Join Stuart Lowman on the Fantasy Fund Manager podcast, navigating the thrilling journey through a 27-week investment competition. In this episode, delve into insightful discussions with financial experts Garreth Montano and Simon Du Plooy from Corion Capital, exploring market dynamics, investment strategies, and the impact of global economic shifts on local and international investments. Celebrate the winners, explore the market’s highs and lows, and glean valuable insights into making strategic investment decisions in a fluctuating economic landscape. Remember, each dawn of Monday is your chance to pitch your winning stocks. With enticing prizes awaiting, the game is on. Rally your comrades and head to www.fantasyfundmanager.co.za to register—big thanks to our platinum sponsors, Sharenet, Terebinth Capital, ClucasGray Asset Management, and MoneyBetter. And mark your calendars: Subscribe now to our podcast to keep up with every episode.
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An edited transcript of the Fantast Fund Manager podcast
Stuart Lowman: It’s that time of the week again, and you’re listening to the Fantasy Fund Manager podcast. We’re into week 23 of the 27-week competition. We’ve just finished the fifth month and are into October, the last month of the six-month competition. Our guests today are Garreth Montana, director at Corion Capital, and Simon Du Plooy, portfolio manager at Corion Capital. Gents, thanks for joining. I’ve got to congratulate the winner from week 22, Garth Nash, up 5.54%, and the September winner was Jonathan Evans, up 8.48%. Those are pretty good numbers. How’s the competition going?
Garreth Montano: We should be hiring them. Simon’s job might be under pressure because of this environment; those are unbelievable returns. I had a better month last month, but this week has brought me back down to earth with a bit of a crash, unfortunately, led by Pick n Pay.
Stuart Lowman: Yeah, we saw a leadership change there. Sean Summers is coming back. A few people had also brought it in on the back of that, but down 15.68% at the recording time. Simon, your side, how’s the game? We’re into week 23, the last month of competition. How’s it playing out?
Simon Du Plooy: Now I have to echo Garreth; it went well until this last week. I also got a bit of a crash, I got caught in Implats, down nearly 20%. So yeah, the platinum miners continue to be under pressure.
Stuart Lowman: So, let’s look at the market environment. Last week, we touched on the bond yield in the US at a 15-year high. On your side, how’s that playing out in markets, Simon? What you’ve seen as the outcome of these expectations of rates for higher? And what is that doing for certainty in the market or uncertainty?
Simon Du Plooy: Yeah, it’s affecting markets in a very real way, both financial assets and the real economy. So we’re seeing US mortgage rates at decade-highs. And it’s playing quite interestingly in the US. Different from South Africa, US mortgages are fixed rates. So many people managed to get a mortgage at 0% two or three years ago, and they won’t sell. They’re not going to pay. They won’t sell that house because they must refinance at seven or eight percent. And it’s leading to a need for more properties in the US. So it’s got this bizarre behaviour where the market’s not moving because nobody can finance a house at 8%. The US consumer is not used to an 8% mortgage rate, especially after this decade of low rates. I saw a stat yesterday that mortgage registrations are the weakest since 1995. So you can imagine that knock-on effect through an economy if properties are not moving.
Stuart Lowman: That wouldn’t put pressure on a discretionary spend. But that would not be good for business with new housing starts, et cetera.
Garreth Montano: These knock-on effects felt far and wide. And it’s compounded with higher funding costs. You’ve got higher energy costs. It all leads to pressure on the consumer. And that pressure on the consumer, we feel it in South Africa. I mean, the recent petrol, diesel and paraffin hikes were quite material this last Wednesday and will be felt again.
Globally, it continues to be the same theme. Is this inflation sticky? It continues to be a concern. The UK, I think I was also reading this week, is the first time, and I don’t know how long they have had a drop in food prices. Any of our friends and colleagues who’ve been over there will tell you how expensive the UK’s got to live in. So, it’s not a South African phenomenon globally; the consumer is under pressure.
Stuart Lowman: What does this ultimately mean for stocks’ valuations in the US that lead into South Africa? And we mentioned off air you talk about no margin of safety, with no margins of safety with valuations. How does that make you at Corion see stocks going forward or the prices of stocks?
