You're listening to Strictly Business Podcast with Lindsay Williams.
The JSC is consistently making new highs, the S&P 500 and the Nasdaq the same.
But when you look at these markets, are they showing the breadth that you might
have got, say, 15,
20 years ago and beyond?
With me is Hannes van der Berg,
head of SA Equity and co-head of multi-asset at 91 in Cape Town.
It seems as though there are...
Stock markets that are climbing the wall of worry, but not the whole stock market
is doing so, Hannes.
I haven't explained myself very well.
You can do better, I think.
Yeah, Lindsay, nice to talk to you again.
It's been a fascinating year.
Last year, everybody was talking about the Magnificent Seven and how strong the tech
stocks have been in the US.
And that conversation, more the artificial intelligence theme or dynamic and capital
or capex spending
that's happening in that sector.
Really reaching levels which some are describing as euphoric.
Incredible rally that we've seen.
And also in between we've had the Liberation Day events that played out.
But as things stand, the NASDAQ composite is up 17% for the year.
The same has played out in the South African market.
We haven't seen an as narrow a rally in the South African market in years.
Essentially the OSHA index, as you and I speak, are up roughly 30%.
But that is made up mainly from the resources index, which is Up year-to-date,
astonishing,
123%.
That makes up 30% of basic materials, makes up 30% of what we can define as cap,
SWIX,
or all-share index.
So that explains pretty much the whole index rally that we've seen, which as you
described it, it's been phenomenal.
The rest of the sectors, the bank sectors, up 5%, 6%.
You've also received a bit of a dividend.
The general retail sector is down 22% year to date.
So it's been a very unsort of characteristic move we've seen in the
South African market and also similarly, like I said,
on the offshore markets.
Is it the case then that there are bargains to be had on the JSC?
I mean, outside of the PGMs and outside of the gold shares and also other general
miners.
Can you have a look at the market now and say, if you didn't know it so well, you
would say, well,
why is that one down in a low interest rate environment?
And an environment that is hopefully going to encourage some growth.
And you look at the retailers and you look at the banks with their dividend yields
and you say, this has surely got to be a no-brainer.
It's an interesting conversation when I have this debate with John Pickard, who
manages equity on the value side here at 91.
John would very quickly highlight that our bond yields traded around about 11.5%, 12%
a few months ago.
Our RAND was closer to 19, 50 and 20.
enough Government of National Unity got formed, and a lot of things have happened
since then.
Our rent currently sits at $17.50-ish. Our bond yields have rallied all the way to
$9.25,
so 200 basis points.
And yet the stocks are trading at valuations the same, if not cheaper,
as some of them traded before the formation of the Government of National
Unity.
So you're right.
I mean, in the banking sector, there are stocks that are trading at six times
forward.
NetBank and APSA are forward PEs.
Standard Bank is on an eight-time forward PE.
If you go lower down, you'll find that some of our retailers, the likes of
Foschini are on a nine times forward, Truers on a seven times forward.
Mr.
Price is on a 12 times forward.
We previously couldn't trade at a 15 times forward PEU.
You're finding some of our life insurance companies that are trading at or below the
valuation metric we use there is called embedded value.
So it's a really interesting market dynamic where you're seeing stocks that
are trading very attractively.
And then what I would also add, and I'm going to try and keep it short, is our
reserve bank have tried to...
talking about targeting a 3% inflation target.
And that is providing a substantial, what I would define as valuation underpin to
our equity market because our bond
yields are going to rally lower and potentially drive a bit of a re-rating in
our market.
When you have a chat with Picard, are you on the opposite side of his arguments?
No, it's interesting.
John was very bullish on gold.
We still have a lot of gold.
He's taken profits on them.
We feel there's still further momentum.
him and And that's just different investment philosophies.
He saw value and then he felt the value became reasonable or in some cases a bit
extended.
Our investment philosophy is one where the earnings profile of the stock drives, in
our minds, the share price.
And with the aggressive rally we've seen in the gold price, currently at 4,100.
And put that in perspective, it was 2,000 in the global financial crisis.
So it's doubled since 2008.
That drives a strong upgrade earnings cycle for gold stocks as well as PGM
stocks, which we own and John doesn't.
But what John has interestingly done, because of the arguments we just discussed
from a valuation perspective,
he finds that these stocks are trading at unreasonable or unrealistic values.
And we share that view.
We also own quite a big chunk of our portfolio in the financial sector and the
banking sector.
30% of the fund are exposed to financials and 35% of the fund are exposed to basic
materials.
That explains two-thirds of the equity fund positioning.
So we share the view that there are some good opportunities in South Africa.
We agree with John on that side.
The obvious question here is when does growth start to come through?
Yes, indeed.
And growth is all to do with the government.
It's not to do with the South African Reserve Bank.
