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The Asset Class: John Biccard · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  A year ago, it was fairly easy to predict that the year 2025 might be an interesting
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  one.
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  There was a new and unpredictable resident coming to the White House.
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  Global economies and central banks were behaving differently and creating low
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  pressure here and high pressure there.
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  And of course, we had a well-established bull market in gold and of course, again,
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  AI stocks.
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  And most importantly, in my opinion, A nascent bear market in the US dollar.
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  But what promised to be an interesting year has turned out to be a remarkable
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  one.
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  And look no further than the, for example, the SA bond market, to justify that
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  description.
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  Looking decidedly shaky at the end of the first quarter, yields have fallen sharply
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  for all the right reasons,
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  and a full-blown bond bull market has ensued.
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  As for equities, the JSC has been an outperformer, with SA Inc.
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  stocks joining the party.
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  But given the bond's ebullience, have equities lagged a little bit?
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  Interesting question, and it's going to be answered from an icy Manhattan by 91 Value
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  Fund manager,
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  John Bickard.
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  And may I be the first to wish you a Merry Christmas, John, and a Happy New Year.
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  And I think you're looking forward to 2026.
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  I get the feeling.
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  Yes, I think your introduction sums it up well,
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  that there's been a massive dislocation between...
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  in SA between equities and bonds and if you just take a step back and look in the
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  value fund over
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  the last 25 years the money we've made is really been like four or five
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  what we'd call big fat pictures when when
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  there's a dislocation in the market and I go back over that 25 years and
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  25 years ago we put all our money in SA Inc at the beginning of the 2000s that
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  eventually worked out really well
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  we avoided resources in 2008 we put money into platinum sort of
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  2017 to 2020 eventually after waiting four or five years that really worked well so
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  all the money we've made in that period
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  is by betting big at the time when there's these dislocations and i think this is
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  where we
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  are right now between south african equities and bonds and i've i find it sort
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  of quite amusing because
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  I listen to...
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  commentators talking on the essay market and everyone now is bullish on bonds and
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  you know I mean where were these
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  people when the bonds were I mean they were 10% the 10-year at the beginning of
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  the year that I think the first quarter as you
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  mentioned they touched 11%
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  if I can interrupt you John yeah just before Liberation Day in anticipation of
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  Liberation Day and then a couple of days after the
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  so-called Liberation Day I think we went to something like eleven point one five
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  percent on the 10 year.
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  And now we're down at something like 8.3%.
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  It's been an extraordinary time.
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  Yes.
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  So, I mean, that is an enormous return.
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  I think the bond return for the year is sort of 25 in Rand.
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  But of that March high, you know, the number is probably closer to 40%.
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  So, you know, on a pretty low-risk asset, that is an enormous return.
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  So, you know, to be chasing the bond market at 8.30, you know,
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  I'm no bond expert and bonds probably are okay still.
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  But.
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  the real money has been made.
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  And the next big opportunity is in SA equity.
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  So, you know, just take another step back.
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  You know, evaluation of an equity is based,
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  the two key drivers on evaluation of equity is the current cash flows.
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  Well, there are three drivers.
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  The current cash flows, the long-term growth in the cash flows, and the discount
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  rate.
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  And I always think the discount rate is the most.
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  underappreciated part of a valuation of an equity because you know when people when
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  people talk about you should buy
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  this share or buy that share you know they talk about what the company's doing and
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  how it's going to grow and how it's going to be so
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  fantastic as they guess the future you don't often hear people say you should buy
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  an equity because the discount rate is low
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  and falling you know that's kind of boring because it's kind of
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  mathematical but the valuation of equity is as much driven
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  by the discount rate as the future cash flows.
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  And so you've had the discount rate fall from 10 or 11% to 8.5%.
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  You've had bonds go up
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  30%. That means an equity that was South African-Rand-based,
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  where there's South African-Rand cash flows, if it was valued at X on the
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  31st of December a year ago, it should be valued 50% higher, unless you...
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  expect lower cash flows from that equity.
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  Assuming that nothing has changed in the cash flows, which if anything, the cash
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  flows have probably got better because the SA economy has got better.
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  But let's just say the cash flows are the same.
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  A SA steady cash flow generating business should be up 50% over the last year.
