Bacher on June’s market drivers – locally all about GNU; Trump Trade on Wall Street

Dramatic news flow at home and abroad had a significant impact on asset prices in the month just past as we hear from Corion Capital’s founder David Bacher. He explains why this was the kind of month that could make or break a money manager’s career. Bacher spoke to BizNews editor Alec Hogg.

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Highlights from the interview

In the discussion between Alec Hogg and David Bacher, Alec begins by praising his broadcasting hero, David Frost, and humorously comparing his and David’s investment show to Frost’s comedic program. They then review the notable events of June, highlighting President Biden’s underwhelming debate performance and the optimistic local market response to South Africa’s government coalition. Bacher points out significant local market gains, especially in equities and bonds, while noting the strong performance of financial shares.

Alec shares his anticipation for an upcoming interview with Helen Ziller of the DA, touching on the challenges she faces in coalition governance. Bacher stresses the importance of prioritizing national interests over party agendas. They discuss the potential positive transformation of South African politicians akin to David Cameron’s rise to prominence.

The conversation shifts to global markets, with a focus on the bullish sentiment driving equity markets and notable performances by companies like Tesla and Nvidia. Bacher cautions against over-reliance on Nvidia despite its dominance in AI technology. They also address the growing US debt, warning of its long-term implications.

Locally, the duo examines the pressure on resource shares and the strong performance of financial shares, emphasizing the impact of recent elections. Bacher highlights the challenges of managing portfolios in such volatile conditions. They conclude with a discussion on the disappointing performance of Breit, a company with significant investment missteps, and reiterate the need for good leadership in South Africa’s government of national unity to ensure stability and progress.

Edited transcript of the interview

Alec Hogg (00:10.894)
Well, my broadcasting hero is David Frost. He was a wonderful interviewer who facilitated conversations without dominating them. He was also a comedian and had a program called “That Was the Week That Was,” which was fabulous to watch. I guess David Bacher and I have “that was the month that was” in the investment world. We’re not as funny as David Frost and the Monty Python gang, but the cartoons make up for it.

Alec Hogg (01:03.405)
What a month it was in June. All kinds of cartoon-like operations. Mr. Biden’s performance in the debate was mind-blowingly poor. Now he’s saying he had jet lag. Inside stories suggest he might have resigned because he’s not all there anymore, but his wife wants to carry on running the country. Your big take of the past month has to be local with the government of national unity, and local stocks way outperforming international markets.

David Bacher (02:05.561)
Indeed, Alec. We said last month there was a good chance we’d report big numbers for local assets in June. The recent elections sparked optimism, leading to a strong rally in local assets. Our local equities were up 4%, and the bond market was up 5%. Financials were the standout performer at 14.5%. It was certainly a good month for investors.

Alec Hogg (02:53.515)
I’ll let you in on a secret. I’ve got an interview later today with Helen Zillee, chair of the federal council of the DA. She’s been negotiating with the ANC and now has to deal with Gauteng, where it seems a rogue branch of the ANC is doing its own thing. This coalition governance is going to be challenging. We have more than just the ANC and the DA in the ministries.

David Bacher (03:53.369)
I agree. People are excited about coalitions, but running governments with different ideologies and agendas has significant negatives. Parties have limited authority and flexibility and are continuously trying to appease their factions. The prayer for all investors and South Africans is for personalities to take a back seat for the country’s interests to be the priority.

Alec Hogg (04:41.611)
I have hope from something most people won’t get. At the World Economic Forum in Davos, I saw David Cameron before he was prime minister. He was unimpressive, but a couple of years later, as prime minister, he was completely different. Hopefully, responsibility will rub off positively on our politicians in South Africa, elevating them to statesman-like behaviour.

David Bacher (05:44.409)
Certainly. It seems when you listen to the rhetoric, it’s a lot about personalities, which is worrying. It’s the nature of politics to some degree, but we need leaders to step up. The time is now.

Alec Hogg (06:10.08)
All right, let’s get into our monthly decoding. The bull market is certainly full of beans, and the bears are nowhere to be seen.

David Bacher (06:36.569)
Yes, every month we try to make light of a serious industry. This month, we went with a wildlife theme. Global equities are up almost 20% over the year, especially in the US and tech shares.

Alec Hogg (07:21.835)
In a bull market, news tends to be interpreted positively. For example, Tesla’s results were interpreted positively despite sales being down because Elon Musk announced self-driving taxis. In a bear market, the same news would have been seen negatively. Right now, sentiment is bullish.

