Speaker 0:
this programme has been created so you can put your questions directly to the experts. This is in the hot seat.

Speaker 0:
Welcome to in the hot seat Asset TV, Local equities with me, Joanne Benham. Today I'm joined by Duane Diar, manager Lorian Capital Gavin Wood, Chief Investment officer Camis Asset Management and Simon Sylvester, head of research and co portfolio manager Rico Asset Management. Welcome to you all

Speaker 0:
just to remind you all you're all gonna give them a quick five minute topic idea and tell us something new and interesting. So due I'm kicking off with you. What's your five minute idea? So right now, where are we seeing opportunities in is in domestic focused companies and you might ask me why.

Speaker 0:
I mean, we all know there's major structural problems with South Africa and you know, you just have to turn on the TV and there's a lot of negativity and pessimism around it, and that flows into the equity markets. And if you ask us, how does that get solved to us? It would really be through private enterprise. Now the problem in the past is the government's ideology has been quite different from private enterprise they haven't really worked well together. And we think you're seeing a change in that now. So something like Operation Und, which was launched in October 2020.

Speaker 0:
And it's really a joint initiative between Treasury and the presidency working to try and fix some of these structural issues. They're focusing on network industries, so that would be electricity, water, telecommunications and logistics. And, um, you know, out of the 35 things they identified, 11 have already been done, and they think they can do another 10 in the next 12 months, which is pretty exciting.

Speaker 0:
So things like the the the 100 megawatt cap, which was lifted in December 22 that's for private enterprise for private embedded electricity production. That was really driven by them. And, you know, in the last 12 months, we've seen over four gigawatts of private embedded, um, generation electricity generation being registered with NSA. And that's pretty exciting. So that would be a stage of load shedding when it comes on.

Speaker 0:
So they're really getting traction, you know, when it comes to water, they've restarted the red um, drop blue drop green drop system, which really tests water around the country and see what kind of quality of water we have. Um, and that's a step in the direction of fixing the the water systems in the country. We've seen the spectrum auction happen, so that was That was great and fantastic there. And they're working closely with Transnet to fix the logistics system, which we know is broken at the moment and trying to get private enterprise to invest in that as well. So we see good traction there.

Speaker 0:
On the flip side from private enterprise, we've seen a lot of the CEO S of, um big JC listed companies get together, and they formed committees that are really focusing and working with the government in three areas. And that would be electricity, logistics and security. And talking security is not only our personal security, but infrastructure, security, state security, et cetera. And they've given very good feedback that they're really working well with government.

Speaker 0:
In fact, we've seen private engineers, um, be deployed to our open cycle gas turbines, and that's to work out. Can we get more diesel to them to produce electricity for Eskom? Now, we're gonna see, uh, four private sector teams being deployed to four. The power stations that Eskom is really struggling with. So you can really see that that relations getting traction.

Speaker 0:
So we think if you can sort out some of the structural issues, you can really get South African growth going again, which would be quite exciting. And the fact that we think the markets are pricing in quite a dire situation at the moment. So if you were to take a stock like a S a, which we think is attractive, trading on sort of a 64 P 9% dividend yield below book and it generates 17 17% ROES and earnings are still growing. And it's well provided,

Speaker 0:
Um, I mean, we think there's a great opportunity there, so banking, looking attractive, something like a Foschini. We also think there's an interesting opportunity there. You know, 40% of the business is offshore, so only 60% in South Africa. So we don't think the market takes that into account, and the South African business is still growing, so doing quite well. Um, they've got batteries in most of their stores. Over 70% of

Speaker 0:
the store, so resilient from a load shedding perspective and load shedding has had an impact on them. So if we were to see load shedding tail off, which would be our base case into 2024 and 2025 you know, you should really see their earnings come back. So that's where we're seeing very interesting opportunities at the moment. OK,

Speaker 1:
thanks. Uh, at Commisso, we spend most of our time looking at, uh, stock specific situations and getting to know the the real fundamentals of the economics of a of A company. So what I've done is I've I've chosen to to talk about MTN, which is one of our key stock picks in the portfolio. Just give, uh, the viewers a sense of what the underlying valuation drivers would be for a stock like MTN, which operates in some really exotic exotic locations with some interesting economies and interesting governments.

Speaker 1:
And, uh, so the the investment case would form a couple of a couple of parts. One would be the base telco company, which is positioned in 19 markets across Africa and the Middle East, and it is facing a huge and growing population. It's one of the few areas of the world where a young demographic is is emerging and and and growing very rapidly, whereas the rest of the world, including China and and and obviously uh, Western Europe is shrinking and ageing.

Speaker 1:
So we're a young population in Africa and growing with that, uh, incomes are growing fast. So you've got a fast population growth. Additionally, fast income growth per capita and MTN is well positioned with dominant market shares in in in many of these markets,

Speaker 1:
and they provide a service which is in many ways an essential service in these these economies. Uh, it's an essential service for social uses, social needs for people to communicate with each other, but also for for business needs, for economic needs, for small businesses and larger businesses to to operate better. So it's It's a vital part of the African economy and and growing, and it's very under penetrated. So the digital economy within Africa is is very under penetrated.