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  And yet, there are many equities that are down in RAND terms and probably the
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  average SA
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  equity off the top of my head is probably up 10% and massively lagged the market.
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  So that is the dislocation.
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  Okay, a good dislocation as well.
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  So I'll get to where this leaves you at the moment, where you're positioned and
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  where you might be positioned over the next few
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  weeks and months.
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  But also let's look at fundamentals.
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  I mean, Operation Vulindlela, for example, Operation Phase One of that out of the
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  way, and it's been rather good.
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  Load shedding is a thing of the past, apparently.
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  Freight problems have been solved to a good degree.
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  There's more to come.
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  The interest rates are...
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  supposedly coming down even further.
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  Inflation is under control.
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  It's all set fair from a fundamental point of view, as well as the technical and
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  mathematical point of view that you've just well described, John.
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  Yeah, so I think those are all important points.
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  So what I've described is if South Africa was the same place as a year ago, you
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  know,
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  an equity should be up 40 or 50%.
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  But actually, the most interesting thing is actually South Africa is in a much
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  better place than it was a year ago.
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  And that's Just an added bonus that I actually think the change,
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  the most important change is the terms of trade, which is, you know, on the 31st of
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  December, if I'd come to you,
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  Lindsay, and said precious metals will be up 50 percent, 60 percent,
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  70 percent in RAND terms.
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  And the oil price will be down 15 percent in RAND terms.
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  And bond yields will be 200 basis points lower.
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  that are trade.
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  that we'd be running a trade surplus and that the current account,
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  the budget deficit would be reduced.
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  And I put all those things in front of you and said, this is what's going to happen
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  over 2025.
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  I think pretty much everyone would say, well, SA shares will be up 40% and they
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  haven't.
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  So why is that?
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  I think the first, you know, people will say it's because there's still problems in
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  South Africa,
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  but the pathetic truth is.
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  The main reason why SA equities have lagged is that fund managers in South
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  Africa went into
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  2025 very underweight platinum and gold shares.
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  And platinum and gold shares have given the entire return of the JSE this year and
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  basically have
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  gone to like 25% of the index between the two of them.
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  And SA fund managers have been underweight that.
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  So in order...
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  to buy more platinum and gold shares to reduce their underweight to keep their
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  jobs.
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  They've had to sell the SA Inc.
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  shares, and that's really what's happened.
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  So, you know, people are going, well, why haven't they responded?
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  And then people start to worry about maybe there's something I've missed.
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  Well, the principal reason they haven't is they have been used as a funder for fund
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  managers to reduce their underweight in precious metals, which makes no sense at
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  all because SA Inc.
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  is actually very cheap, as we've discussed, and it is actually a
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  beneficiary of precious metals.
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  So you're selling the cheap thing to buy the thing that's helping the cheap thing
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  that's gone up
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  200% in a year.
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  It just doesn't make sense.
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  But if you're lagging the index and you've got a half weight in platinum and gold and
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  your chief investment officer says,
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  what are you doing?
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  You narrow that underweight and you sell.
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  Okay, so what's the chief investment officer going to say at the beginning of
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  the new year?
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  We'll sit down and say, right, chaps, 2026.
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  We messed up a little bit in 2025.
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  We've got maybe another, according to this podcast with Bickard and Williams, we've
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  got another maybe 40, 50%
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  to go in SA Inc.
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  stocks or certain SA Incorporated stocks.
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  Anyway, do you think it's going to be a bull market?
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  And are you positioned accordingly?
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  So, yes, I do.
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  And I think...
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  To go back to what we said at the beginning, at the moment we are basically
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  more overweight SA Inc.
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  shares in the funds than we were prior to the election.
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  So the last time there was a real opportunity was just prior to the election
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  when everyone
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  was so negative about the outcome of the election and we basically were fully
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  loaded SA Inc.
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  shares and they rallied 40 or 50% after that.
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  We then sold them out and now we've bought back and we've actually bought more now.
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  So, excluding one big position we have in commodities,
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  which is African rainbow minerals, which we think is a very good way into platinum
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  and gold,
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  which is the biggest position in the fund.
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  Outside of that, everything else in the portfolio.
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  is in South African shares.
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  And we used to have quite a lot of banks.
