Veteran investment manager Kokkie Kooyman of Denker Capital explains why the Rand and share prices of SA financial companies have risen so strongly over the past few days: the election results and ANC’s choice of GNU partners has avoided “an 80% chance” of the country replicating a Zimbabwe-type disaster. He cautions that there is still a risk of “own goals” and malevolent political forces derailing the nation’s future. But Kooyman, the winner of many global investment management awards, reckons a more likely scenario is a second wave of asset price increases driven by large foreign capital flows as SA’s watershed is fully absorbed in the world’s financial capitals.
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Highlights from the interview
The conversation between Alec Hogg and Kokkie Kooyman centres on South Africa’s recent political developments and their implications for the economy. Following a critical election where the ANC avoided a potentially destabilizing coalition, choosing instead to maintain a more market-friendly path, optimism has surged in financial markets. Kooyman highlights the positive market reactions, citing increased investor confidence reflected in currency strength and stock market rallies, particularly in the financial sector. He emphasizes that the ANC’s choice to uphold constitutional principles and maintain economic stability is crucial for attracting foreign investment and fostering economic growth.
Kooyman underscores the importance of constitutional integrity, particularly the independence of the judiciary and central bank, in ensuring long-term economic stability. He contrasts South Africa’s situation with recent developments in Mexico, where perceived threats to judicial independence led to significant market turmoil. Hogg and Kooyman discuss the potential economic benefits, such as lower inflation and increased consumer spending, if confidence continues to improve under stable governance.
Looking ahead, Kooyman suggests that despite initial market rallies, there remains upside potential in South African banking shares due to attractive valuations and expected interest rate cuts. He predicts that continued sensible governance could lead to sustained investor interest and economic recovery, though cautioning against potential political risks. Overall, the conversation reflects cautious optimism about South Africa’s economic prospects post-election, contingent on maintaining political stability and investor confidence.
Edited transcript of the interview ___STEADY_PAYWALL___
Alec Hogg (00:10.446) South Africa’s government of national unity has been welcomed around the world. It was a binary option for the ANC. They could have gone with the non-constitutionalists, which many believe would have been the end of the young democracy, but they didn’t. They went with the constitutionalists. If you had predicted this, you could have made a lot of money in the markets.
Foreign investors are now looking at South Africa and saying, maybe it is investable after all. We’ll find out if that is a prospect with Kokkie Kooyman from Denka Capital.
Alec Hogg (00:54.542) Our political scientist, Frans Cronje, said it was a binary choice going into the election. Either the ANC chose the DA and a market-driven economy, or they took us back into what he called the Chernobyl option. Thankfully, the Chernobyl option was not selected.
The markets have reacted very positively thus far. People overreact in markets. How are you reading this?
Kokkie Kooyman (01:35.426) Yes, as Frans said, it was a binary outcome. Even on Wednesday evening, Thursday, it could have gone either way. We all think the choice made by the ANC, with President Cyril Ramaphosa, was the right one. The markets are applauding that.
There are many within the ANC who don’t believe that. Both local and offshore investors liked it. Money is coming in, evident in the Rand strength. JP Morgan’s graphs show how much selling there has been in recent years, both by local and offshore investors. Everybody was underweight. Our banking system is strong, shares are cheap, so a positive outcome resulted in a strong rally. But people were too afraid to take that bet. Today is quieter.
Financial shares are still up 1-2%. The big rally of almost 18-20% in the last two weeks, a lot of it in three days, has taken place. If you look at the valuations of bank shares, FirstRand was trading in 2019 pre-COVID at 2.7 times price to NAV. It’s now re-rated to 2.2. ABSA was trading at 1.6 before the election, it was at 0.98, now re-rated to 1.17. Others are similar. ABSA’s normalized price to net asset value is 1.6.
Kokkie Kooyman (03:53.538) If ABSA generates a return on capital of 16-18%, it should re-rate to 1.5 or 1.6. This isn’t without risk. The market sees we’re heading in the right direction. Even if the government does nothing, simply money coming back into the country and Rand strength will ensure a further petrol price decrease, putting money back into consumers’ pockets. Inflation comes down, leading to a positive emerging market cycle like in 2003.
