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‘The market can’t predict who the winners or losers will be’

‘Stock picking and being more judicious when it comes to investment is going to be more important going forward than just getting the broad macro direction right’ – Patrice Rassou of Ashburton Investments.

RYK VAN NIEKERK: Welcome to my weekly Market Commentator Podcast, where I pick the brains of the chief investment officers of South Africa’s leading asset managers. We discuss the perceptions of the market, their investment strategies and probably, more importantly, which shares and assets they are buying and selling.

My guest today is Patrice Rassou. He’s the chief investment officer at Ashburton Investments. He has been in the asset management business for more than 20 years. Prior to Ashburton he was the head of equities at Sanlam Investment Managers for 14 years and, prior to that, he was at Old Mutual Asset Management for six years.

Patrice, thank you so much for joining me. You joined Ashburton as the investment head in March last year, just prior to the pretty aggressive market correction we saw, and then the quite impressive subsequent rebound. It must’ve been a pretty interesting 18 months or so for you there at Ashburton.

PATRICE RASSOU: Thanks very much, Ryk, and my greetings to your listeners. Yes, it’s been a baptism of fire for me, but we’ve learned a lot through the process. I think really when you want to get onto the field of play, maybe sometimes it’s good to get into the toughest games first to see whether you are up to the task. I’m quite glad, looking back at how the team and the portfolios have done, that we’ve come out broadly with flying colours, which is quite reassuring for me.

RYK VAN NIEKERK: You’ve just said you’ve learnt a lot, but I think many asset managers would look at what has happened over the past 18 months, actually over the past two years or so, and scratch their heads because it seems as if the investment theory has changed. We are in a environment with very high liquidity, very low interest rates. Did you discuss maybe a change in your investment strategy to adopt to this new environment?

PATRICE RASSOU: I think where you are very right is that in this world you have to be fleet-footed. You have to be very pragmatic. What we learned in the last year is really how global central banks are the real drivers of financial markets, and what we’ve seen in the last year is one of the strongest rallies in risky assets globally that we’ve seen on record. Basically global equities and commodities have done in one year what is expected over a period of two years post an economic slump. So the pace of the recoveries surprised us, and also the extent of central bank action in terms of quantitative easing also surprised us.

And then obviously what was very unpredictable, Ryk, is the whole reopening of the global economy, which with the vaccine rollout was probably again something which was ahead of what most people predicted.

RYK VAN NIEKERK: You’ve just said the pace of the recovery was surprising, and the market did in one year what you would have expected in two. So how do you approach it now? Do you change the approach or do you just see this maybe as part of a volatile cycle?

PATRICE RASSOU: I think volatility is definitely here for us to stay. If I look back at the type of recovery we saw from the JSE, just from the massive sell-off that we had last year in March, initially it was quite clear that the more cyclical sectors led the rally. So we had close to five months where resources were leading the JSE and the direction where this recovery was going was quite clear.

If you now look back to this current calendar year, it’s almost like every month we’ve had a different sector leading the charge. So it’s been like a raceway between resources, financial and industrials, each taking leadership each calendar month, which for me is an example of the volatility we are likely to see increasingly going forward. The market is more uncertain, the market can’t predict who the winners or losers will be. The general macro theme, which meant that the whole world went in one direction, is likely to be a little bit more choppy, which means in my view that stock-picking and being more judicious when it comes to investment is going to be more important going forward than just getting the broad macro direction right.

RYK VAN NIEKERK: Absolutely. It is a stock-picker’s market. But we saw a significant recovery last year – and this year as well. When do you think we will move from a recovery phase into a type of a bull market phase?

PATRICE RASSOU: It’s quite interesting that everyone is looking to a small town in Wyoming, Jackson Hole, for what the clever people at the [US] Fed driving policy are going to say.* I think one of the big factors now driving financial markets will be what I call like the direction of the three Ts: so it’s tapering, whether we’re going to have a tantrum, and whether the move of the Fed will be well telegraphed to the market.

