining by 17% pretty much right after they released results that fell short of the guidance they had given the market. Headline earnings per share fell by 3%. So, they were particularly under pressure during September.
Alec Hogg (14:16.18)
Take us through your thoughts on the whole Eskom saga. There was a lot of celebration at the business conference when the chairman of Eskom explained that load shedding is probably behind us now. He mentioned that his next task would be to bring costs under control. Well, we aren't seeing that on the horizon at the moment, as Eskom is asking for a very large increase in its pricing.
David Bacher (14:44.91)
I mean, they proposed what we've been reading—a 44% increase. I don't think they'll get that, but that's what they're proposing. So, you know, that has a significant impact in terms of costs of goods and costs to the consumer, etc. It's something we need to be aware of. While we've had some good news over the last few months, there are always things that worry investors. There always will be. I think the increase in energy prices in South Africa remains a concern. That said, let's be grateful for the fact that we have many days without load shedding. So at least from that perspective, I think we can all be very happy.
Alec Hogg (15:29.742)
I suppose the problem here, David, is that Eskom supplies so much of South Africa's electricity to the industrial areas and mines. If the economy is burdened with another huge increase, it's going to make things even more difficult for those companies to produce profitably. That could lead to more layoffs and less money coming back into the economy. It really is a dilemma. But on the other hand, we now know that there is enough electricity to go around, and we don't have to do without for extended periods each day.
David Bacher (16:16.014)
Correct, 100%. I think we also need to note that it's been a number of years of Eskom facing difficulties. A lot of companies and corporates have invested significantly in becoming more self-sufficient, which comes at a cost, and that's not ideal. However, many companies have started to position themselves to be less dependent on Eskom. The impact going forward might be less reliant, but having said that, it's still very much a part of a company's cost base. So it's something we need to monitor closely.
Alec Hogg (17:00.18)
When you look ahead from Corian's perspective, after such an incredibly strong month in September, how do you see things?
Alec Hogg (17:19.118)
David, when you look ahead, how are you seeing things for the next month?
David Bacher (17:27.534)
It's definitely going to be a month of volatility, and I think what's happening in the Middle East is going to be the big decider of asset class returns. No one likes volatility, war, or uncertainty—especially investors. So it's hard to predict how things will pan out for the month due to these events. Our investment premise at Corian is always based on the long term. We still think South African assets are cheap. We are concerned about the U.S. market in terms of its valuations, and we believe China, even after its 25% increase, still has room for growth given how much it underperformed for a decade. In short, we are underweight in the U.S. and largely overweight elsewhere, thinking you can find value in the world.
Alec Hogg (18:24.843)
And in South Africa in particular?
David Bacher (18:29.12)
I mean, the markets have been up about 30% over the last few months—that's a significant rally—but you still have banking shares that are giving you dividend yields of 7% to 8%. Historically, that is extremely cheap. So we'll be favoring financials, insurance companies, and some SA Inc.-sensitive stocks. Although these stocks have rallied hard over the last 12 months, you have to look forward. We believe these companies are still priced at attractive valuations and have room to run.
Alec Hogg (19:13.112)
It's almost as though they've come so far down that now they're lifting their heads off the troughs. This doesn't mean it's over; it could just be the start.
David Bacher (19:25.09)
Correct. You never want to buy too early and then wait for the moment, which we've been waiting for at Corian, only to trim in the first lap. We think this is the first lap of potentially many more to come. We are positively positioned for South African assets. Our hope is that the party has started, and there's still lots to enjoy. We're not leaving the party too soon.
Alec Hogg (19:58.862)
Good luck.
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