Speaker 1:
And, uh, very few people actually have, um, full access to to data and and three G and four G, which is is part of the growth curve. Uh, and and the the last part of the the the core thesis would be that the competition is is reasonably limited for MTN. Their blended market share across, uh, across their markets is about 48%

Speaker 1:
uh, which is very, very high. So they come at it from AAA very high, uh, scale advantage with their platforms, uh, a very strong incumbent position and with services that are essential and and marketed to a growing population with growing incomes. So that would be the base of business, which is highly cash generative. It's reasonably strong, strongly growing, with many bumps in the road given their exotic locations.

Speaker 1:
Uh, but the long term picture is very strong. The second part of their their business and the investment case would be they're very fast growing businesses and in particular, uh, Africa is very unbanked. So financial services across Africa are very, very nascent. And 90% of African commerce and transactions happen by cash, for example,

Speaker 1:
uh, with cash. And so, uh, so MTN is is has this network of millions. They've got 270 million subscribers. They have millions and millions of building relationships, uh, right down to a granular person level in many, many villages across Africa, which reaches into these these communities and has a commercial arrangement with them. And they have this digital technology which is able to leapfrog any other,

Speaker 1:
uh, infrastructure that other banks and compete Competing offerings could could, uh, need to to to access those those populations. And they can provide mobile banking digitally to, uh, to these populations and their client base, uh, with reasonably low additional cost in Capex and the the the financial services that they offer a very high margin for them

Speaker 1:
and, uh, and and very high return on capital. So you've got this very fast growing origin, really very fast growing profit pool, uh, providing mobile banking and other financial services payments and and and other, uh, transaction services and and and and lending right across their client base and very under penetrated. So,

Speaker 1:
uh, that would be, uh, uh uh uh, part of the second part of the the business. The the other part of this. The second part of their business would be that they've got infrastructure assets that are, we think, very under, uh, appreciated within the the share price. So they have fibre extensive fibre networks across Africa. They have extensive tower networks across Africa,

Speaker 1:
uh, which they have a stated intention of monetizing to some degree in other words, selling and realising value or making the listing and and and making the value very apparent to to shareholders. So that would be an additional part of the the second part of the investment case. Um, the third part would be, uh, be things that MTN has in its favour, which we wouldn't value in our base case. But if they go right, could be very material for for for them.

Speaker 1:
So one of them would be, uh, would be, uh, other financial services and other services that they can sell to their client base. So, for example, they have a joint venture with sunlamp to to provide insurance to their client base. It's a longer term opportunity. It's not yet, um, growing to to any great degree, and it's not yet profitable to any great degree. But that down the line for also very under penetrated insurance market could be something that could add value. Uh, they have a very large business. In fact, it's one of their largest businesses in Iran, and in Iran, they,

Speaker 1:
uh, it's It's obviously one of the most exotic locations and uh, and we describe very little value to that business, but it it remains a very profitable, very, very good business. Uh, and if the no, the situation in Iran and the Middle East normalises just a little bit and and it's very hard to imagine it gets much worse. Uh, if it normalises a little bit, that could be a potential upside. Uh, and and ultimately they could realise that and sell it or or or or get cash out of that business.

Speaker 1:
Uh, and then, uh, and then they have, uh uh uh also a twinkle in their eye, in many respects is they have this, uh, uh, super app or a universal app that they called Ayo, that they are marketing throughout Africa to their client base, which, as as Africans get more and more smartphones, uh is potentially the super app that services Africa and super apps are very, very important. And something that doesn't doesn't occur really in the developed world like America and Europe,

Speaker 1:
and many companies are trying to get to it. But it's an it's an access portal within a a smartphone where you do a lot of your commerce and you do a lot of your activities. And in China, Tencent Wechat is very successful in that regard. Uh, and this a is a twinkle in the eye, but it potentially longer term down the track could be very valuable, and it's a and it's a very, very good starting point.

Speaker 1:
So So when one reflects on on all of those aspects of the investment case and you do the numbers and you look at MT and trading on a a free cash flow yield of of something like 12% a historic PE of of nine times, which I think is is is a little bit fictitious and misleading Given that, uh, some of the currencies that they, they, um, they report in translating into rands you'd need to depreciate, uh, given the the the true fundamentals in Nigeria and Ghana, for example.

Speaker 1:
But if one adjust for that, we'd say they're on a historic P of 12. I, uh, and many of their businesses, as I say, are very fast growing, and we think that's a It's a fantastic opportunity now with that share price where it is,

Speaker 1:
uh, to enter into MTN and and and ride that investment case into the future.

Speaker 0:
Thanks, Gavin. I love that word. Exotic. A great way to describe certain regions of the world. Simon Great. So so something We focus on a lot is risk management. So if you could put portfolio managers and we can talk about our stock picks all day long

Speaker 0:
conviction, stock picks, we've done all the fundamental work and dug through it. But we we try and do something a bit different where we overlay a risk management on top of our high conviction stock picks to get a different kind of outcome. So I thought, in that context, to give give an example to illustrate our process. At the moment, we've got about a 10% in total position to discovery and momentum,

Speaker 0:
and I'll talk through the reasoning. Why

Speaker 0:
a lot of portfolio managers at the moment a lot of commentary is talking about how cheap South African anchors really cheap dividend yields of high single digits. Low PE S. It's a fantastic place to be, but of course it's cheap for a reason that there's these tail risks. You're worried about Eskom. You're worried about the South African consumer and so forth.

