RYK VAN NIEKERK: There are growing concerns that equity markets have possibly over-recovered since the market crashed in March and April this year. And it seems as if the valuations of most stock markets around the world have disconnected from underlying economic prospects and that investment risks have ballooned in recent months. Hannes van den Berg, who is the co-head of SA Equity & Multi-Assets at Ninety One, is on the line. Hannes, thank you so much for joining me. What do you think of current valuations? Do you think we have over-recovered since the crash in March?
HANNES VAN DEN BERG: Hi Ryk, thanks for the opportunity. Yeah, it’s certainly been quite a severe, unexpected, much faster than most people could get-their-heads-around recovery since we’ve seen that those lows in March and the first week in April. I think what happened in April was, yes, Covid-19 and that’s the one that everybody’s been focusing on.
But on top of that, we had an oil price, a geopolitical disagreement, which sent the June oil price futures into negative territory.
We also had, if I listen to my colleagues in London, we dialled in once a week and discussed some global themes and what we’re seeing in different markets and asset classes, a severe liquidity shock and subsequently central banks have injected not only a massive size or a lot of money but also the speed at which it got injected was much faster than we’ve ever seen before.
So maybe we’ve learned something from previous crises, but you’re right, that has now sent equity markets into territory where valuations do look a bit extended. And I think the way around it is people must now ask themselves is, are the fears of a second wave not priced in? Are we pricing a V-shaped – very fast – recovery too much into equity markets? And that’s where the risk lies at the moment.
RYK VAN NIEKERK: The S&P 500 is 8% from its all-time high. The JSE is 9% from an all-time high and the economic prospects are really depressed. In South Africa we will see a very deep recession; in most markets around the world, we will see recessions. Do you think the investment risk has changed due to this rather over-enthusiastic recovery we’ve seen?
HANNES VAN DEN BERG: That’s an interesting conversation Ryk, and I don’t know if we have enough time for this, because to a certain degree human beings like to do things together, social distancing over time will probably disappear. I guess the question is how long along will we need to go back to being social as we were before.
If we look at the markets, what’s priced into the markets, you’ve alluded to some of the indexes. I mean, if you go and look inside the index and just take our South African index, for example, as I look at my screen, Naspers is up 40% year-to-date, Prosus is up 55% year-to-date. Some of the telecommunication companies are up 15%. British American Tobacco is up 15%. Some of the commodity counters that we can invest in, which is a play on China, the likes of BHP Billiton, [are] up 10% for the year.
Then you look on the other side of the spectrum, our banks are down 40% for the year.
Some property counters are down 50% for the year. Some retailers are coming to the market with rights issues and asking shareholders to contribute more money to stabilise their businesses. So you also have to dive into which sectors have exposure to a V- or a U- or L-shaped recovery. And inside you need to do the right stock-picking and allocation, and that’s not only applicable to our market, but it’s also applicable to global markets as well.
Having said that, our economy, our South African economy was, let’s call it a bit vulnerable going into Covid-19. And this severe shock as Ray Dahlia [American billionaire hedge fund manager and philanthropist] pointed out in a video, right at the end of March, he pointed out that there is a severe revenue shock that happens to consumers and companies.
And that creates a balance sheet effect, a hole on your balance sheet that you have to fill with some form of liquidity.
And that’s unfortunately where I think a lot of the South African companies find themselves. They need to plug this balance sheet hole that occurred because of your revenue literally going down to zero with people being sent back to their homes and going into national lockdown.
RYK VAN NIEKERK: Markets are driven by professional investors, and there seems to be a significant change in the dynamics of many sectors, as you’ve just alluded to. How should a retail investor, a normal person saving for retirement, look at what is playing out now in markets locally and internationally, and is there anything you can and should do to try and reduce the risk?
HANNES VAN DEN BERG: Yeah, it’s a good question Ryk, because the number of calls I’ve received from friends and retail investors who would like to put a bit of money to work in the markets has really escalated, and I’ve received quite a number of calls as to which stocks and opportunities you buy.
I think globally one of the best examples is the share price of Hertz [and] airline companies, where these companies came to the market and said, we need to go into business rescue, or we need to file for Chapter 11 [United States Bankruptcy Code], which is a legal process [with] similar legal requirements [as] going into business rescue. And they’re saying to shareholders and funders ‘We don’t have a sustainable business model’. And with retail investors and, I tend to call it fast money, that has started to chase these opportunities, those share prices start moving upwards again with companies telling us that they’re going bankrupt.
So the risks here are that you need to decide on a medium- to a longer-term view of certain sectors and companies.
First and foremost, you want companies that will survive.
And secondly, you would like companies that will potentially be structural winners coming out of Covid-19. And obviously you want to avoid those that potentially will not survive or will be potentially on the back foot and struggle to catch up post-Covid-19.
