Latest / Strictly Business / The Asset Class: John Biccard

Transcript

The Asset Class: John Biccard · Strictly Business

• 0:00
  The value of investments can fall as well as rise and losses may be made.
• 0:04
  This is not a buy, sell or hold recommendation for any particular
• 0:09
  security.
• 0:11
  A year ago, it was fairly easy to predict that the year 2025 might be an interesting
• 0:16
  one.
• 0:18
  There was a new and unpredictable resident coming to the White House.
• 0:19
  Global economies and central banks were behaving differently and creating low
• 0:24
  pressure here and high pressure there.
• 0:26
  And of course, we had a well-established bull.
• 0:27
  market in gold and of course again ai stocks and most importantly in my opinion
• 0:34
  a nascent
• 0:36
  bear market in the u.s dollar but what promised to be an interesting year has
• 0:41
  turned out to be a remarkable
• 0:43
  one and look no further than the for example the sa bond market to justify that
• 0:48
  description looking decidedly shaky at
• 0:50
  the end of the first quarter yields have fallen sharply for all the right reasons
• 0:55
  and a full-blown bond bull market has
• 0:57
  ensued as for equities you
• 0:59
  The JSC has been an outperformer with SA Incorporated stocks joining the party.
• 1:03
  But given the bond's ebullience, have equities lagged a little bit?
• 1:07
  Interesting question, and it's going to be answered from an icy Manhattan by 91 Value
• 1:13
  Fund manager,
• 1:15
  John Bickard.
• 1:17
  And may I be the first to wish you a Merry Christmas, John, and a Happy New Year.
• 1:18
  And I think you're looking forward to 2026.
• 1:22
  I get the feeling.
• 1:24
  Yes, I think your introduction sums it up well,
• 1:27
  that there's been a massive dislocation in SA
• 1:35
  between equities and bonds.
• 1:36
  And if you just take a step back and look in the value fund over the last 25 years,
• 1:42
  the money we've made has really been like four or five what we'd call big fat
• 1:49
  pitches
• 1:51
  when there's a dislocation in the market.
• 1:52
  And I'll go back over that.
• 1:53
  25 years and 25 years ago we put all our money in SA Inc at the beginning of the
• 1:59
  2000s that eventually worked out really well.
• 2:02
  We avoided resources in 2008.
• 2:06
  We put money into Platinum sort of 2017 to 2020 eventually after waiting four or five
• 2:12
  years
• 2:13
  that really worked well.
• 2:13
  So all the money we've made in that period is by betting big at the time when there's
• 2:20
  these
• 2:22
  dislocations and I think this is where we are.
• 2:23
  right now between South African equities and bonds.
• 2:26
  And I find it sort of quite amusing because, you know,
• 2:30
  I listen to commentators talking on the SA market and everyone now is bullish on
• 2:36
  bonds.
• 2:37
  And, you know, I mean, where were these people when the bonds were, I mean, they
• 2:43
  were 10%,
• 2:45
  the 10-year at the beginning of the year, I think in the first quarter, as you
• 2:46
  mentioned.
• 2:47
  They touched 11%.
• 2:48
  If I can interrupt you, John, just before Liberation Day, in anticipation of
• 2:53
  Liberation Day,
• 2:55
  and then a couple of days after the so-called Liberation Day, I think we went
• 3:00
  to something like 11.15%
• 3:02
  on the 10-year, and now we're down at something like 8.3%.
• 3:05
  It's been an extraordinary time.
• 3:07
  Yes.
• 3:08
  So, I mean, that is an enormous return.
• 3:10
  I think the bond return for the year is sort of 25 in Rand, but off that March
• 3:16
  high.
• 3:18
  you know, the number's probably closer to 40%.
• 3:19
  So, you know, on a pretty low-risk asset, that is an enormous return.
• 3:24
  So, you know, to be chasing the bond market at 830, you know, I'm no bond
• 3:29
  expert,
• 3:31
  and bonds probably are okay still, but the real money's been made.
• 3:33
  And the big, the next big opportunity is in SA equity.
• 3:38
  So, you know, if, just take another step back, you know, evaluation of an equity is
• 3:44
  done,
• 3:45
  is based on...
• 3:46
  The two key drivers on evaluation of equity is the current cash flows.