So really I see two broad scenarios. If the noise out of Jackson Hole is quite measured and dovish, you might find that markets keep creeping higher and a lot of the more bearish type of investors get flushed out of the market. If the noise is that the Fed is likely to taper earlier, then we might have very much a 2013 type of volatility. But we don’t think that’s the base case scenario.

(*This podcast was recorded before Jackson Hole concluded)

Read: Powell says US taper could start in 2021, with no rush on rate hike

RYK VAN NIEKERK: I spoke to Karl Leinberger of Coronation last week, and he made an interesting point. He said there’s a lot of noise in the market and you need to look for signals to try and gauge where the market is going, and not to take too much notice of noise in the market. But of course it’s difficult to identify a signal within such a noisy environment. What signals are you looking for to try and ascertain where things are going?

PATRICE RASSOU: The first signal among the noise is definitely the direction of the Fed, and we are watching the dot plot very carefully. That’s one.

The other thing we are really watching is globally the rate of vaccination and how the new Delta variant is impacting the reopening of global economies. We are watching the data quite carefully.

I think there are signs that inflation might have peaked. We are quite positive that that’s not going to make a massive impact, but just bear in mind sort of US inflation now at 5% is back to what we saw in 2008. It’s a very high level, but we are seeing signs that that level of inflation is starting to roll over. But any signs that inflation in the US and globally is more sticky than we expect, might derail this type of tapering that we are expecting from the Federal Reserve.

RYK VAN NIEKERK: The question now is where is the most value? Coronation, Allan Gray and Ninety One have all expressed a pretty bullish sentiment about the local market and Coronation, for example, is the most exposed to the local market. It has been in more than a decade. Do you share that optimism about the local market?

PATRICE RASSOU: I think there is definite value in the local market. We are a little bit more even-handed. We think that in a situation where we see real yields in South Africa are close to 4% compared to global real yields in mostly developed market at ‑2%, I think that makes our bond market extremely attractive.

So I think within our range of funds those with high fixed-income allocation will do well going forward.

The SA equity market is obviously also priced quite well. (Stocks) are trading at quite a large discount to the emerging market peers, which over time hasn’t been the case, and obviously emerging markets are also at a big discount – so are most developed markets, especially the US. That’s obviously attractive, but I would caution that there are one or two things which one needs to be cautious about.

Obviously there’s the whole Chinese situation, which now has led to a bit of a rethink of the China risk in terms of our markets. That’s obviously Naspers and Prosus. And then the commodity cycle is still very overextended.

So while visually it looks like a number of the stocks are quite cheap, I think there are a lot of risks in the cyclical part of our market and the Chinese-exposed part of the market.

So if you aggregate, Ryk, resources and Naspers are about half our market, which is exposed to one geography where it’s quite clear that the risks – whether economic roll-over or regulatory interventions – are quite high.

We are positive in South Africa, but probably more looking at the SA Inc financial and industrial parts of the market, and are being very select elsewhere.

RYK VAN NIEKERK: You just referred to several international risks which may impact the local market. But the South African economy and the financial health of the state, our fiscal position, has really deteriorated over the past few years. In fact, it’s at a very, very precarious position at the moment. Some people expect that the fiscal position may worsen, others say it may stabilise and improve.

Having said that, we’ve seen record high unemployment levels earlier this week. How does that play into your investment perspectives and valuations, or do you think the international risks are superior or more relevant than those local risks?

PATRICE RASSOU: A very good question, Ryk. I think the first thing that we look at is always trying to measure what the market participants are discounting versus our own expectations. At this point in time if we look at South Africa, you are very right. What we also did is look back to 2013, when we had the taper tantrum, look at how the South African economy was positioned then – and we took quite a knock.

So as an example, in 2013 we were sitting with a current account deficit of ‑7% of GDP, whereas now we have a surplus of 5% of GDP. Yes, you are spot-on; the debt-to-GDP ratio is very high, but bear in mind, with that revision in GDP that we’ve just seen recently, our debt-to-GDP ratio drops from 80% to 70%. Yes, it doesn’t change the debt-service ratio, but I think, again, optically that looks slightly better.

