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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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The 91 Value Fund is 25 years old and for most of that time has been under the
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stewardship of John Bickard.
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John joins me now.
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Now, John, I've thought about you on occasion recently, and I imagine that
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you're one of the few people that I know living in New York, in
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Manhattan, that's able to blot out all the noise of the city, the New York Knicks
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celebrations, the World Cup tourists, the celebrity
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weddings.
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Just like you do when you're investing, you look at very noisy markets, I imagine
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again, and see opportunities elsewhere because
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many stocks are overlooked when more glamorous companies are in vogue.
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Am I right to a certain extent?
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Yeah, I think the only hard thing was the next because there was that night there
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was so much streaming you couldn't.
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The whole city, the lid of the whole city came off basically.
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But away from that, yes, we just carry on.
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I mean, the...
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The US market just shifts, the money just shifts from one idea to another, but
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basically the party's
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continuing.
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You know, it was the Magnificent Seven and, you know, in the last three, four
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months that
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switched, you know, it's gone to the chip stocks.
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As an aside, I mean, obviously it's not an area of the market that really interests
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me, but it is interesting that I get
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500 emails a day from all over the world from analysts.
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you know, three, four months ago, there was no one who was sending me anything
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saying, you know, the next thing is chips.
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And, you know, those chip stocks went up five times in like a straight line.
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So in a way, I sort of, I feel a bit sorry for people who are trying to, who are in
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the tech market and who are
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trying to navigate this.
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Because I mean, in the last year, there's been massive changes, which I don't think
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anyone saw.
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I mean, A year ago, people were all in software stocks, and then they got
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absolutely obliterated.
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I mean, literally halved in six months.
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And again, I didn't see anyone forecasting that.
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Suddenly, the market said, software is going to be killed by AI.
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So everyone switched out of software into the hyperscalers.
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And then everyone was into the hyperscalers.
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And the next minute, the money left there to some extent and all went to the chip
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stocks.
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And the big magnificent seven went down.
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The chip stocks went up five times.
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So all I'd say is if you're on the wrong side of some of these moves,
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it's really bad.
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I mean, there are a lot of funds that are full of software.
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And, you know, I mean, while the market's gone up, those stocks have halved.
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And it's hard.
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You know, there's such change in tech.
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You know, I actually think it's impossible to try and forecast what's going to
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happen.
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So, I mean, obviously, I'm not going to go there because the valuations.
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really don't make any sense.
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But in a funny way, I'm kind of glad that I don't have to worry about, you know,
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what's the next tech wave is going to be.
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We'll come to tech later on because you are in tech in a certain way.
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And as I say, later on, we'll cover that particular angle.
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But you also, there's a note of cynicism in your voice when it comes to analysts.
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And many analysts might say, oh, well, why is anyone bullish on SA Equity?
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It's dead.
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It's finished.
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But you're bullish on SA Equity.
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Why are you?
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So the big picture with SAEquity is if you go back 10 years ago, inflation
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expectations
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in South Africa were six and they were 1% in the US.
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And you fast forward 10 years later, inflation expectations between those two
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countries have massively
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converged.
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So there used to be like a 5% difference in the inflation rate between South Africa
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and the US, and now the expected
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inflation difference is more like 2%.
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In fact, it's one and a half.
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So in the last 10 years, the South African Reserve Bank has run South
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Africa like it's Switzerland, basically, with very conservative monetary policy and
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has really brought the structural inflation
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rate down.
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And that has supported the currency and it's brought bond yields much closer to
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U.S.
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bond yields.
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So 10 years ago, there was a 5% inflation differential between the two countries.
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And there was a...
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7, 8% differential in bond yields.
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And today, now there's a 2% inflation differential and 3.5%, 4% differential
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bond yields.
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So if 10 years ago you would have said this would have happened and basically the
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South African Reserve Bank has run
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proper monetary policy and the U.S.
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Federal Reserve has run very loose monetary policy.
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And that's by design.
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They want to...
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inflate away the debt.
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So they're actually, you know, they've got a 2%, the Fed has got a 2% target
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inflation, and it's, I think it's now
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65 months, the US has been above, you know, above the 2%.
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And, you know, there's no sign of them raising rates.
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You know, if that had been the South African Reserve Bank, they would have been
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raising rates for the last 68 months.
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Just before you go on, does that mean that the South African Reserve Bank is more
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responsible than the US Federal Reserve?
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Because it's ahead.
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As soon as it sees something, it says, right, we must act now and not talk about,
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what was that famous phrase from Powell?
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Transitry.
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Yes.
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It is more responsible, but I think it's by design, you know, that South Africa
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knows they have to keep.
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positive real rates to attract capital.
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And whereas the US, it's also by design, because they say they've got an inflation
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target, but they don't really.