• 3:51
  Well, there are three drivers.
• 3:52
  The current cash flows, the long-term growth in the cash flows, and the discount
• 3:56
  rate.
• 3:58
  And I always think the discount rate is the most underappreciated part of
• 4:03
  evaluation of an equity.
• 4:05
  Because when people talk about you should buy this share or buy that share, they
• 4:10
  talk about…
• 4:12
  what the company's doing and how it's going to grow and how it's going to be so
• 4:16
  fantastic as they guess the future.
• 4:18
  You don't often hear people say you should buy an equity because the discount rate is
• 4:21
  low and falling.
• 4:23
  You know, that's kind of boring because it's kind of mathematical.
• 4:24
  But the valuation of equity is as much driven by the discount rate as the future
• 4:31
  cash flows.
• 4:32
  And so you've had the discount rate fall from 10 or 11 percent to eight and a half.
• 4:37
  You've had bonds go up.
• 4:39
  30%, that means an equity that was South African rent-based,
• 4:46
  where there's South African rent cash flows, if it was valued at X on the
• 4:52
  31st of December a year ago, it should be valued 50% higher,
• 4:56
  unless you expect lower cash flows from that equity.
• 5:01
  Assuming that nothing has changed in the cash flows, which if anything, the cash
• 5:07
  flows have probably got better because the SA economy has got better.
• 5:09
  But let's just say the cash flows are the same.
• 5:11
  A SA steady cash flow generating business should be up 50% over the last year.
• 5:15
  And yet, there are many equities that are down in RAND terms.
• 5:20
  And probably the average SA equity off the top of my head is probably up 10% and
• 5:26
  massively lagged the market.
• 5:28
  So that is the dislocation.
• 5:28
  Okay, a good dislocation as well.
• 5:30
  So I'll get to where this leaves you at the moment, where you're positioned and
• 5:36
  where you might be positioned over the next few
• 5:38
  weeks and months.
• 5:40
  But also let's look at fundamentals.
• 5:42
  I mean, Operation Vulindlela, for example, Operation Phase One of that out of the
• 5:45
  way, and it's been rather good.
• 5:47
  Load shedding is a thing of the past, apparently.
• 5:48
  Freight problems have been solved to a good degree.
• 5:52
  There's more to come.
• 5:53
  The interest rates are...
• 5:55
  supposedly coming down even further.
• 5:57
  Inflation is under control.
• 6:00
  It's all set fair from a fundamental point of view, as well as the technical and
• 6:06
  mathematical point of view that you've just well described, John.
• 6:08
  Yeah, so I think those are all important points.
• 6:10
  So what I've described is if South Africa was the same place as a year ago, you
• 6:15
  know,
• 6:16
  an equity should be up 40 or 50%.
• 6:18
  But actually, the most interesting thing is actually South Africa is in a much
• 6:23
  better place than it was a year ago.
• 6:25
  And that's Just an added bonus that I actually think the change,
• 6:29
  the most important change is the terms of trade, which is, you know, on the 31st of
• 6:36
  December, if I'd come to you,
• 6:38
  Lindsay, and said precious metals will be up 50 percent, 60 percent,
• 6:41
  70 percent in RAND terms.
• 6:44
  And the oil price will be down 15 percent in RAND terms.
• 6:48
  And bond yields will be 200 basis points lower.
• 6:51
  that are trade.
• 6:53
  that we'd be running a trade surplus and that the current account,
• 6:59
  the budget deficit would be reduced.
• 7:02
  And I put all those things in front of you and said, this is what's going to happen
• 7:08
  over 2025.
• 7:10
  I think pretty much everyone would say, well, SA shares will be up 40% and they
• 7:13
  haven't.
• 7:13
  So why is that?
• 7:14
  I think the first, you know, people will say it's because there's still problems in
• 7:20
  South Africa and all that.
• 7:22
  But the pathetic truth is...
• 7:23
  The main reason why SA equities have lagged is that fund managers in South
• 7:30
  Africa went into
• 7:32
  2025 very underweight platinum and gold shares.
• 7:34
  And platinum and gold shares have given the entire return of the JSE this year and
• 7:41
  basically have
• 7:43
  gone to like 25% of the index between the two of them.