And the rand, which is always an indicator of the health of the country, in 2013 when we had the tapering was at R8/dollar, the long bond was just under seven. Now we have the rand at R15/dollar. I think a lot is priced in in our markets. You are very right, that unemployment for us is probably the biggest issue which may lead to instability in the country, especially youth unemployment. That 75% is really unacceptable, which leads to this whole issue of can we afford a basic-income grant? Just bear in mind, the other emerging markets we look with relatively high unemployment, places like Colombia and Turkey, have only a 15% unemployment level. So we are really at levels which will have to lead to policy action.

But I would say in the very short term you will find that the optics in South Africa are probably better than the worst expectations. But longer term we definitely have quite a big structural issue that we need to address.

A universal basic income grant isn’t the solution
SA unemployment is far worse than a bloodbath

RYK VAN NIEKERK: I’m looking at the fund fact sheet for your Equity Fund. It’s a R425 million fund. The largest shareholdings, which I can see – I can only see the top 10 – include Naspers, Anglo American, BHP and Richemont. Those are four very, very big companies earning most of the profits offshore. Do you think that’s going to remain a theme where these counters which are not so exposed to the local market will attract the most interest from investors?

PATRICE RASSOU: I think, Ryk, it’s really a tale of two parts. In many of these big names – while they look like high absolute numbers – we are well below the benchmark. So that’s the one thing. We’ve been quite selective in our offshore exposure. We’ve seen value for instance in a number of the offshore names where the market hasn’t priced in this reopening trade properly. That’s one.

Locally we’re increasingly finding value in the SA Inc names, especially in the financial sector.

These are in the process of recovering. We’ve seen very good numbers; they’re resuming dividends, but they are still trading at big discounts to book value compared to what they were pre-Covid. It’s one of the barbell strategies. So we want to have the very dominant names overseas, and companies which can derive their revenues from a number of geographies, and locally I think there is definitely a very good value story where a number of counters are trading at attractive valuations.

RYK VAN NIEKERK: Now in the top 10 the financial counters are Standard Bank, FirstRand and Sanlam. Obviously blue chip companies. But are you currently investing in those or have you already invested and are now waiting for the returns to come?

PATRICE RASSOU: We have been picking them up continuously. We still think they are value, even from what you see now. I think definitely on an absolute basis there is value, so we’re looking to add to these counters.

RYK VAN NIEKERK: Let’s talk about Naspers. The AGM took place this week. They was a lot of unhappiness with the remuneration structure and a few other resolutions also did not get as many votes as I think Naspers would have wanted from their ‘N’ shareholders. But most of those resolutions were pushed through by their ‘A’ shareholders, which is a small group of people and institutions that seem to be in charge of Naspers. How do you feel about the shareholder structure at Naspers and the value it creates for shareholders?

Naspers AGM: The A shares have it – all resolutions pass
As to who is calling the shots at Naspers …

PATRICE RASSOU: I think that’s always been a very controversial topic because so much of the Naspers share price over the years was dominated by the performance of Tencent. The management has tried the process of restructuring the company to unlock value. That hasn’t yet yielded any result. I guess the biggest issue here in terms of the whole incentivisation is that the remuneration should be linked more to the non-Tencent part of the portfolio, the earnings part of the portfolio, which will then give a greater incentive to unlock value for the rest of the portfolio – whereas, at the end of the day the holding in Tencent is pretty much a passive holding which the management team cannot really unlock, and now they have an agreement not to sell down further. So it’s not an investment which is being actively managed. It’s done well in the past. It will not look very good over the current period, given the pull-back of the price.

Obviously for us it would have been better to have a more direct line of sight between parts of the portfolio that the management is directly influencing, and create additional incentive for management to accelerate the turnaround of many of these high-potential but loss-making assets in the portfolio.

RYK VAN NIEKERK: I think many asset managers would agree with you. But why do more asset managers then not go and invest directly into Tencent and bypass Prosus and Naspers – and therefore you have that direct exposure without the noise surrounding Prosus and Naspers?

