SIMON BROWN: I’m chatting now with Gary Booysen. He is, of course, a portfolio manager at Rand Swiss. Gary, good morning. I appreciate your time. I’ve mentioned that everyone seems bullish. I messaged you last night and asked what’s worrying you because everyone’s bullish out there – and that’s fine, But there’s always something out there. So I thought I’d throw you the hot potato, figuratively. Is there something out there in the markets that may not be keeping you awake at night, but certainly something you are keeping an eye on, just in case?
GARY BOOYSEN: Absolutely. Whenever you invest in equities, there is always going to be a degree of risk. I think that that’s important to understand as well – whether people are all bullish or all bearish, equities come with risk. But it’s really that risk that makes them attractive because that’s the risk that helps you answer your return.
But of course, there are many different types of the risk out there. We normally equate risk to volatility if you’re looking at portfolio management, but that’s by no means the only type of risk. It’s also very difficult for clients to understand risk. Most of them are focused on performance and not risk-weighted performance.
So if I had to come up with the big risks that are worrying me, I’ve got a couple of market-related risks, but the one that’s probably most concerning at the moment is the FOMO [fear of missing out] risk. They are seeing these markets that are very hot, they see markets going higher, and it’s prompting them to want to change their taxable asset allocations. They’re kind of looking at more expensive markets and saying; “Oh, well, I should have more exposure to them, because look how well they’re doing. I want to capture those kinds of returns.” It’s almost a psychological risk that most investors face – that in financial markets it works very differently from the normal real-world markets of goods and services. If you went into a shop and you saw a TV that was going for R20 000 and you went in the next day and it was going for R35 000, you wouldn’t go and buy that TV. You’d say, “I’m not going to buy that. It’s more expensive than it was yesterday.”
SIMON BROWN: Markets are exactly the opposite.
GARY BOOYSEN: Exactly the opposite, because markets are kind of an agglomeration of everyone’s ideas and beliefs. The tendency is, when they see prices going up they go, “Oh, everybody knows something that don’t I know. I should probably get in there, even though I’m not quite sure why I’m getting in there.” That for me is a massive risk for investors. If you’re getting into stocks because you just see them going up, that is absolutely the wrong reason to be buying into a stock. If you’re changing your tactical asset allocation to say, “I want to go from 60% equity to 70% equity,” just because you see prices are higher again, that’s a very, very wrong way of making that decision.
I can see that decision being made at many levels by clients managing their own portfolios. So I’d say to listeners, just be very concerned around that; because markets are going higher doesn’t mean that you should be buying more at this stage. You should be going and looking for cheap themes that will give you something extra.
SIMON BROWN: I take your point. I mean, absolutely. And I like it. FOMO risk. The antidote in a sense is to have your strategy, know your strategy, and trust your strategy. I know it’s very easy for me and you to sit here and say that. It’s a whole lot harder when something you don’t own or something you think you’re underweight is flying, but it’s around having a very clear strategy from day one to kind of keep you out of this FOMO [trend] because it’ll all shake out in time.
GARY BOOYSEN: Absolutely. I mean, we’ve seen it across so many different sectors at a time. A couple of years ago, if you looked at commodity counters on the JSE, you’d say: “There’s no way I can buy Kumba. Yes, it makes iron ore, yes, people are probably going to use iron ore, but this company is going bankrupt.” A couple of years later it has turned around. We’ve just seen it in the oil companies over the last six months as well.
So stick to the fundamentals of the companies and understand what you’re doing.
I’m looking at another risk – I’ll just give you one more at the moment. This is more of a financial market risk that we are seeing. It’s kind of starting to filter into the mainstream media headlines, and that’s just the risk around inflation coming into the system, and higher interest rates as well. We saw a little bit of concern earlier in the year that we would see some inflationary pressure creeping in. We saw it with those higher bond yields in the US, as people were expecting interest [rates] to have to increase. We’ve seen that kind of reverse. And for us, if you are really looking for, I suppose, a broader view, not a psychological risk from actual markets, that’s kind of where you should be looking.
Obviously, after the global financial crisis we saw, basically, very strained untested monetary policy coming in – all the QE [quantitative easing] programmes. Everyone said to us, “We are going to have runaway inflation,” and they were dead wrong. We’ve had no inflation for 10 years. But just because we haven’t had this kind of runaway inflation for 10 years doesn’t mean that it can’t come back. And with the fiscal programmes that are coming in from the Biden administration, I think that that could filter into the financial markets as well.
Now, to go back to our original project of doing good fundamental analysis, if you are expecting high inflation, what you’re looking for at this stage is companies that have low gearing and have the ability to pass their costs on to their customers. If that’s the kind of a segment that you’re looking at, go and find companies that are at reasonable valuations.
That’s a strategy I think listeners can adopt; if we do see higher inflation going forward they will be paid off for that.
SIMON BROWN: I like that. It’s around that pricing power, but also around their debt that sits there. Gary Booysen is a portfolio manager at Rand Swiss. Affirm a risk, and that potential inflation/interest rate risk as well. I appreciate your early morning.
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