• 7:45
  And SA fund managers have been underweight that.
• 7:47
  So in order...
• 7:49
  to buy more platinum and gold shares to reduce their underweight to keep their
• 7:53
  jobs.
• 7:53
  They've had to sell the SA Inc.
• 7:56
  shares, and that's really what's happened.
• 7:58
  So, you know, people are going, well, why haven't they responded?
• 8:01
  And then people start to worry about maybe there's something I've missed.
• 8:05
  Well, the principal reason they haven't is they have been used as a funder for fund
• 8:11
  managers to reduce their underweight in precious metals, which makes no sense at
• 8:18
  all because SA Inc.
• 8:20
  is actually very cheap, as we've discussed, and it is actually a
• 8:24
  beneficiary of precious metals.
• 8:26
  So you're selling the cheap thing to buy the thing that's helping the cheap thing
• 8:30
  that's gone up
• 8:32
  200% in a year.
• 8:33
  It just doesn't make sense.
• 8:34
  But if you're lagging the index and you've got a half weight in platinum and gold and
• 8:40
  your chief investment officer says,
• 8:42
  what are you doing?
• 8:44
  You narrow that underweight and you sell.
• 8:46
  Okay, so what's the chief investment officer going to say at the beginning of
• 8:47
  the new year?
• 8:47
  We'll sit down and say, right, chaps, 2026.
• 8:49
  We messed up a little bit in 2025.
• 8:53
  We've got maybe another, according to this podcast with Bickard and Williams, we've
• 8:58
  got another maybe 40%, 50%
• 9:00
  to go in SA Inc.
• 9:01
  stocks or certain SA Incorporated stocks.
• 9:03
  Anyway, do you think it's going to be a bull market?
• 9:06
  And are you positioned accordingly?
• 9:10
  So, yes, I do.
• 9:12
  and I think To go back to what we said at the beginning,
• 9:15
  at the moment we are basically more overweight SA Inc.
• 9:20
  shares in the funds than we were prior to the election.
• 9:24
  So the last time there was a real opportunity was just prior to the election
• 9:31
  when everyone
• 9:33
  was so negative about the outcome of the election and we basically were fully
• 9:35
  loaded SA Inc.
• 9:37
  shares and they rallied 40 or 50% after that.
• 9:39
  We then sold them out and now we've bought back and we've actually bought more now.
• 9:44
  So, excluding one big position we have in commodities,
• 9:50
  which is African rainbow minerals, which we think is a very good way into platinum
• 9:55
  and gold,
• 9:57
  which is the biggest position in the fund.
• 9:58
  Outside of that, everything else in the portfolio.
• 10:01
  is in South African shares.
• 10:03
  And we used to have quite a lot of banks.
• 10:06
  Banks have actually been the better performing SA Inc.
• 10:10
  I mean, I think they're still cheap,
• 10:13
  but they've kind of led an underperforming pack and they've done okay.
• 10:18
  So what we've done is sell our ABSA and we've rotated that money into the SA Inc.
• 10:22
  shares that have lagged.
• 10:24
  And so our biggest positions are Bitvest, which is a real...
• 10:30
  it's you know it's always been a proxy for uh inc and a popular stock for foreign
• 10:37
  foreign shelters and that is
• 10:39
  massively lag and on 11 times earnings we think is just completely underpriced
• 10:44
  especially considering that they are big
• 10:46
  in logistics and they've got a lot of good businesses in there our
• 10:48
  second biggest holding is woolworths which has also lagged the retailers and we see
• 10:55
  concrete signs that that's
• 10:57
  turning around and then we've brought back into the hospital companies net care and
• 11:00
  life health care.
• 11:02
  And if I say something about hospitals, hospitals are interesting because
• 11:07
  hospitals are really a bond proxy in
• 11:09
  equities.
• 11:11
  There's not a lot of growth.
• 11:13
  They grow patient days at 1% and they grow their top line at 5 or 6 and they're
• 11:16
  getting a bit of efficiency.
• 11:18
  So they're growing their earnings at 10 to 15%.
• 11:19
  But it's an annuity earning business, just churning out rents.
• 11:24
  It's almost like a bond.
• 11:27
  but with some inflation characteristics.
• 11:30
  And this is exactly the kind of stock you want.