Alec Hogg (04:23.79) Hmm.
Kokkie Kooyman (04:50.434) Similar to after Nelson Mandela was elected, governments initially need to do nothing. The markets are reacting positively, putting money in consumers’ pockets, boosting confidence, resulting in job creation. If the government, the combination of ANC, DA, and other parties can be sensible, a lot will start happening, and confidence will return.
Alec Hogg (05:22.222) So just don’t score any own goals, and you will see improvement. Is that a reflection of how badly the country has been perceived internationally?
Kokkie Kooyman (05:35.746) Yes, it shows how poorly we were perceived. Recently in Mexico, Claudia Sheinbaum’s victory led to talks of changing judiciary independence, causing the peso to fall 9% and bank shares to fall 15%. Here, we have the chance to cement our constitution, proving we are a constitutionally driven country, making decisions that will create jobs.
Alec Hogg (06:51.214) Explain to a grade seven student why an independent judiciary and constitution are so important.
Kokkie Kooyman (07:10.754) Politicians are paid to do their job and get re-elected. They have a lot of power and can make short-term decisions. The Constitution ensures the governing party doesn’t use power to the country’s detriment. Judges must be independent to rule fairly. The central bank’s independence prevents short-term, harmful economic decisions. The constitution stands above the ruling party, ensuring long-term stability.
Alec Hogg (09:03.246) Kleptocrats love autocracies because they hate restraints like the media and judiciary. We know power corrupts, and absolute power corrupts absolutely.
Kokkie Kooyman (09:17.026) Absolutely. Our team has studied changes in Ireland, Portugal, and other countries that moved towards better democracy and decision-making. Examples include Ireland’s 1980s and 1990s miracle and Georgia and Indonesia’s moves away from corruption. The South African economy and consumer have been under immense pressure. Confidence returning will lead to spending and job creation. Improved confidence and lower interest rates benefit the financial sector, which thrives on a good economy.
Alec Hogg (11:57.774) So, even if you haven’t bought these shares yet, there is still upside and potential for good returns?
Kokkie Kooyman (12:13.378) Yes, the initial rally has happened. The Rand is just below 18. Johann Els of Old Mutual says the fair value for the Rand is 12, though it may not get there. Even an improvement to 17 will bring inflation down, allowing the Reserve Bank to cut interest rates, benefiting the financial sector. Valuations are low, and buying good quality assets when mispriced offers growth and re-rating. If the ANC and DA work together, the ANC could get back to 40-43% as the economy improves.
Alec Hogg (14:15.534) The Economist and The Financial Times welcomed the election result. How long will it take for international investors to react positively?
Kokkie Kooyman (14:45.554) It depends on the institution size. Smaller funds react immediately. Larger institutions need investment committee decisions and more research. JP Morgan and other big houses will start upgrading SA banks to overweight. Passive investors will follow as SA banks increase in the index. Interest is back, and the process will continue if we avoid own goals.
Alec Hogg (16:57.87) It’s like having a gale force wind behind you. How can the public understand that market reactions are important?
Kokkie Kooyman (17:39.138) Socialists dislike the market because it forces efficiency. The market allocates capital to the best opportunities, even if it means closing inefficient businesses like Eskom. The market creates new jobs and improves decision-making by holding management accountable. Government institutions often lack this accountability, leading to sloppiness and corruption. The market’s excitement stems from stepping back from carried employment and corruption towards better decision-making.
Alec Hogg (20:04.27) Pre-election, international observers might have thought South Africa could go the way of Zimbabwe. What were the chances of that happening before and after the election?
Kokkie Kooyman (20:06.978) Pre-election, the chances were high, around 60-80%. Post-election, the chances are less than 50%, around 40%. The shift to MK away from the ANC was unexpected, but there’s a real chance we can reverse the negative trend. The EFF and MK will try to discredit the DA and derail the process, but the chances have improved dramatically.
Alec Hogg (22:43.918) Kokkie Kooyman of Denker Capital. I’m Alec Hogg from BizNews.com.
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