Speaker 0:
So how's this gonna play out isn't so certain in the next one or two years, but over the long term. 5, 10 years. If everything goes fine in South Africa, buying things on a seven PE with a 9% dividend yield you South Africa improves, you're gonna make money off that. So, thinking about risk management, how can we get exposure to S A Inc without taking too much of the risk within our portfolio so that we can get the benefit of that cheapness but not take so much tail risk? And that's something at risk. We've always trying to avoid this tail risk. Um,

Speaker 0:
for career management, you take take tail risk because it doesn't happen very often, but you get your salary and bonus every year. But for portfolio management risk, we take a lot of care and tail risk. Think about the macro risks, think about the country and so forth.

Speaker 0:
So discovery and momentum are interesting and that they cheap discovery is obviously a little bit more expensive, but a 12 PE forward. But it's got growth close to 20% so that's that's pretty cheap in that context. Relative to its growth, momentum is also cheap. It's P is about six, and it's getting growth. Maybe high single digits over the next couple of years, so still relative to its P is pretty good. And it's got a high dividend yield. Discovery doesn't

Speaker 0:
so those those two fitters kind of growth at a reasonable price type of shares. But here's why. I like them over some of the other exposures within S A Inc. Because they don't have this short term S a consumer risk. We were really worried with the interest rate tax, with everyone putting solar and renting it. You're seeing the consumers under a lot of pressure. And the banks recently have spoken about Standard Bank recently speaking about how even in the mortgage space that they seeing pressure on the consumer and so buying an S. A retailer now that looks cheap, will

Speaker 0:
with discretionary spend and the S a consumer that you're wondering whether they're even turning on the heaters because you see Eskom demand has gone down. Is that because the consumer has it can't afford to turn on the heater? Or is it because there's been an industry that's gone bust? Why has electricity demand fallen so quickly, and discovery and momentum don't have that sensitivity in the short term to the S, a consumer within their businesses. Discovery, of course, has this global growth story. So as an S A Inc play, you get the upside of South Africa improves and everything goes fine in this country.

Speaker 0:
But also, if there's problems, you've got a little bit of protection and that it does have this really nice growth business. A lot of people worried about health insurance in South Africa. That's a really long term thing, and that's a structural risk to the entire economy. With such a narrow tax base, you can't force everyone to go to a government hospital. So that's that's not something that worries us, um, in in in the next in the medium term.

Speaker 0:
But if you think about it, the UK health business is a fantastic business. In 2025 we see the UK health business profit be about 60% of the S a health businesses profit, and that's a that's a business with tailwinds where obviously the NHS is under pressure. There's massive growth within the private sector health insurance, so that's a great business, and the UK composite within discovery is about 25% of the business profit now.

Speaker 0:
It's a really nice quality business, getting growth from a lot of different drivers, whether it's the Chinese recovery post covid with their vitality, partnerships building new businesses like amplifier. And as the bank matures, there's a lot of different drivers for that almost 20% growth that makes it a little bit higher quality. You can high expectation that they'll achieve something around that. And on a 12 P, that's really good value

Speaker 0:
momentum that's a bit cheaper. It's probably an unloved share, uh, but unloved for reasons that I understand. So I. I don't like buying value when you don't know why it's cheap. You want to know why it's cheap and momentum have had some issues domestically within their life, business and the metropolitan business. But they're very clear issues, and they they issues, they can turn around. And so you got this business on a six PE, probably one of the cheapest SAN businesses.

Speaker 0:
The Indian business is valued at zero, but recently got an investment from the Abu Dhabi Sovereign Fund that puts that Indian JV value as part of momentum market cap about 20% but it's completely ignored by by the markets now. I don't know if I'd give it such a high value. Now we need to see how it plays out, but it certainly has some value. So again you're buying a cheap S A Inc.

Speaker 0:
But you're getting global upside optionality. So from a risk perspective, it really adds a lot of value to the portfolio construction. Because you, if the tail risk in South Africa does happen if it doesn't, Eskom is looking good at Stage three. Now. Everything feels really nice in South Africa. I think sentiment goes with Eskom to push these days and, um but But nonetheless, we'll see how this plays out.

Speaker 0:
If South Africa does really well, these SAN shares are going to do well. But if South Africa does badly buying a cheap retailer or a cheap bank, if people start, if if there's more defaults on mortgages and so forth, you could be in for a rough couple of years. As as things have to settle down and so that's why I like like that idea that illustrates our so our style of risk management and conviction. Stock picking together and bringing in the macro environment.

Speaker 0:
OK, so we discuss some stock ideas. And one of the themes I'm picking up here is trying to find earnings outside South Africa. So it's not just an A play, but equally S. A could be improving and no one's kind of pricing that in. Let's just go back to Global for a second, and then we'll kind of dig into local. One of the theories that I've been reading is that interest rates will be higher for longer. And Wayne, what do you think that means from a portfolio construction perspective? When you think about equities, if we have higher interest rates than we've had for the last 10 years?

