Winds of positive change blowing over markets

RYK VAN NIEKERK: Welcome to this Market Commentator podcast, the investment professional I’m talking to today is Anthea Gardner of Cartesian Capital. Anthea, welcome to the show, we are seeing winds of positive change blowing over markets, the JSE jumped nearly 4% on Thursday and its really being linked to a positive investor mood following the election of Cyril Ramaphosa as the new president of South Africa, what do you think of this?

ANTHEA GARDNER: I think it’s wonderful, it’s probably my job to say to you we have got the budget coming, we’ve got a potential Moody’s downgrade hanging over our heads but I must say that I do feel like this positive mood is warranted. I think one of the things that has been holding our market back is really just the negativity and the uncertainty around the politics. In the last three years we haven’t really kept up with global markets, we really have lagged and so it’s been a shame but at least now there is positivity coming through. I think we all know that there are good value companies in South Africa that didn’t perform just because we were nervous about what was going to happen, if we just think about the Mining Charter it’s probably the big standout one. I guess the question now is can we catch up?

My biggest worry or the thing that keeps me awake right now is where we are right now in the global commodities cycle because I think we are closer to the downturn than we are to the uptick. Let’s assume that everything goes through cycles, you asked about global growth but I would say for South Africa now to fully take advantage of this commodity rally we’ve had we’re going to have to hunker down and get on with it and not with just that. I don’t know if we can play catch up for sure but there are still very good value stocks or more certainty than anything else. 

RYK VAN NIEKERK: So, what you’re saying is we hit rock bottom in investor confidence under President Jacob Zuma and just his replacement has reignited confidence. If you look at our performance last year specifically we saw all the internationally-exposed stocks performing really well and especially Naspers, which moved the market up significantly. Do you think we can see a broader positive performance among the small- and mid-cap stocks this year just because of a new president?

ANTHEA GARDNER: I’m always nervous of small- and mid-cap stocks just because of the volatility and you would have seen on Thursday, when the market rallied, the small- and mid-caps rallied particularly hard because of the liquidity and if anything turns they turn equally hard down, so they have this very strong excess, if you like, correlation.

I would say yes, we can see I’m more inclined to say the local stocks rally, so the banks and the retailers and just logically, not even fundamentally analysing the share. I think if you are a businessman in South Africa and you weren’t sure about the country or if you were a foreign investor and you weren’t sure about how things were going to go and you weren’t sure about politics and what the next big move was going to be then it does detract or does stop you from investing. So suddenly now you have got a new president who has come in, who everyone really believes can wield the power that he has. He has already pulled out his sword at Eskom and so we can hope that that will continue. Sure, he’s got a lot of fixing to do, it’s an incredible task ahead of him but I think just by having people believe that the country will turn around and that there won’t be these crazy surprises and that maybe corruption will be kind of tempered, I don’t think it will ever come to a halt, they want to invest in local companies again and that even the consumer will feel positive again. The euphoria we are feeling this week surely has to somehow filter into the consumer and the consumer going out to spend again, I can only hope that they will manage their indebtedness because that is obviously a big issue. But yes, I think the euphoria is well placed actually.

Investor confidence returning

RYK VAN NIEKERK: But it’s not only on the JSE, we also saw the rand strengthen against the dollar specifically, although there was a bit of dollar weakness, but also against the pound and the euro. I’m looking at the capital markets, the R186, currently at 8.15% and in December, just before Ramaphosa’s election it was 9.4%, so maybe that is the biggest indicator of investor confidence returning.

ANTHEA GARDNER: Sure, we do have this interest rate disparity in the market at the moment, where the US is looking to raise and we are looking to cut, and that is a little bit of a worry because money will flow to where the highest yields are, there’s no doubt about that. That’s a good sign, I guess, for us that the yields have come in a bit and that sure, it feels like the foreign money is going into the bonds and local money… or even the equity funds, in fact, I think there was a lot of ETF buying. So the question you are asking me is, is it sustainable, it’s a tough one to call but I do think we should see the equity market continue to be strong this year, especially the local shares.

RYK VAN NIEKERK: Obviously they are not as expensive as some of the international counters, despite the correction we have seen in the past few weeks.

ANTHEA GARDNER: I know, we’ve seen one of the big counters and that’s the banks, which have been relatively cheap. I remember looking at Barclays a couple of months ago and it was on a 7% dividend yield and on a 7% forward price-earnings ratio, where in the world do you get an excellent bank for so cheap. So, you’ve seen when the confidence comes back how investors are running to the cheap shares. I think the PEs will come in a bit, they will normalise again and especially the banks, now that I’m talking about the banks if they can continue to print these mid-teen and in some cases, like FirstRand, low 20s on equity I think the support for our local market will be there.

RYK VAN NIEKERK: Let’s look at your equity fund, top shareholding in Naspers, that’s not surprising, many fund managers love the stock and it’s been very kind to many portfolios in recent years, what is your current perspective on Naspers? 