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They're saying the right things, but they know what the game is up.
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And the big difference is South Africa is running a small fiscal deficit and it's
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got 75% debt
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to GDP.
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The US has got 110% debt to GDP and is running a 7%, 8% deficit.
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So, The U.S., basically, there's no way out of the debt, the fiscal problem in the
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U.S., so they have to inflate away the debt.
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Let's get back to stocks, though, because we've lost the track.
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So basically, the bond market, the cost of money in South Africa has come down
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massively
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compared to the U.S.
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in the last 10 years.
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And so if you went back 10 years ago, South African stocks traded on 11 times
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earnings.
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And the U.S.
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market trade on 15 times earnings.
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And if you would have said 10 years ago, this is what's going to happen.
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The cost of money, the cost of money is going to come down relative massively in
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South Africa relative to the U.S.
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And the bond yields are going to converge.
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You would have said, well, then obviously the P.E.
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differential between the two markets should also converge because that's the
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mass of equities.
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But yet now we fast forward 10 years, the U.S.
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market trades on 24 times.
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And South Africa trades on nine times.
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So the gap has opened.
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And so really the story of SA equities is the bond market in South Africa reflects
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the debt and the risk of South Africa.
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But the equity market, you know, has gone completely the different way.
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So South African equities on a 9 PE relative to an 8% bond yield just
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makes no sense at all.
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And all we've had is selling out of SA.
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So I'd like to...
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Because the growth has been slow in South Africa, people like bonds, but they hate
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equities.
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But you have to like South African equities if the South African bond market
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is right.
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The South African bond market is fascinating.
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It's so resilient.
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And you see the RAND and the bond market moving together.
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You almost, I've got this picture of people buying the bonds, bringing the
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money in.
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The RAND gets stronger or rather steadies, even though it shouldn't steady.
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given what other emerging market currencies are doing.
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So, yeah, it is a fascinating picture that you paint here.
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But also it's fascinating.
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People will say to you, pick and pay.
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It's dead in the water.
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I mean, they make lots of comparisons between Boxer and pick and pay.
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And if you buy this, you get this one free, et cetera.
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And TrueWorths is another one.
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But you're sticking with them.
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Am I right in saying you're increasing your holdings in companies like that?
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So TrueWorths is the largest holding in the fund.
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basically can't buy anymore because it's 10% of the fund and pick and pay is 5% or
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6% of the fund.
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So those two alone are 16% of the fund.
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And, you know, the story there is just ridiculously low valuation.
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So Truerts isn't growing, but it's on a 6.5% PE and a 9% dividend yield.
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So just to end, you know, they've got no debt on their balance sheet.
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They've got a UK asset, which is half their earnings, which they could sell
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tomorrow probably for
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10 or 11 or 12 times earnings.
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The share trades on six, seven times earnings.
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So, you know, the SA business, you're really getting four, five times earnings
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and a 9% dividend yield when the bond
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yield is eight and a quarter.
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So you get more in dividends in truers than you do.
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And I don't think they're going to cut the dividends.
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So, yeah, so it's just absurd valuations.
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And then pick and pays, you know, you take out Boxer, the market pays you 15 billion
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rand to take away the pick and pay business.
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And by the way, the pick and pay, the core supermarket business is still in trouble
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and is still losing money, but it's in the
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best shape it's been in in three years.
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You know, Sean Summers has been there nearly three years and he's, you know,
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he's continually working on it.
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I mean, it's not, it hasn't been turned around, but compared to the pick and pay
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of five years ago, it's in better shape.
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They've closed the worst stores and, you know, they're cutting costs and it's a
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long way from fixed.
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you know, when people pay me 15 billion rand to take away a business.
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It's very interesting.
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So, you know, those are the situations you get when foreigners have completely left
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the market and
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locals are unenthusiastic.
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And all the time, the most interesting thing is against this background, as you
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say, of a steady rent and a firm bond market,
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equities just continue to go down, which, you know, one of them is going to change.
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You know, one of those markets is wrong.
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And, you know, and it looks like it's the equity market.
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Do you think, just before we go on to global exposure, do you think that when an
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investment management company from overseas looks at something like
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Pick and Pay and True as the two stocks that we've mentioned, do you think that
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they say to themselves, It's a bear market.
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When it turns, I'll have a look at it.
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Or is it simply because they're deploying capital elsewhere in the more glamorous
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stocks that I referenced in my introduction?
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Is it a combination of the two?
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I think it's a combination.
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You've hit the nail on the head.
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The first one is most emerging market managers are not value managers.
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They are growth managers because emerging markets is relative growth in the world.
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So they like growing companies and neither of those are.
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growth companies, but they're ridiculously cheap.
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So there is a definite feeling we'll wait for it to turn up.
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That's the first thing.