Speaker 0:
So I mean, looking at domestic equities, obviously that would imply generally, that you have higher interest rates domestically as well for longer. Um, I. I mean, even though we've seen the inflation print that came out recently and it was better than expected, so those expectations have sort of the interest rate hike cycle has moderated. Certainly

Speaker 0:
that that means sort of higher discount rates generally and lower PS on stocks. So I mean a a cheaper stock well not cheaper stock market but using high discount rates in the stock market. So let's say the stocks looking more fairly priced. So if you would take a stock like AA and use the current long bond yields of close to 12% plus the equity risk premium, suddenly it's not looking that cheap if you're using, if you truly believe that is where rates will stay for longer, but you don't believe it. So I mean, that being said, we do believe that US interest rates

Speaker 0:
probably stay slightly higher for longer because we think inflation is more sticky there. That being said, we think with the rand coming in in South Africa, that obviously helps inflation. Yeah, plus, we've seen food inflation now roll over and generally our inflation. We expect in July to come back into the central bank's range. We should see we are at the top of our interest rate cycle and that will give them room to manoeuvre and our interest rates will start coming down. We think there's also a lot, you know, if you look at South African long bond, there's a lot of risks around South Africa that are priced in like total blackout.

Speaker 0:
You know, there's very high levels of load shedding political risk around the elections next year, etcetera. And we think as we move through that and we get through some of those risks, which would be our base case, you would see some of that, um, sort of that risk premium. Um, come come back in in bonds. So you have more of an optimist in nature thinking things are going to get better right now. I mean, you know, you you're off quite a low base at the moment. So we we really think you're sort of at rock bottom at the moment, so it's quite easy to get better from here. We would think

Speaker 0:
a question for you about risk appetites in markets. Most people now know all about NVIDIA, you know, price of sales ratio. Four EP of 200. What do you think that's telling us about what people are thinking about Mark? Is that a bullish sign or bearish sign when companies like that are running really hard? What do you think?

Speaker 1:
I've got no real idea What? That what that's telling us. Other than that, perhaps there is a segment of the American market that likes a really strong story, and

Speaker 1:
that story gets very over hyped and gets very overvalued. Uh, and sometimes it's not overvalued. So and then that's what I think people are hoping for is that

Speaker 1:
two years ago it was crypto, and anything crypto related was valued very highly. And we've seen how that ends, uh, three years ago, four years ago, with perhaps something else. At the moment, it's artificial intelligence and anything with artificial intelligence. Uh, flavour in it is doing extremely well, and NVIDIA is the spice of of artificial intelligence flavour. It is the heart of anything that's to do with these large language models at the moment and processing, and it doesn't seem to have any competition.

Speaker 1:
So it is the most fantastic story amongst an incredible story of of a I and what that could be, uh, economically. So I think it. I don't think it tells us anything unique. It tells us that a segment of the market likes to chase a really strong story, and potentially, it's, uh something that pays off a lot. But at a trillion dollars for NVIDIA, it's pretty unlikely, but it's possible. Uh, But there's a segment of the population that loves a good story and loves to to follow that story with their their money. And, uh,

Speaker 1:
yeah, it's not what we do

Speaker 0:
know. It's not what you do. I just want to get because you've been in markets for a long time and it's more sentiment indicator because, Simon, my question to you in one of your commentaries, you write the the future is not going to look like the past, which is pretty obvious, really, because it never does. But what do you mean by that? And how do you think about that from a portfolio construction within local equities?

Speaker 0:
Yes, so So the comment probably more relates globally. And this kind of how we've been in this 40 year bond bill market and things have structurally changed. And so it's higher interest rates for longer story, which people are grappling with. How does it play out? The natural human tendency is to say interest rates are just gonna go back to where they were. It's like a comfortable, comfortable space, but now that they're not really doing that, it's OK. They just take a little bit longer to go back to where they were, but they're still gonna go there. And we think it's important that you can manage the

Speaker 0:
the the environment, your your portfolio in the context that maybe that's not gonna happen. How do you How does that play out and thinking about the different risks? So you might hear someone say No. Um, interest rates are going to stay high for longer because inflation is gonna come down. OK, But that's not the whole story, OK? Because why did inflation come down? Did it come down because of a horrible recession? In which case that doesn't That's not good for equities. That's bad for earnings and so forth. So we try and put these puzzles together, and in that context and the interest rate regime, we think is very, very important. The liquidity regime

Speaker 0:
and in the past, market corrections. Recently, you know, GFC and and covid have been resolved with liquidity. And so in an environment where there's higher inflation, you can't resolve it with liquidity. Maybe we just need to have a good old fashioned bear market and a recession.

Speaker 0:
Uh, maybe maybe that's gonna happen, and I don't think the market's conditioned for that, and that's kind of our thinking. It's It's a bit of a different environment. You got to think about risk and maybe to use an example. So let's take insurers verse banks OK, when interest rates stay higher for longer as a bank. Initially, when the interest rates go up, the banks are enjoying it. They're getting the the interest margin benefit. So shares like Absa and so forth their earnings are looking good. But when interest rates stay high for longer,

Speaker 0:
it's actually bad for banks because obviously you get your credit losses coming through because you're squeezing the consumer. Whereas an insurer like Discovery has been complaining about the low interest rates in the UK, and it's actually been detrimental to their insurance business. So, yeah, we can still buy cheap SAN, but actually that that is very comfortable with interest rates staying a bit higher

Speaker 0:
over time, it's actually better for a life insurance business as opposed to a bank where you're squeezing the consumer into eventually some kind of higher default. So, Gavin, a question for you on S A Inc in South Africa, you've been quite vocal to say that you think structurally there's some earning issues here,

Speaker 0:
this economy. So back to the stock picking ideas, what kind of local shares apart from MTN that you discussed? Are you looking at you saying these have different drivers? We're not relying on the economy. They've got self help stories. What are the reasons are what are the sort of a shares that are interesting you at the moment?