Simon Du Plooy: So whenever growth rates come down, companies, or let me rather say sectors, because you can always have a company that’s an exception, but sectors that have assumed significant growth into the future, that if that doesn’t materialise, there’s going to be pressure on the share prices—the company’s trading at PE multiples of above 50. An investor has to be very careful that growth and earnings will materialise with what we’re increasingly seeing in the economic backdrop. It is a real worry. We also had a look at some bankruptcy statistics in the US this past week. And although not an outlier, bankruptcies are the highest in, well, the third highest since 2010. So it’s only 2010 that was, you know, a hangover from the financial crisis and COVID, where the bankruptcies here today have been higher than this particular year. So you’re starting to see that pressure in the economy, beginning to see it affecting company earnings, definitely on bankruptcies. And that’s a genuine concern if you’re buying stocks priced for growth.
Stuart Lowman: I know we don’t like to be a Dr. Doom, Nouriel Roubini, but is there more likelihood of a recession if we look forward to the rates for a more extended scenario playing out in the US?
Simon Du Plooy: It’s difficult to argue otherwise. For a world that’s got accustomed to zero interest rates, there are lovely quotes, especially if you go back in history, where I saw one in the US, as soon as rates drop below 2%, people don’t want to hold cash, which is an important asset to hold at times. And that’s when some investors start doing ridiculous things. And we’ve had that for at least five years if not a decade. And all of that’s unwinding now. Suddenly, you have to get used to, like we said in the beginning, mortgages at 7%, which is where they were for most of the 90s and the 80s. But young people, somebody in their mid-50s, don’t know anything other than mortgages at below 5%. And now it’s suddenly that high. So, it’s complicated to argue that the risk of recession has stayed the same. It’s increased in my mind.
Stuart Lowman: As an investor with that risk increase, what do you do if you’re sitting on cash? Do you stay on cash or move looking for valuation or opportunities in the market with that risk?
Simon Du Plooy: It’s a combination of both. So, if investors want to be fully invested in equities all the time, it is trying to find the stocks that will perform better in a recession. And we always think about tilting instead of going into one stock or sector. So, tilt more toward the companies that will be more defensive in a recession. That is something to consider. But the easiest is in multi-asset portfolios, where you might be more cautious on your equity allocation, maybe all the bit more cash, even if it’s just in the short term to protect against a potential downswing. But also not so extreme because the recession might not happen. We can see signs, but markets are always uncertain.
Garreth Montano: It’s such a good and challenging answer, but it stems from the view of equities and being rewarded for risk over a long period. And that cliche gets thrown around, but it is impactful in dissecting it because it’s not timing the market; it’s time in the market. And there are so many instances over the last few years where you could have just gone, I don’t want anything to do with equities, whether it be SA, globally, coming out of COVID, that V-shaped recovery, it was so easy to sell at the bottom of COVID. Looking at the global bottlenecks, the economy shutdown was so easy that you don’t want to be in equities. You sell at the bottom and need to double in returns from the bottom in equity. So it’s in these times. If you’re entering the market and lucky enough to be in cash, it’s, as Simon says, tilt or stage your investment in. Put in a little bit of money in weak periods and ride through. But if you’re in the market, selling now is very difficult. You can do some rotation. Potentially, you’re going to something where stocks aren’t that valued, where there’s more certainty around cash flows and maybe not by those high growth counters where it becomes challenging to look through a cycle and know what earnings will do.
Stuart Lowman: One of the things that comes out this week is a stronger dollar. I’m bringing it back to the local market. Is this a sign or an expectation of the current environment? Will we see a stronger dollar with what’s happening in the market, Simon?
Simon Du Plooy: The stronger dollar is, at this stage, a function of the rates. Whenever you see US treasuries or US interest rates, short-term interest rates, reaching new highs, that’s attractive to foreign investors who want to diversify their portfolio. And to buy that bond or buy the deposit, you have to buy dollars first. It’s much more a function of the rates than the currency. The currency is ultimately a means to an end.
Interestingly, our local currency held up comparatively well. Now, people will tell me, no, we were trading R18 against the dollar a few weeks ago. Now we’re at 19:50. But we’re more robust against the euro. We’re stronger, much more robust against the pound. This shows that often what happens in fixed income markets, well, in FX markets, is far more external to South Africa than what it’s internal to South Africa. A stronger dollar can always continue. And for those investors who can hedge, it’s an opportune time to look at reducing some offshore exposure. But at the same time, we know that if a recession hits and hits hard, the dollar will get much stronger. So, this is one of the most challenging scenarios to position for this stage.