Somebody once said to me, he said, the government's job, though, is not to create
jobs themselves by saying, right,
we're going to fund this project and 10,000 people will work on it.
That's the job of the private sector to do something.
Create the environment, yes.
Let the private sector do the rest.
And that is what growth is all about.
And that's when I come back to the retail stocks.
They got such a huge boost.
from the government of national unity when it first formed and everyone was
optimistic.
So they were unrealistically pushed higher and now they've more or less come back to
where they should be, haven't they?
Well, we saw the same in Ramaphoria when that happened in 2017 and the foreigners
very
quickly reminded us post the formation of the government of national unity they're
not going to make the same mistake again.
They're talking about 2% GDP growth for two years in a row that they feel will
make them change their view
on South Africa.
So you're right.
The Ramaphoria rally and the post-information of the Governor of
National Unities, there were big sentiment changes and re-rating in stocks.
And then that has to be confirmed by earnings growth and GDP growth.
And these retailers, to your point, they tell us that it's incredibly difficult to
operate in this environment of 1% GDP growth because that's stall speed.
You don't find new jobs being created, new consumers joining the spending fray.
And also, these companies...
out Inside and outside the retail sector, you can go to any other financial or
manufacturing or industrial companies in Africa.
They will only spend if there's confidence and if there's a clear line of sight and
future for them to spend, create jobs and put infrastructure down.
And that's that certainty that we need.
Does it leave the markets very vulnerable?
Does it mean that if the PGMs and the gold stocks have a bad period,
then the JSE's All Share Index comes down and other things are dragged down with it,
even if they haven't participated?
in the rally, the same in the United States with the Magnificent Seven plus AI.
If something happens there, if somebody comes out and says, well, actually, you've
got to contribute a lot to the GDP of the country,
the US in particular, in order to justify these valuations, and down they come.
The whole market is then vulnerable.
The whole financial system is vulnerable, given the amount of money that's been put
into the stock market since Liberation Day.
So vulnerability.
Do you think that's something that you should be worrying about as a portfolio
manager?
Yeah, that's a very good sort of opening paragraph to what can be a very long and
lengthy debate, Lindsay.
I mean, we want to make money for our clients.
We need to get our sales up to deliver inflation-beating returns over the medium
and long term.
Markets are giving us that at this stage.
The beta and the returns that I spoke about earlier on is there.
And ironically, we are getting interest rate cuts in the U.S.
whilst markets are making all-time highs.
and people just struggle to square that.
So markets always climb this wall of worry.
We as fund managers try and make money, but we have to be very aware of what are
the risks out there.
And to sort of summarize the risks and try and keep it short, I think a very
consensus trade at this stage is to be long,
make medicine seven, to be underweight, the US dollar, weak dollars driving
stronger currencies in the emerging markets.
And the other trade that I think is getting sort of a lot of attention and
focus on is the gold trade and the PGM trade.
So those three are quite crowded trades and we have to ask ourselves what if what
if the dollar
starts to strengthen what if the china u.s state of
trade war escalates into year end what if the geopolitics rise or flare up again
somewhere and there's there's a bit of a curveball and i
think the big elephant in the room as well as the u.s consumer and is there a
potential labor market and a slowdown coming because that drives
70 of the u.s economy so there are lots of these things that we monitor on a monthly
and a daily basis and try and stay close to.
But for now and going into 2026, where we expect GDP growth,
global GDP growth to be higher than 2025, we've still got ourselves up to try and
make money for our clients.
Just in case, are you prepared with insurance?
I mean, are you allowed to in any of your portfolios, any of your strategies to put
some insurance in place?
We don't do derivatives.
We don't hedge across the portfolios.
But what we do try and do is you try and...
work that out in your portfolio construction.
I often call it the what-if scenario.
What if the rent starts to weaken because the dollar starts to strengthen?
How will the portfolio react?
What if the gold price turns around?
What will be the other areas where you can then have to focus on to make money?
And how do you balance that in your portfolio?
So we stress these top portfolios for what we call certain macro outcomes, commodity
price moves, interest rate moves, currency moves.
Also, if emerging markets or developed markets pull back, if bond yields suddenly
spike.
How will the portfolio react?
And we try and balance it.
And that's actually coming back to what we discussed earlier on.
The interesting part about what we're seeing in the market, we are long stocks
in the material sector, which has got a lot of momentum behind them,
35% of the fund there.
And then we've also got stocks in the portfolio that have not done well.
There are, as Mr.
Bickhart highlighted, trading very attractively from a valuation perspective.
So if things start to drift and tilt in other directions, we think we've got other
areas that will then bail us out and help us out from a
risk management perspective.
Hannes, thank you very much for your insight.
Hannes van der Berg is Head of SA Equity and Co-Head of Multi-Asset at 91 in Cape
Town.
The views and opinions expressed in these podcasts are those of Lindsay Williams and
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