• 11:32
  So instead of going to buy SA Bond on 8.3%, as we said, you can go and buy
• 11:40
  Life Healthcare or Netcare and their free cash flow yield.
• 11:44
  In other words, a direct comparison to the 8.3% in the bond is probably more like
• 11:52
  12%.
• 11:54
  And it's growing.
• 11:56
  And they have not rallied at all, really.
• 11:58
  They are the worst performing because people are worried still about national
• 12:04
  health and other things like that.
• 12:06
  But they are just generating rent cash flows and are trading at a massive
• 12:12
  discount considering where bond
• 12:14
  deals are.
• 12:16
  So those are the kind of interesting stocks.
• 12:18
  And then we've got a lot of mid-cap shares.
• 12:20
  So mid-caps, you know, banks have led because they're the most liquid.
• 12:22
  And in the last few months, we've seen some foreign buying.
• 12:25
  in SA equities and they've come first for the banks.
• 12:28
  So they come for the liquid shares first.
• 12:30
  So that will be things like the banks.
• 12:32
  And then eventually the money trickles down to the mid caps and there's a whole
• 12:38
  raft of mid caps that if you
• 12:40
  think, but based in Woolworths and the hospitals are cheap, the mid caps are
• 12:44
  crazy.
• 12:44
  I mean, they, you can buy any mid caps on most mid caps in South Africa trade on
• 12:50
  three or four times cashflow,
• 12:52
  which means they trade on like 20%, 25% free cash flow yields when the bond yield
• 12:57
  is 8%, which is...
• 12:59
  So there we have names like Italtile, Sogo Sun, Rainbow Chickens, Invicta,
• 13:04
  City Lodge.
• 13:06
  City Lodge is one we've just bought where things are getting a lot better and
• 13:13
  basically it trades at a quarter of the
• 13:15
  market value of its properties, which is quite interesting.
• 13:17
  So you've bet big in the past and you bet big...
• 13:19
  again.
• 13:20
  And this is all very well, all the things I've said, all the things you've said.
• 13:24
  And again, going back to Operation Vulinglela, they say that by 2030,
• 13:28
  South Africa's GDP will be 3% per annum, suggesting that perhaps there's a four,
• 13:34
  five year bull market for SA Incorporated stocks coming.
• 13:37
  Any chance, as has happened in the past, any chance you might be wrong?
• 13:41
  I mean, not you're going to be wrong, but the South African situation might
• 13:48
  disappoint you.
• 13:50
  So So obviously there's always a chance you can be wrong.
• 13:52
  I guess I'd say the only, I mean, the valuation is the valuation.
• 13:57
  The gap to bond yields is the gap to bond yields.
• 13:59
  The improvement in SA is pretty widespread.
• 14:04
  You know, it's not all one thing.
• 14:05
  You know, we're not putting all our money on ESCOM.
• 14:07
  As you say, it's Transnet and ESCOM.
• 14:09
  And so it's a number of things are getting better.
• 14:13
  So I guess probably the only wild card is, I guess, politics.
• 14:19
  is, which by the way, always has the smallest effect on the stock market.
• 14:26
  You know, politics is not as big as the discount rate or growth, but it is a
• 14:32
  concern.
• 14:32
  So I would say where we could be wrong is, you know,
• 14:35
  a Zuma type problem with respect to the leadership of the country, which is always
• 14:41
  a possibility.
• 14:43
  I think it's unlikely, but that's probably the wild card where we could be wrong.
• 14:45
  Okay, so politics is an outside chance of a wild card scuppering the very rosy
• 14:52
  picture that
• 14:54
  you've just painted.
• 14:56
  John, thank you very much for your time.
• 14:58
  A very exciting way to end 2025. John Bickard is Portfolio Manager,
• 15:00
  Value Fund at 91.
• 15:06
  This podcast is a marketing communication and is provided for general information
• 15:13
  only and assumes a certain level of knowledge of
• 15:15
  financial markets.
• 15:17
  It is not an invitation to make an investment and should not be construed as
• 15:19
  advice.
• 15:20
  The views of this podcast are those of contributors at the time of publication
• 15:26
  and do not necessarily reflect those of
• 15:28
  91.
• 15:30
  In South Africa, 91 is an authorized financial services provider.