Stuart Lowman: When we look at the JSE, we’re speaking pre-podcast. If you look at the revenue income for JSE contributions, about 60 to 70%, I know we’re not sure of the exact number, is in foreign currency; it’s almost like you’re trying to play both sides because the economy locally is not great. But you’re earning offshore as a business. Does that play into a positive or a negative for local markets?
Simon Du Plooy: It’s mixed because there is the currency factor. And like you say, it depends on which index you’re using, if you’re using the top 40 or any other indices that will determine the foreign earnings ratio. But that’s hardly the only factor in driving the share price performance. There’s the cost side to it. Some companies cost in dollars, and other companies have cost in rands. For some companies, the primary market where the share price is determined in London or New York. So if those share prices come down in pound or dollar terms, you need the Rand to do much worse to compensate. That’s why investors are often disappointed by Rand hedge stocks. Yes, there’s a benefit from the Rand going weaker, but that doesn’t mean the stock doesn’t sell off in London or New York.
Stuart Lowman: Garreth, any input from you on the currency and what it means for companies?
Garreth Montano: I mean more of a positive spin on the South African earnings base for those companies and that you have a natural hedge in the round appreciating. Is it going to be translating one to one? Probably not. But, you know, we are fortunate that our index has, as we discussed in the previous podcast, the likes of Richemont and Naspers driven by Tencent. China’s got its issues. But a separate discussion regarding where they are from a macro perspective. But you get the benefit of a Bidcorp and anything else externalised. The South African market sometimes doesn’t translate directly with our local economy, which is a great investing tool. And you do know that your savings aren’t linked to the dollar going massively stronger against the Rand, and we’ve got no hope, and the market’s under real pressure.
Stuart Lowman: So we’ll return it to Fantasy Fund, looking ahead to next week. I don’t know if either of you looks at ex-dividend stocks when you make your picks, but for listeners, next week, we’ve got Discovery, FirstRand and Harmony going ex-dividend, and we’ve got results from Karoooo. Do you use those details in your decision-making?
Garreth Montano: Yeah. If your stock is, as we know, if you’ve got a stock going ex-dividend, the rules of these games, in an ordinary share portfolio, you’ll get paid your dividend. Here, unfortunately, your stock should drop by that dividend. So I wouldn’t be a holder if you hold any of them.
Stuart Lowman: And on results, is it 50-50? You are still determining how the markets will react to earnings. For example, that would be throwing out the dice for a Karoooo.
Garreth Montano: Earnings tend to work now because the information is ubiquitous. And unless they’re surprised relative to how they’ve informed the market, much of it tends to be in the price. You know, the likes of a Transaction Capital, you know, absolutely shocked the market and continue to shock the market. Now, we can argue whether the analysts got that right or wrong. But expectations weren’t, you know, that we, by course, would be under as much pressure as it was. Generally speaking, though, most earnings forecasts are guided by companies and shouldn’t be that much of a shock.
Stuart Lowman: Simon, we like a tip for gamers, not a significant tip, but we like to close the show off with a gamer tip. Have you got anything or any words of wisdom for listeners?
Simon Du Plooy: So we’re in the final four weeks. I’ll go back to my comment on the previous podcast: this game is unique in that you can catch up or lose the game in the final week. It would hurt your chances if you had Implats today and were high up on the ranking tables. So now is the time to be more active and take more chances. It is ultimately a game, and winning here is to get to the top of the table, not necessarily to protect capital, which is the exact opposite of what we’re trying to do daily. So I suspect we’ll see, at least on those who played very actively, some significant portfolio changes in these four weeks because you’ve got limited downside, very limited in your reputation. But if you’re lucky, you could go up the tables, at least in your local group.
Stuart Lowman: Those dinner table reputations are significant, Simon. Thanks very much for your time. That’s Simon Du Plooy, portfolio manager at Corion Capital and Garreth Montano, director at Corion Capital. And a big thanks to our partners that make the podcast possible. That’s Terebinth Capital, Sharenet, Money Better and Clucas Gray Asset Management. And from me, Stuart Lowman, until next time, cheerio.
Read more:
FFM podcast ep22: Navigating bond yields and energy markets; Resilient Rand; Spar; R5k still to play for
FFM podcast ep21: Hawks, doves or uncertainty; Tencent doused Bob-less Naspers; Retailers kicking back
FFM podcast ep20: A media-fuelled frenzy; Rose-tinted glasses; Bottom drawers; A red aqua
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