ANTHEA GARDNER: I’m a little bit confused as to why Naspers has come off so much and I know one of the big banks wrote a report that was seemingly negative and then retracted it, well, the analyst didn’t say I’m retracting what I said that was negative about the share but there’s still value in the share. I thought yes, we all knew that all along, so what I’m trying to say is what concerns me is why the share is trading at such a big discount because at R3 000/share, where it was trading a couple of days ago, it’s on a 45% discount to the underlying holdings. I understand that MultiChoice is probably going through a tough time and we do have concerns around Naspers’ holding in Tencent, and there’s always this question around do we or don’t we really understand what Naspers is doing. By sheer very simple mathematics if you add up all the little bits underlying in Naspers it should be trading well above R4 000/share. So, I’m going to hold onto it a bit, it does worry me that it’s such a heavy weight, particularly in the index and quite similarly in my portfolio because even though we’d like to think we are not benchmark huggers, the point is we kind of have to hold it and if the market rallies because of Naspers and I’m not holding it then I’m underperforming just by a few basis points but hugely by percentage points. So, it’s a very difficult one to decide what level you want to be in and to be honest I tend to trade it quite a bit just because of that.

RYK VAN NIEKERK: But it hasn’t performed that poorly, over the last 30 days it dropped about 6% but it’s up over 90 days nearly 7%, over six months nearly 20%. I think the worrying factor for me is the discount, why do we see a discount of up to 40%. Saxo Bank at the beginning of the year they make these outrageous forecasts, one of them, by the way, was that South Africa will experience a renaissance and that the rand could strengthen significantly, so they are definitely in play on that one. One of their other outrageous predictions was that Tencent will become the biggest company in the world and that is a very, very bullish view on Tencent but yet you see one of the major shareholders trading at a 40% discount.

ANTHEA GARDNER: I think it’s definitely the nervousness around South African investors. South Africa is such a small market and even though Naspers is such a big share, as a foreigner do you really want to be buying a huge stake in Naspers. There are so many reasons that it trades at a discount, I think probably the fact that it’s Naspers and it’s based in South Africa is one of them but it is a bit of a concern about why the discount just won’t narrow. It’s become quite apparent why they won’t unbundle the Tencent stake out of Naspers and it’s got to do with how it’s held….

RYK VAN NIEKERK: The ownership structure.

ANTHEA GARDNER: Exactly, so now that we all understand that is the question, then are we nervous that the Chinese government is suddenly going to change their mind and do away with the structure? I don’t think so.

Holdings in the Cartesian portfolio

RYK VAN NIEKERK: It takes a brave person to bet against Naspers, it has shown over the last 20 years that it has been a phenomenal success. Let’s look at your other holdings, AVI, FirstRand and Bidcorp, industrials and obviously FirstRand in financial services space but South Africa-focused, you are bullish on those following our previous discussion.

ANTHEA GARDNER: I am absolutely bullish on those just simply because they’ve been trading at huge discounts and I believe that things will turn and when they do it will be good for the economy. The rand, it’s really great for a change to see a strong rand and a strong market, we’re always talking about how the South African market is so rand hedged and obviously if we cut interest rates and the US raises interest rates you’re looking at a weaker rand, in which case it’s going to have an immediate negative impact on the shares, so I’m going to watch that. I certainly think there will be speed bumps but medium to longer term, yes, I am very bullish on South African shares at the moment and, of course, there are some that are particularly company specific like Comair, for example, it’s not so much the great South African story because nobody likes to hold airline shares when the oil price is . 

RYK VAN NIEKERK: Comair seems to be an overweight share in your portfolio.

ANTHEA GARDNER: Yes, more so today because it’s had such a good rally but the story there really is about the company, it’s about the management of the company, how they are growing the business, how they’ve diversified away from simply airlines, they have vertically integrated, so they’ve bought the food business and that alone will save tens of millions of rands every year. Then they are also less reliant on the oil price than most airline companies are. Then, of course, we’ve got the SAA court case hanging over their head, which I am fairly confident – and I sound like Erik Venter at the moment – that they will win. So, I don’t think that’s at all priced into the share where it is today. 

RYK VAN NIEKERK: Just lastly, the rand a year ago, after some of the cabinet reshuffles, the rand really plummeted to around R15/US$, there was a belief that we will never see a stronger rand, people took a lot of money out of South Africa at inflated levels, north of R14, even when it strengthened to below R14 people thought it was very strong and took money out. Now suddenly we are approaching R11.50 and many people are going long. It’s just such a volatile currency and you don’t need to include the rand as a factor really in investment planning.

ANTHEA GARDNER: Exactly, Ryk, I think the last sentence is exactly right, when you’re planning your investments the most important thing to understand is where your assets and your liabilities sit. If you have liabilities in South Africa then your assets or your earning power must sit here as well. Risking that is a big thing, you are absolutely right when the rand goes to 15 or 16 then the phone rings non-stop and everybody wants to take money offshore but when the rand is at 11.50 nobody thinks about doing it.

I don’t know where the rand is going to go, I honestly have no idea and so I am making my investments based on the companies and company-specific financials and what they’re doing, rather than based on where I think the rand is going to go. Obviously, it does almost move in tandem, if I think we’re going to have a stronger rand then obviously the consumer is going to do well, the economy is going to do well to a point, of course, because a rand that’s too strong doesn’t help us at all and then you want to be in the local banks, and if you think it’s going to go weaker…But to try and guess is near impossible for me.

RYK VAN NIEKERK: Thank you for coming into the studio, Anthea, and hopefully we’ll have another very good year for markets and for the right reasons because of economic performances.

ANTHEA GARDNER: Thanks, Ryk, holding thumbs.

RYK VAN NIEKERK: That was Anthea Gardner of Cartesian Capital.

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