David Bacher (08:20.889)
100%. Sentiment drives markets in the short term, though over the long term, valuations will play out. We’re currently in a bull market, but it doesn’t mean it will stay the same. We must be cautious and stick to long-term principles.

Alec Hogg (09:02.44)
And South Africa even more so.

David Bacher (09:06.681)
Correct. We labelled this cartoon “Springing Bok” because, on a dollar-weighted basis, we were the standout performer, up 9% due to a strong equity market and currency. Financial shares and South African ink shares took the election results positively.

Alec Hogg (09:37.096)
Interesting to see the second-best performer was India, which also had an election. Investors enjoyed the results there as well. More competition means more accountability, and investors like that.

David Bacher (10:12.377)
India has been a standout investment region over the last few years. Its weighting compared to China in the emerging market index has almost equaled. The economy is growing, with good policy, a stable government, and lots of innovation. However, we have been decreasing our weight in India lately due to its high market pricing.

Alec Hogg (11:03.974)
We should start looking at Indian companies like we have looked at the US and China. And NVIDIA, the new king, has been a huge performer.

David Bacher (11:47.289)
Correct. NVIDIA became the largest company in the world on June 18th, driven by a massive surge in their chips, which account for 80% of all chips used in data centers. Their growth has been unbelievable.

Alec Hogg (12:33.607)
Many sceptics think the AI revolution will transform industries. NVIDIA has a lock hold on this market. Do you think it’s gone too far, David?

David Bacher (13:08.345)
History shows that dominance in one area never lasts forever. Other companies will compete, and policies will change. NVIDIA’s current valuations are high, and we’re starting to think they might not be justified. We’re diversifying into other shares.

Alec Hogg (14:20.901)
We sold half of our NVIDIA shares and banked some money. At these levels, we’d be cautious about taking profits. Did you watch the debate between Joe Biden and Donald Trump? Investors are having the Trump trade, thinking Biden cannot be re-elected.

David Bacher (15:23.289)
I watched it and was sad to see. Biden has served his country with good intent, but his legacy was shaken in that debate. It’s important to know when to retire, and he seemed to have taken the wrong route.

Alec Hogg (16:08.74)
His personal struggles and running the country must be overwhelming. I saw him in Davos years ago and was so impressed. Seeing him in that debate was heartbreaking. Moving on to US debt, it’s a significant issue, growing from $7 trillion in 2004 to $34 trillion today.

David Bacher (17:09.657)
Correct. We labelled it “the elephant in the room.” Borrowing can fuel growth short-term, but it must be paid back. Significant debt can be inflationary and impact future policies. While the US has great economic growth, we must consider the impact on future generations.

Alec Hogg (18:13.668)
Servicing debt is a challenge. In Kenya, 38% of the budget goes to pay debt. In the US, it’s still relatively small, but you can get into a debt trap quickly. On the JSE, financial shares had a good month, but resources are under pressure.

David Bacher (19:01.497)
Correct. A strengthening local currency is a headwind for resource shares, and some commodities came off. However, the rally in financial shares was emphatic.

Alec Hogg (19:42.946)
More than 20% for some big banks. These are months to remember.

David Bacher (19:53.401)
Correct. These months can make or break an asset manager’s track record. We were overweight on the right sectors, but investing is about the long term. One month should not dictate strategy, as market conditions can change.

Alec Hogg (21:20.898)
You included BRAIT, a company controlled by Christo Wiese, who must be wondering about his involvement. It’s been a wild dog.

David Bacher (21:40.441)
Probably had one of the worst corporate transactions in South African history, buying New Look for about 16 billion rand, which was later written down to zero. The share price dropped from 150s to less than one rand. It was a sad story for investors and Christo Wiese.

Alec Hogg (22:31.555)
Don’t swim against the tide. When they bought New Look, high street fashion retailers were already under pressure. In South Africa, the big story is the continuing ruckus in the Gauteng provincial government. What’s your take on the government of national unity?

David Bacher (23:08.857)
It presents challenges but is a lesser evil from a market perspective. It requires good leadership to prioritize the country’s interests over party interests. Many investors still doubt the ability of our leaders to do that. We hope for good leadership and putting the country’s needs first.

Alec Hogg (24:15.362)
Maybe our politicians will step up like David Cameron did in Davos. David Bacher with Corion, and I’m Alec Hogg from BizNews.com.