Speaker 1:
Yeah. I mean, I think that that the problem with the narrative that S A Inc is going to get a lot better is that it may do that,

Speaker 1:
but it's the path dependency, so the path that it takes towards improvement and it is a low base now. But the path could go lower for now for a for a while. And so given that you want to be in companies that are are, uh, a lot less vulnerable. So in particular, that leads us to err on the side of companies that are less leveraged with a lot less debt, uh, and and also in a in a raised interest rate environment. And who knows how long that will,

Speaker 1:
uh, last high interest rates. But in a high interest rate environment, it's It's those highly leveraged companies, companies with a lot of debt on their balance sheet that can get into real trouble. And we've seen a number of examples of that. Uh, most recently, let's say SPA, which it hits some operational problems and load shedding is hitting them pretty hard. But they've got a very stretched balance sheet right now, and and that exposes them and and,

Speaker 1:
uh, and so on there. There are many companies like that which are which are highly leveraged and and if things go wrong, they can get severely taken out. Equity shares can can. Equity holders can take, get, get taken out. So on the one hand, we're looking for very strong balance sheets. The second thing that we'd sense our sense would be that the the S a economy doesn't grow very strongly for many years to come.

Speaker 1:
And notwithstanding some of the improvements that are coming down the track like electricity provision, there are many other structural problems that I I don't want to get depressing and talk about them. We all know what they are, but in particular a very large, unemployed, unskilled population that's unlikely to ever get a job. Uh, so that that's a massive structural problem for this economy, and it's just gonna hamper growth for years and years back decades to come. So in a in a

Speaker 1:
a low growth environment, what you want to do is you want to be positioning companies that are executing extremely strongly and growing market share so that you're not relying on the economy to grow. And so we're looking for companies where management teams are really superior. Business models are superior, and they're actually able to take advantage of the complexity and the complexity of the environment that we we face with all the challenges from municipal service delivery inadequacies to load shedding and dealing with all these issues.

Speaker 1:
Uh, but dealing with them a lot better than their competition. So a good example would be a shop right versus pick and pay where ShopRite is out competing them on almost every front, uh, out competing pick and pay, uh, and, uh, and taking market share reliably. Another one we really like. And and it is quite big in our portfolio is Pepco, where, uh, they are have, over the last decade or so, taken a huge amount of market share of the apparel retail sector, uh, in particular from Edgars and Icon,

Speaker 1:
but also from others through this last decade and a bit and executing really well, very well positioned, with massive scale buying, scale purchasing scale that scale into all of the various parts of the country and and executing extremely well in their various businesses and and at a price point where in a tough environment people trade down.

Speaker 1:
Uh, they'll be trading down to Pep and amen and and some of the other brands. So So that's a particular type of company we're looking at for strong balance sheets, Great management team that are taking market share. Great management teams, business models and in particular things like a bank is, on the surface, very inexpensive. And those numbers that that that one looks at are they look inexpensive. They look very appetising.

Speaker 1:
The banks happen to be the most leveraged companies on our market, and I

Speaker 0:
want to bring in here because you mentioned in your opening commentary that the deal I think you said Absa was 9% PE ratio of six. If you listen to Gavin and you wonder where we are going with this just

Speaker 0:
fight your corner. I want to hear this. So So I mean, banks are inherently leveraged, there's no doubt about it. But I mean, if you look at the way our banks are are run and the capital adequacy ratio is they're very high and they're very well capitalised in the South African market, they were very well provided. So, yes, there's stress coming through. And the banks have reported stress in mortgage and retail part of the bank. That's quite small. I mean, if you look at the the corporate investment bank books, they they're running very well.

Speaker 0:
And so the banks, I mean, have gone slightly out of their range when it comes to provisions. But most of them are are pretty healthy when it comes to provisions and still growing their earnings. So great opportunities to grow their books into an economy where let's say, people are looking for loans for green energy, et cetera. So opportunity to grow,

Speaker 0:
um, And then on top of that, we think there's a lot priced into the banks. So if you look at that valuation, you know, 9% of yield six PE, it's almost the opposite sentiment argument earlier about NVIDIA to to listen to everyone. Everyone hates a NC at the moment.

Speaker 1:
The problem with Banks is that if you've got assets of 100 you've got liabilities of 90. And if your assets have credit losses of 10, you wipe out your capital base and your equity shared is wiped out.

Speaker 1:
And I think it's very underappreciated when looking at dividend yields or earnings. And just look at the last year we've seen a Swiss bank, one of the most preeminent economies on Earth, a Swiss bank go under.