PATRICE RASSOU: It’s a very good question. Part of the answer there is that our local market is already very exposed to Naspers. So most of the mandates that we have from clients would require us to invest a large portion of their funds in the local market, which would indirectly give exposure to Naspers.

When we look at the broader investment universe, we prefer to invest outside of China and look at another broader investment universe, otherwise you’re just doubling up on a counter that you can get directly on the JSE.

RYK VAN NIEKERK: I’m also looking at your Global Leaders Equity Fund, and the top 10 shareholdings include many of the really blue-chip companies, especially in the technology sector. Alphabet is there, Samsung, Adobe, Microsoft, and then Eaton Corporation PLC is right at the top, nearly 7% of the holding. I haven’t seen that counter being the main shareholding of funds. Tell us about Eaton and why you like it so much.

PATRICE RASSOU: That’s a bit of a gem that our team managed by Dr James Cook in Jersey has uncovered. It’s a power management company. It provides solutions in various sectors, like if you think of electrical products and systems. And one of the smaller divisions, but a fast-growing division, is the whole theme of e-mobility that they’ve got into. So this whole vehicle segment and market supplies drive trains and power-train systems in cars and trucks. Again, it’s one counter which was heavily beaten up, but really one which has produced excellent results and numbers. As, you can imagine, economic activity and mobility comes back strongly, that counter is very poised to benefit. It’s done very well for us. We’re quite pleased, as you said. And credit to you for spotting that; it’s been a bit of a differentiator for the Global Leaders Fund and done very well for us.

RYK VAN NIEKERK: Also on the list is AstraZeneca. When did you acquire your stake there, and has it performed since the vaccine race got some momentum?

PATRICE RASSOU: Again, the portfolio manager, Dr James Cook, has got a very strong background in the whole medical field. So he’s the real expert rather than I am. In the holdings we’ve got AstraZeneca, we also have Novartis, we also have Johnson & Johnson. I wish I could tell you, Ryk, that we had Moderna. Moderna, I think, gave 500% over the last year. But we’ve had these other counters for a while now.

RYK VAN NIEKERK: Just lastly, going forward, where are you actually investing now, and are there certain sectors which you are divesting from?

PATRICE RASSOU: Where we are quite positive now – the one area that we think will do very well going forward and is a more secular theme – is the whole semiconductor market. We own Taiwan Semiconductors there. As you know, there’s been this global shortage of chips. We are seeing prices going up and we see continuous demand. This whole digital trend is causing a very strong demand for the product and they are quite uniquely positioned whereby they’ve got a leadership position and a technology advantage which we think is the proper mode for them.

So we’re looking for companies which have this ability to deliver growth continuously, even if you have a situation over the next few years, that things will normalise globally. It’s going to get a little bit tougher, but some of these trends will continue.

So we are now being a little bit more cautious and looking at quality shares.

Especially looking at the Global Leaders Fund, that’s a fund which focuses on these very globally dominant mega caps, which are likely to do very well in a very constrained environment over the next few years.

RYK VAN NIEKERK: Now that semiconductor market is interesting, because there is this international shortage. I don’t think there are prospects that it will be alleviated in the near future. And on the other hand, you have big car manufacturers and manufacturers of electronic goods which are cutting back on production because of this shortage. It seems to be quite a significant imbalance. Do you think there are still opportunities to benefit from that imbalance?

PATRICE RASSOU: We do think so. There are two parts here, as you say. One, the supplier hasn’t kept up with the demand, so that’s going to come through, but more importantly longer term, in terms of the type of demand that is coming more broadly from various manufacturers, I think those with the technological advantage, like the TSMC, the Taiwan Semiconductors, will be able to lead the market there. And this is how we are really playing the whole digitisation theme in our funds.

RYK VAN NIEKERK: Interesting times indeed. Patrice, thank you so much for joining me today. That was Patrice Rassou, chief investment officer at Ashburton Investments.




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Just wonder WHY Coronation, Allan Gray and Ninety One are so bullish about the local market – do they know (or expecting) something that we don`t?
The split in local/foreign assets is more or less 70%/30%.

End of comments.





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