Also, what I’d like to say is that it’s important to consider different asset classes, and don’t put your eggs all just in one, for example, equity markets and buy equities that you believe are bombed out and therefore there’s only one way for these equities to go, and that’s up. Some of these companies are going to require funding from shareholders, which means you will get diluted and the issue will get diluted even more with a second-round as they come and tap equity markets for funding.
RYK VAN NIEKERK: It’s also interesting that there are some concerns about the dollar as a so-called safe haven. Stephen Roach is an economist I follow quite closely, he’s from Yale University. He was also a former chairman at Morgan Stanley Asia, and he forecasts that the dollar, may devalue quite significantly, and in the not-too-distant future. He’s really concerned about the dollar and the prospect for the greenback. Of course, that will change the dynamic of world markets in itself, if there is a change in valuation for the US currency. Are you worried about the dollar?
HANNES VAN DEN BERG: Yes. There are several reasons why I’m worried about the dollar, Ryk. So I embrace and I agree with that view. One which is incredibly difficult to call is the US election – that’s probably going to be a volatile period between now and November, and whichever way that election goes. At the moment there’s a lot of uncertainty in the US, not only in markets but also in politics. So that is going to be an interesting dynamic. And which tweets do we see potentially escalating a trade war or not? And what will the outcome be because Mr Trump at the moment is definitely on the back foot and he will want to get re-elected.
But in addition to that, if you just look at markets, interest rates have been slashed to zero and central banks have decided they are all-in with regards to fiscal and monetary stimulus globally.
And we tend to think that the differential in growth rates, or the expectations changing growth rates going forward between geographies, tends to drive currencies. And it’s sort of a spiral between inflation, currencies, interest rates, and growth, and these are all linked. And you have to ask yourself, what is the growth outlook like for the US and how does that potential change in growth outlook pay off relative to the rest of the world.
We’ve seen a massive recovery fund impetus in Europe. We know Asia has come out of this stronger and faster than potentially the European and US geographies. I mean, Latin America, Brazil at the moment is a mess, and it’s very unfortunate in how it’s playing out from a Covid-19 perspective. And that makes Asia as an investment opportunity screen quite well. So that might lead a strategist, say over a call the other day, that the Chinese Renminbi might become the reserve currency of the world over time. You know, so that mindset will make people drift away from the US and potentially into other geographies. And that means weakness for the dollar, potentially, going forward.
RYK VAN NIEKERK: I had a discussion with one of your colleagues, Michael Power, a strategist at Ninety One, and he said exactly that. He says the economic power may move to the East, and that will change investment markets. How quickly do you think that can happen? Should it influence your investment choices at the moment, this potential long-term trend?
HANNES VAN DEN BERG: I think it’s already started Ryk. It’s already playing out in front of us. It’s not as fast and severe as people think it is, and it won’t happen overnight, but I’ve visited Tencent and I visited some of the companies in China just over a year ago, and what amazed me is the size of everything there and the innovation and the work ethic of people on the ground.
So I tend to think this [is a] shift, and that is potentially why Mr Trump tried to pick a trade war, because he also sees it as a risk and the approach with regards to Huawei and their distribution globally. But I seem to think the financial services sector, the reforms that are happening there, the stronger Chinese consumer, it’s slowly but surely [happening]. For example, the Chinese consumer in the luxury goods sector, the tech sector, the health sector already is trying to find a vaccine, it’s already started, and gradually, slowly, the world is starting to realise that the East is not only catching up but at some stage will potentially start to lead.
RYK VAN NIEKERK: How should investors look at investments in the East, especially equities. What type of investments would you recommend?
HANNES VAN DEN BERG: So in our multi-asset funds Ryk, we’ve got some exposure to what is called the Chinese H-shares Index [Renminbi-denominated shares issued by People’s Republic of China], which allows you to not only invest in Chinese companies but also in broader Asian companies.
You would have seen recently that Mr Trump made some comments about the listing of Chinese tech companies in the US and the response from those tech companies was, well, then we’ll just list [in] Hong Kong or we’ll list in Asia directly. And I think these opportunities are more and more going to come to the fore.
We’ve also invested into Chinese credit recently, corporate credit. Some of the property developers there have very stable balance sheets. And obviously there’s a lot of stimulus going on post-Covid-19 to make sure their job creation and growth rate stays intact.
So these companies give you 5% plus yield in hard currency, back to a South African investor, where currently, which we didn’t touch on earlier, for a South African investor, after 275 basis points of interest rate reduction, a money market fund is going to give you somewhere between 4 and 5%. So now you get 5% in hard currency offshore, which is quite interesting.
RYK VAN NIEKERK: Thank you, Hannes, we’ll have to leave it there. That was Hannes van den Berg, he’s co-head of SA Equity & Multi-Asset at asset management group Ninety One.
Brought to you by Ninety One.