Speaker 1:
Uh, we've seen a whole lot of American banks. No, no, I'm not saying that I'm not saying that at all, but in in rough times and with with uncertain times and real tail risks in the potential on the horizon, very weak environment. I think being in leveraged, uh, companies is is a real potential value trap, and it and and I'm not saying that our banks are gonna go under necessarily. But you could take big hits from various parts of their their businesses in a in a downside scenario,

Speaker 1:
and and and you just look at the the the the the American Regional Banks in the last little while. Many of them have gone down for a wide variety of reasons. And in the US case was run on the banks from the deposit point of view because yeah, OK,

Speaker 0:
so let's take away from banks for a second. I want to talk about the large sector of the market we haven't even talked about yet is resources so D? I'm gonna give you a chance here. What are you thinking about Resources? Because on the one hand, I'm reading,

Speaker 0:
you know, it's a macro view. I'm reading that China is being a bit disappointing in their growth, and they're not going the property route like they used to. So what does this mean for resource shares in South Africa? So So when you say China has been disappointing with their growth compared to what the market expected with the big opening, Yes, you know it's still growing at. Let's say that they're targeting 5% growth this year. That's still decent growth. So maybe it's 4.5, you know, depending on what happened, so it's still very decent growth. Um,

Speaker 0:
but that being said there is a structural change where the growth is coming from. So it's more from consumer. Let's say consumer retail sales growing in the teens, whereas the infrastructure spend is literally growing mid single digits. And most of that is actually government led, not private um, sort of property investment. So there is a structural change there which is probably healthy for the economy, that structural change. And because of that, we probably a little more cautious on commodities like iron ore, where a large percentage of Seaborne iron ore goes into

Speaker 0:
the Chinese market. Let's call it 70 to 80% and more constructive on commodities like copper, which is really plays into that growth of electric vehicles globally, especially in China. The build out of electric networks, Um, things like that, Um, we also constructive on platinum group metals at the moment, which is under a lot of pressure. But there we see that there has been some offloading of the inventory into the market. Um, there's a huge worry around electric vehicles. We,

Speaker 0:
the share of electric vehicles, really grow in China. But a lot of that is hybrid electric vehicle plug in electric vehicles, which actually still use quite a lot of PG MS um so if we look at the supply so it's limited supply to the South African market. Very, very little new mines being developed same out of Russia. And we look at the demand over time with stricter restrictions When it comes to, um, let's say, um, emissions in China. Six P going forward, um, and

Speaker 0:
hydrogen in the future, we think will will sort out a part of the the transport infrastructure in in bulk. Um, transport, et cetera, and PG MS are obviously used in that. If we put that all together, we still very constructive on PGM metals at the moment. So that would be sort of our lay of the land. When it comes to commodities I know you've got I think your platinum ETF is your largest holding

Speaker 0:
right and your equity fund in the PGM space. Because this this comes down to this risk management idea. You can't always get what you want. So it's nice to have cash flow balance sheet, good management, growing market share. But you've got 80 shares, 100 shares to choose from. So when you have this list of stuff you want, you go for your shopping list, and you can maybe find a couple of shares for this one time and point in time and then a different

Speaker 0:
couple of shares the next time you we're doing some marketing. But the reality is we've got to build a portfolio. We've got to think about risk. You gotta make sacrifices. You got to buy something. Maybe you don't want as much. And in the case of PGM, what we did is that's why we bought the platinum ETF. We said, OK, sorry, Simon. I interrupt you there, but your clients do have choice. They don't have to buy local equities at all. If they're not in a R 28 portfolio,

Speaker 0:
you don't have to buy those 80 shares. So maybe you do. But we've got to think about this from a global context today. Should you buy what you want to buy? OK, so talking in the South African equity space. So our multi asset funds have a low exposure to South African equities, and then our S, a invested fully invested in

Speaker 0:
fund, has a risk management kind of this idea. We fully invested, but risk managed. So as a good example, PG MS so there. We've invested in the platinum ETF. We've lost a little bit of money, but we haven't lost the 30% drawdown that you've had in the minor. And so from a risk basis, you said OK, well, we like

Speaker 0:
the global supply and demand and maybe their support for platinum. But you don't necessarily get the best exposure through a miner which has cost inflation, which is very geared to the platinum price. And you take a lot of risk by buying a miner when there's a lot of kind of positivity around commodities over the last couple of years in the bay going into where it's very difficult to produce the metals here in South Africa and the costs are going up, better to be positioned with the metal

Speaker 0:
in rands than the miner. So from a risk basis you get a much, much better in this period. Risk return profile. Now. If the miners were a lot cheaper and we had still had a positive view on the metal, then we could move into into the mining space, and I think the other important thing on resources, maybe just to add, is because it always is. China and resources, and we put the two together.

Speaker 0:
But the reality is in South Africa, the resources space is is quite divergent. It's not all just China. You got to look at each commodity and look at the space of each commodity. The global supply and demand and do really detailed analysis per commodity. And the reality is a South African investor. The resources that we have listed in South Africa aren't great, and the only thing everyone seems to like is copper. But then you get it again. This whole thing of risk management, you get the copper, but you also get it with coal or iron ore, and you might not want the coal or iron ore with the copper.