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  Banks have actually been the better performing SA Inc.
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  I mean, I think they're still cheap,
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  but they've kind of led an underperforming pack and they've done okay.
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  So what we've done is sell our ABSA and we've rotated that money into the SA Inc.
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  shares that have lagged.
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  And so our biggest positions are Bitvest, which is a real...
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  It's always been a proxy for SA Inc.
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  and a popular stock for foreign shareholders, and that has massively
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  lagged.
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  And on 11 times earnings, we think it's just completely underpriced,
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  especially considering that they are big in logistics and they've got a lot of good
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  businesses in there.
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  Our second biggest holding is Woolworths, which has also lagged the retailers,
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  and we see concrete signs that that's turning around.
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  And then we've bought back into the hospital companies.
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  net care and life health care.
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  And if I say something about hospitals, hospitals are interesting because
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  hospitals are really a bond proxy in
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  equities.
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  There's not a lot of growth.
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  They grow patient days at 1% and they grow their top line at 5% or 6%.
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  And they're getting a bit of efficiency, so they're growing their earnings at 10%
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  to 15%.
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  But it's an annuity earning business just churning out rants.
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  It's almost like a bond.
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  but with some inflation characteristics.
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  And this is exactly the kind of stock you want.
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  So instead of going to buy SA Bond on 8.3%, as we said, you can go and buy
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  Life Healthcare or Netcare and their free cash flow yield.
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  In other words, a direct comparison to the 8.3% in the bond is probably more like
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  12%.
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  And it's growing.
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  And they have not rallied at all, really.
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  They are the worst performing because people are worried still about national
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  health and other things like that.
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  But they are just generating rent cash flows and are trading at a massive
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  discount considering where bond
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  deals are.
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  So those are the kind of interesting stocks.
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  And then we've got a lot of mid-cap shares.
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  So mid-caps, you know, banks have led because they're the most liquid.
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  And in the last few months, we've seen some foreign buying.
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  in SA equities and they've come first for the bank so they come for the liquid
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  shares first so that will be things like the banks and
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  then eventually the money trickles down to the mid caps and there's a whole raft of
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  mid caps that if you think
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  uh but vest and woolworths and the hospitals are cheap the mid caps are crazy
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  i mean
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  they you can buy any mid caps on and most
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  mid caps in south africa trade on three or four times cash flow which means they
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  trade on like 20%, 25%
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  free cash flow yields when the bond yield is 8%, which is...
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  So there we have names like Italtile, Tsogo Sun, Rainbow Chickens, Invicta,
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  City Lodge.
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  City Lodge is one we've just bought where things are getting a lot better and
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  basically it trades at a quarter of the
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  market value of its properties, which is quite interesting.
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  So you've bet big in the past and you bet big.
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  Again, and this is all very well, all the things I've said, all the things you've
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  said.
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  And again, going back to Operation Voulinclela, they say that by 2030,
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  South Africa's GDP will be 3% per annum,
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  suggesting that perhaps there's a four or five year bull market for SA Incorporated
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  stocks coming.
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  Any chance, as has happened in the past, any chance you might be wrong?
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  I mean, not you're going to be wrong, but the South African situation might
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  disappoint you.
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  So So obviously there's always a chance you can be wrong.
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  I guess I'd say the only, I mean, the valuation is the valuation.
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  The gap to bond yields is the gap to bond yields.
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  The improvement in SA is pretty widespread.
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  You know, it's not all one thing.
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  You know, we're not putting all our money on ESCOM.
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  As you say, it's Transnet and ESCOM.
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  And so it's a number of things are getting better.
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  So I guess probably the only wild card is, I guess, politics.
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  is, which by the way, always has the smallest effect on the stock market.
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  You know, politics is not as big as the discount rate or growth, but it is a
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  concern.
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  So I would say where we could be wrong is, you know,
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  a Zuma type problem with respect to the leadership of the country, which is always
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  a possibility.
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  I think it's unlikely, but that's probably the wild card where we could be wrong.
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  Okay, so politics is an outside chance of a wild card scuppering the very rosy
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  picture that
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  you've just painted.
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  John, thank you very much for your time.
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  A very exciting way to end 2025. John Bickard is Portfolio Manager,
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  Value Fund at 91.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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• 15:15
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