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The Asset Class: Hannes van den Berg · Strictly Business

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