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And then it's a massive thing that, you know, if you go back to emerging markets
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of 10 years ago, it was Russia,
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South Africa, Brazil, Turkey.
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Today, the emerging market index is Taiwan, South Korea, China.
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I mean, if you add up Taiwan, South Korea, and China, I think It's like 80% of
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the emerging market index are those three countries.
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And, you know, obviously Russia has completely disappeared.
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Turkey has all but disappeared.
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And the only two that are left are Brazil and South Africa at like tiny weighting.
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South Africa is 3% of the index, and I think Brazil is 4 or 5.
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And then the money now in emerging markets is all going to the semi-stocks in Korea
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and
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into Taiwan and to a less extent to China.
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So some of it's the flow of funds and some of it is it looks unexciting.
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But, you know, some people say, you know, the JSC is dying.
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And that's the market you want to be in when no one's issuing stock, when
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companies are being bought out and there's no
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new shares being issued.
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The warning signs in the U.S., you see the issuing of shares from SpaceX, from South
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Korea and
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from Hynix.
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I mean, in the U.S., there's...
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I think you add those two together, that's $100 billion of equity rate in the last
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three weeks.
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And, you know, that's a sign of a market you should be getting out of because
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they're issuing
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shares because the valuations are too high.
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Okay, talking about high valuations and IT, the two go together.
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You've just bought your first global IT stock.
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And the background to this, my background to this, is that as I look at my notebook
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here, As I record this podcast, I'm recording on
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something called Adobe Audition.
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And I'm checking your levels all the time, and it does it beautifully.
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And by the way, your level's really, really good.
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You're always a nice, steady talker.
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So I've been using Adobe for the last 15 years, and it's the one that you've
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chosen.
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Why?
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So obviously the IT shares, you know, the software companies have been decimated.
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I mean, they're down 60% on average in six months.
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So that...
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is an area that obviously anything that falls that much in so quickly attracts my
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interest i've looked looked at all them all
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and the one that i chose was adobe principally because it went down more than
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most i mean doby was 700
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like a couple of years ago it's now 200 so it's down massively and it trades the most
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interesting thing is it trades on 10 times earnings you know it's trades on like
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almost a south african p and yet it's
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still growing i mean the last the The final moment that got me into the stock
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was about three weeks ago, four weeks ago.
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They came out with their quarterly and the share, which had been falling for a year,
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fell another 10 or 15% on the day.
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And I remember seeing it falling 15%.
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I'd obviously been watching the share for weeks.
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So I thought, oh, they must have clearly missed their earnings by a mile.
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And yet, they still showed 11% dollar revenue growth over the last quarter.
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And the last quarter was...
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a quarter that AI was affecting them.
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So there's no sign of a slowdown, and yet the company is actively adopting
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AI in their business model.
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So it's not like they're sitting in the corner and saying, you know, AI is going
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to go away and we're going to
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continue with our old model.
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They're using AI to enhance the product that you are using, and yet the market is
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basically priced in that
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AI will...
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will take the place that you will give up that software program that you use from
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them and do that directly
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somehow using AI.
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And I think your example is a good one because will you save...
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many dollars you pay a month to use that software package and try and do that
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yourself using AI?
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I don't think so.
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I think, you know, that you probably theoretically could do it, but it would be
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quite risky for your
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business and it would be a lot of work for you to work out how to do it.
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And you've got other things to do.
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So the odds are you will stay with Adobe, that software program, and hopefully
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they...
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upgrade that program using AI that you won't feel it necessary to change.
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So in the meantime, it's down 70% and it's on 10 times earnings and it's still
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growing.
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So, you know, I think it's an opportunity.
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But you need to look at each software because there are some software businesses
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that may be
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easier to replace than others.
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And to me, Adobe looks a bit safer than the average one.
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Well, I'm sticking with it and you're probably going to stick with it as well.
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And they are, incidentally, adopting little AI tweaks here and there to help
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the business.
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And it has done for me anyway.
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Before we leave the international exposure, the last time we spoke, you made
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my sort of mouth open a little bit because you were talking
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about booze stocks, spirits and spirits in particular.
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And you came up with the argument about COVID and destocking and now restocking,
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etc.
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How is that going?
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Are you still committed?
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Still committed.
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We've still got a third of the fund in the spirit stocks and another 10% in beer.
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The beer stocks have picked up quite nicely.
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I mean, they're maybe up 10%, 20% since I bought.
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And I think the World Cup effect has helped that a bit.
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And beer has improved a little bit.
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With respect to spirits, the shares are still on their lows.
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They're still basically at the price that I've paid for them.