Speaker 0:
And so this idea of a pure, pure play. Copper isn't available on the JSE. And so then how do you manage your risk and your exposure when you get something you want, But it comes with something you don't want. It gets a bit trickier. Then you said something very interesting that you said there's 80 stocks and we kind of you have to buy something in that mix. OK, so let's take two examples of companies that fund managers in Africa have bought because they didn't want to buy other things. Or maybe they loved it. Let's not argue that, but Richmont

Speaker 0:
comes to mind. So, Gavin, are you looking at Rimon at the moment? Is it just too expensive? Are you saying look, this is a company with fantastic pricing power, Great cash flow? Or are you just saying the valuations are ridiculous? Like to me forced buyers of the stock in South Africa? What are you thinking? Yeah, I'm saying

Speaker 1:
both of those things. I'd say it's a fantastic stock with fantastic pricing power. And,

Speaker 1:
uh, it's got brands that take hundreds of years to produce and and make so they it. It's impossible to have competition for some of those brands,

Speaker 1:
but it's vastly, vastly too expensive. Uh, it's, uh, it's benefiting from a huge amount of movement from services to goods, uh, spend over the last year or two or three after covid. And, uh, I think it's it's benefiting from a lot of windfall out of the US where US, uh, high net people high net worth people have done really well in crypto in tech stocks in a wide variety of other areas.

Speaker 1:
And, uh, and and it's now got. Now I got to tell when that China is coming back and China's tourism is is picking up and the Chinese consumers being a little bit subdued and is now coming back in a in a big way. So I think sales are very elevated.

Speaker 1:
And and I think what's underappreciated in this one is that it's quite cyclical. It's got quite a high fixed cost base, and demand is cyclical and it can. And profits can go up a lot and can go down a lot. And at the moment we're in a cycle where they've gone up a lot and the share prices are at, um, nose bleeding, higher levels, I would say nose

Speaker 0:
bleeding, high level. We've had exotic today and nose bleeding high levels. Dwayne um, pass process. You've got a company management team that's been buying back shares and the discount has narrowed.

Speaker 0:
But you've also got people in the market arguing this management team is being massively incentivized doing things that actually they didn't really add a lot of value on what are you thinking about? No, right now.

Speaker 0:
So I mean, when we think about the management team. We probably agree that over time management team, you know, created a lot of the cross holding structure, et cetera. That created a lot of the discount. And now they've instituted something the market's been arguing for for a long time, which is the share buybacks, which is starting to narrow the discount. So there's a lot of questions around that. If we look at where the stock is at the moment, we still think Tencent is extremely attractive. So I mean, you know, it's gone through quite a tough period. But if you look at its valuation, you take off the its associates portfolio.

Speaker 0:
And even if we put a a holding company discount in that, it's trading at sort of a mid teen P with quite strong growth forecasts going forward and they they're doing buy backs as well and returning a lot of let's say, um of those of the associate and bundling a lot of those to shoulders, so returning capital to shoulders, so that's great and then you're buying that through Napa process at a very wide discount, so that give you more of a margin of safety

Speaker 0:
and the management team, for all their faults, are sort of very focused now on closing that discount. So you've got buybacks. They they're looking at that core, what they call the core run portfolio and getting that profitable over time. So that should help close that discount and then unlocking value in that core portfolio

Speaker 0:
through listings or trade sales of different assets. So if you put that all together, we think it's still a very, very attractive investment opportunity at this point. You've been pretty bullish on us in process in the past, and I think it's still one of your top holdings. Are you not worried that selling the crown jewels so they kind of sell 10 cent and buy back shares? And then you're left with a whole bunch of weird and wonderful investments, but not quite the calibre of 10 Cent?

Speaker 1:
What do you mean that it's quite technical, So I'm not gonna be able to do it justice. But the mathematics of what they're doing and the discounts means they're actually the percentage rate in 10 and is going up per share. OK, so because the the process, uh, discount is so high, well, then I suppose discount is so high

Speaker 1:
when you sell 10 cent and buy back yourself, correct? Yeah, You're increasing the weight of 10 cent in your per share value. So they are going down. They've gone from sort of 29.9% in 10 cent down to what was it, 26% or 27%? Last I looked, Uh, but the per share value of 10 cent is going up in that that nice per share price? We'd

Speaker 0:
argue. We'd argue the faster they could sell 10 cent the better because that's the problem.

Speaker 0:
That's a VIE structure. It's Chinese tech. It's gonna get regulated. It's gonna become a utility.

Speaker 0:
That 12 PE could become a six PE, like Chinese banks as the government squeezes, squeezes profit. That's what happened in the Chinese banking system. It everyone has high growth love Chinese banks. And then they became utilities. And the Internet is in China's utility run by the government, and it's gonna squeeze profits for many, many years to come, and you're just not gonna see that earnings. Yeah, you've got earnings growth. Now we

Speaker 0:
Well, why? Why? We don't want to buy, uh a VIE structure generally if it's not giving us a reason to. But generally we wouldn't touch a VIE structure from a corporate governance perspective. But from selling 10 cents is important because that's the problem. Yeah, pardon. You think it's a good idea that they're selling 10 cents to get out selling 10 cents at a, uh, and the mechanics of it pushes the value of NAS up. I don't think they're gonna waste the cash that they receive.

Speaker 0:
They they they'll be disciplined in that. And you you will get your value from selling 10 cents if it comes to the NSP process structure in some form. And so a great, great idea, OK, and first share, it's going up and all these things are OK, but you brought up in the very beginning, Discovery was one of your best shares. Second biggest holding in your portfolio. There's a little thing called N. I OK, and now we might all argue

Speaker 0:
it's never going to happen. They will be in court for the next 10 years, but this this government has done a lot of things that we didn't think they'd ever do. OK, why are you so confident that discovery is going to be OK with this. OK, so So how we thinking a little bit about risk here. If the government implements N HR so that it would be disastrous for discovery, that will take maybe 10 years. OK, but that's a massive structural risk to South Africa,

Speaker 0:
because it's like we got to take away your private insurance or your private security. So with a narrow tax base, it's a huge risk. You can't just think about N HR being a risk just to discovery. It's a risk to the entire South Africa. OK, but but no one seems to care. In government. That was the that was the argument. They would never pass it. Yes, but it's not an emotional thing. It's to say OK, how much earnings contribution is the health business to discovery? So what's discovery

Speaker 0:
do relative to Sin Group or PP or Absa? If the government chases away all the taxpayers because they're forced to go to a government hospital, it's a bizarre scenario. It's a tail risk that could happen. What share is gonna do better if if the government implements N HR company with massive global growth over the next 10 years, a massive UK business, global RP that's gonna protect you to somewhat or an SAN share where you're chasing away the

Speaker 0:
the South African.

Speaker 1:
I just can I just put 10, 15 years. I put one little comment in there so I I would agree, Um, in general that I think the NR while it does look like a systemic risk and problem for the hospital sector and and discovery, I think the discovery health business is the jewel in the crown. It's cash generative, low growth, but cash generative. It's It's a fantastic business. It's an unassailable competitive position, so I I'd be less worried about that. But I'd be very worried about in discovery from a risk management point of view.

Speaker 1:
Is that and and one thing that we spend a lot of time focusing on to manage risk is whether the earnings are backed by cash flow

Speaker 1:
and, uh, they they they've got various businesses in particular the S, a life business which is large in their mix, where earnings is not very well backed by cash flow, so they create a, uh, assets on their balance sheet, and that translates into earnings, and they don't deliver cash flow. So for me, that would be The big worry is if there's experience is not what they expected in the life business and the earnings they've declared in the past, they actually have to

Speaker 1:
off because the cash never comes.

Speaker 0:
OK, guys, because we only have time to. So what's your opinion on discovery given NH I given insurance and cash flow? Do you have a strong position on it or not? If you don't? Don't worry. No So, well, NH, I we probably agree that, you know, it takes a long time to be implemented, if at all. I mean, I'd call that tail risk. You're going to define tail risk for one, I'd agree with Gavin. There are definitely questions around the cash flow

Speaker 0:
within discovery, so that would be once again a risk we less worried about it. When we look at all the work we've done around that overall, well, we think discovery is relatively fully priced when we look at some of the other insurance opportunities in the South African market. So we would rather own some of the other insurers rather than discovery which is fully priced, you know, taking on all the risk you take into account. Um, compared to something like a momentum, which we like to a certain extent,

Speaker 0:
um, or I sell them. OK, guys, we talked a lot about stocks today. I want to just end it off with one question and just kind of bring this all together, and I gonna start with you. Duane, if I sit in front of a client and I've got a choice between Sanc or S A equities Sorry. So you can be overweight S A Inc within it, but S a equities, global equities, or S, a fixed income.

Speaker 0:
Where would I be most overweight from a risk adjusted perspective. Do you think so? I mean, we would always advise a diversified portfolio. Um, we would think SA a domestic fixed income looks very, very attractive. So we would be overweight. That and domestic S a equity we would be overweight. Well, when it comes to global equity, I mean, it's very specific. So Chinese equity, we think looks very, very attractive versus US, S and P, we think looks expensive kind of thing. So they'd be more more specific, but generally underweight global equities. Gavin.

Speaker 1:
So I mean, the only way I can really answer that is to just look into the asset allocation in our balance fund, which has scope. And it's not at the constraints in any particular area. So we've got a roughly 73 74% in equities, which is pretty much half, half S a and and global. And we could have a lot more in global, but we don't We have it so they would answer between global and and S A. We find quite a lot of attractive opportunities in S a, um uh, the S a market and S a listed companies not necessarily Sanc

Speaker 0:
because

Speaker 1:
so S a listed companies. And then I think we are, uh, in the fixed income or yield assets side. We are almost at maximum in very long bonds

Speaker 1:
and, uh, and have virtually got nothing else from property to, uh, to money market instruments or anything else. It's long bonds that we, we really think are very, very underpriced. It's a very overweight that but a reasonably balanced, um allocation across it. So I think to for each client, you'd have a different mix of those. But for a balanced point client. That's how we positioned. Thank you, Simon. Suppose

Speaker 0:
those three asset class options highlight what's happened with R 28 because you left out global fixed income.

Speaker 0:
Well, I mean, that's too long a conversation. I just want what I'm trying to understand here. The question is S a equity is what we're talking about today. Would I rather be in a equities global equities or essay equities or S a income of those three if I had to choose? I mean, you could throw global bonds. You're right. But let's just stick to this. So in South Africa, we prefer bonds over equities globally. We prefer short data Treasuries over global equities. That sums it up beautifully. OK, guys, Thanks so much for your time today. Thank you.

Speaker 1:
Thank you.