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been now waiting for sort of a year and they've stopped falling the news is still
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all i'd say about
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the news on spirits the volumes are less bad so you know the volume the market was
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contracting at six or
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seven percent a year ago and today it's contracting at two or three percent so to
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me it looks like you know jumbo jet
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landing you know this the rate of decline is slowing and eventually i think it'll
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turn up again when the destocking
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cycle is finished the market still mainly thinks it's a structural break and that
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alcohol is dead.
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And that's why the shares are down 75% and haven't rallied yet.
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But I can say that if there is, the data comes out every two weeks across the world
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on spurts.
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If there is a two-week period where volumes start growing, these shares will
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do really well.
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The data, to me, still looks like a steep cyclical downtrend, as you say, after
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COVID.
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more than a structural shift.
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This brings me to a broader discussion, a brief discussion about your philosophy,
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because you've been talking about the stocks and you've
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said the alcohol stocks and you've said you've been waiting for a year now.
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You don't fall in love with a stock.
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That's one of your rules.
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You always buy cheap.
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There's no exception.
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And when a share reaches a fair value, you get out.
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You always buy too, not always, but sometimes you buy too soon.
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No, pretty much always.
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Always, okay.
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That's your word.
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You always buy too soon and you sell too soon.
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But you're in good company.
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I think it was Rothschild that came up with some clever phrase a century or so
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ago.
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But anyway, those principles, no matter what the market does, still stand true.
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Is that right?
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Yes.
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So using the biggest spirit stock I own is Remy Contreau.
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And that share was 220 euros and it bottomed at about 32 recently.
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And I started buying it at 50 and finished at 32.
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So maybe I'm in at 40.
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And the key thing with that stock is I feel you need to be in it at 40
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when there's an inflection in the spirits volumes, that
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share will go in a straight line from 40 to 80.
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And I'm not waiting back for 220, but you've got to have a big position in the
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turning point because most of
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the money is made in the turning point.
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the short sellers have short sold a third of the free float of the company they'll
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have to cover some long only
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players will come in and buy i mean you'll look up and suddenly the shell be 80 and
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you know so what i think it's worth i think it's probably
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worth 120 i mean off the top of my head is it was never worth 220 like it traded at
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four five years
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ago but equally it's not worth 35 so you know the the key thing is to have a big
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position as it
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goes from ridiculously cheap to like fair value and then the truth is i might have
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to i've been waiting a year
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so far i haven't lost any money but obviously the market has gone up so it
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doesn't look so good the market's probably up 20 and these
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shares haven't moved so it is hurting but I'm not losing money, and I know when
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things turn,
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it'll go up quickly.
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So, again, I'll probably sell too early.
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I mean, when it turns, it will probably go from 30.
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It could even go back to its old high eventually.
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But the key thing is the 30 to 120 move is where most of the money made, and not the
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120 to the 220 move.
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Very final question, John.
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What keeps you up at night?
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Is it the excitement of the fact that these AI stocks that are driving the
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markets In such
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narrow markets, and let's face it, they are very narrow and have been for a while
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now, are you excited about them coming, not to a sticky
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end, but certainly coming off the boil and therefore the stocks that you're in
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starting to claw
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back a bit of performance?
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Or are you fearful about the market?
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So is it excitement or fear that keeps you awake?
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It's mainly the noise of the Knicks fans that keeps me awake.
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No, neither of that.
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I mean, it's an incredibly narrow market.
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There's nothing you can do about it.
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And I think the one thing I sort of have learned over the years, I mean, I was
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running money in 2000.
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I mean, focusing on, you know, NVIDIA is hurting me, and now today focusing on the
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chip
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companies are hurting me.
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It's actually pointless because you're never going to buy them, and it just vexes
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the spirit, you know.
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So I don't focus on that.
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I'll rather focus on the things.
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that are really cheap like South African shares, like alcohol shares, like Adobe,
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and try and
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focus on the things that I think are cheap and just stick to that and not spend too
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much time
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explaining why these shares are so expensive on the other side because it's
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counterproductive because no
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one's ever going to listen to me anyway and it will end.
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You're right.
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When it ends, the money will flow into the undervalued side of the market, which is
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staples and alcohol.
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And that, unfortunately, probably is the catalyst.
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And when it'll end, I don't know, but it will end one day.
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And in the meantime, I've got these deeply undervalued shares, which I can wait in.
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So, you know, you have to make peace with, you know, it's been a year we've been
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waiting alcohol, but the truth is we waited for four
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years on platinum stocks in South Africa.
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So I'm hoping it's not four years, but...
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You know, you don't know when it'll end.
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And you just have to keep going on your course because it could end tomorrow or it
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could end in a year.
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John, thanks so much for your insight.
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Fascinating, as always.
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And enjoy the rest of your New York summer.
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John Bickard is the portfolio manager responsible for the 91 Value Fund.
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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, employer or company
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associated with
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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 and
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rethinking at any time.
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Please do not hold us to them in perpetuity.