SIMON BROWN: I’m chatting now with Gary Booysen from Rand Swiss. He and his colleague Viv Govender did a webcast last week, looking at 2021 and beyond. I’ve got to say, Gary, I liked the “and beyond” part because we try and make predictions and fit them into calendar years. But of course, predictions are not trends and don’t fit into calendar years. They’re typically way more than that. There were a couple of themes that you were talking on. The one that came through I thought quite strongly from your presentation is small caps doing better than large caps, certainly in the local space. And broadly our local market, the Top 40, doing better than the MSCI World Index. In other words, those laggers, which have been locally small. And globally EMs (emerging markets) picking up and taking the fight to the hot stocks of the Nasdaq as we see, I suppose, a rotation and sort of a level of back-to-work type of investing.
GARY BOOYSEN: Thanks, Simon. I think you’re right. And it really does come down to that “beyond”, because that was one of many comments from clients afterwards, saying, “We like the thinking and I think you guys will be right”. The problem is, as you say, that the click-over from 2020 to 2021 doesn’t make much difference, and we might see a lot of that overhang from 2020, and just the coronavirus rolling through the markets.
But at some point, we really do believe this has to change. If you look at the valuations on the US market specifically, they are incredibly high at the moment. Sure, they are being skewed a little bit by the inclusion of something like Tesla, which has forced the S&P 500 PE all the way up to just under 30 times earnings at the moment. And that can quite easily unwind.
Now, if you look into an emerging market vs developed market chart over the years, these things are long cycles.
They’re trying to say that the beginning of the first quarter of 2021 is when it’s going to turn. It’s very, very unlikely, but at some point, it probably will.
And there was a lovely chart just showing the length of a cycle is normally around 10 years. We peaked. And the trough was kind of early 2000s, where developed markets were really a trader. We then went through that big boom in China, which helped emerging markets flourish. That ended around 2010. We are 10 years on from there. And, if you look at the relatives, the evaluations on the US versus emerging markets have changed.
I remember 2010, trading just around that time. The idea of going and investing in the developed markets was crazy. There was no growth. These were economies that could only grow at the pace of human invention while emerging market economies could grow at the pace of catching up to technology. So there was far more excitement about emerging markets. If that changes, as I say, it’s probably not going to change in the next couple of months, but at some point, it will change.
And, if you’re an investor with a longer-term time horizon, looking at some of our small and mid-caps, looking at price, especially at emerging Asia, we think that there are really decent returns to be had.
SIMON BROWN: I remember someone who actually in January 2000 bought some of the VOO, which is the S&P, track ETF (exchange-traded fund) in the US and, literally, in November 2010 they were not yet in profit. It was a horror decade, and our market had gone up probably six-, seven-, eight-fold over the period.
You also talk around the Nasdaq. What you’re not saying is that the Nasdaq is going to collapse in a heap. Yes, there are some stretched valuations there, but this is not a dotcom bubble. These companies are generating profits, massive profits, and they are generating cash, real cash. It’s just a case that perhaps those evaluations are stretched and maybe the prices sort of start stagnating, rather than continuing their march higher.
GARY BOOYSEN: Yes. The Nasdaq is always a composite. So it’s very difficult to talk about a composite like that without kind of drilling into the underlying companies. If you look at the returns from things like DocuSign, Moderna, Tesla, last year they really were the standouts in the Nasdaq. They propelled the index up to whatever it ended up, around 40%, 44% for the year. Will that continue? Yes, they do have earnings but, as you said, the valuations are very stretched. I’m not saying that all of them like Nasdaq stocks are going to unwind. I’m not saying that we’re going to see a reduction in innovation in the US and that’s going to mean a total collapse, but the point is, in human innovation, we only grow at a certain pace. It requires a roll-out. We can’t continue to grow exponentially. It’s just not possible.
And at some point, the pendulum has to swing back. And that’s kind of what we’re saying – investors have to be cognisant of that.
SIMON BROWN: Well, what about local property? This has been a sector that truthfully was under significant pressure. Before the pandemic arrived that index peaked a couple of years ago. Last year was a horror show for them. We’ve got companies like Redefine not wanting to pay dividends. Hyprop tried to not pay a dividend and ended up mostly paying scrip. Is this another cyclical process that needs to turn? Maybe not this quarter and probably slowly, but a space we should be having a long, hard look at.
GARY BOOYSEN: Yes, I think that’s right. And we also understand that the nature of property is changing. You can’t expect to go and invest heavily in shopping centres with a view that the tenants are all going to be fine, and suddenly the trend in retail is going to change. In our market, we are fortunate to have some very interesting speciality property companies, and traditionally the relationship between property and interest rates is that, when interest rates fall, property generally does significantly better. It’s not just that the cost of capital is reduced. It’s because investors looking for yield suddenly go and look at the high-quality property counters, and they say, “Oh, at least these Reits are going to pay us some sort of distribution, whereas we’re getting just about no interest on, let’s say, scrip in the money market, for example.
So if you look at the speciality ones – we chatted about (this) before – but a company like Stor-Age Property, (if) you look at their collections over the lockdown period, they are collecting at like 98%. They actually visited the sites as well. They are essentially stores. You almost have to go on a waiting list if you want to get a unit. So the business is doing very, very well in the current environment.
I’m not a traditional property player, but there are definitely segments in property that are going to still capture that theme of lower interest rates, helping to lift the counters.
So it might not, again, be a broad sector trend, I might not go and buy something like a Satrix property tracker or property-tracking ETFs, but definitely, I think there are opportunities in that sector.
SIMON BROWN: And logistics, obviously, have done and really well. Equites (Property Fund) has done spectacularly well.
One of your other themes was back to work. Stocks will start beating work from home. I was just chatting with Wayne McCurrie. The world is rolling out a vaccine. We are not yet, but if we jump forward toward the end of the year there will be billions of people who would have been vaccinated on planet Earth, which means we start going back to those offices. Some of the stocks have benefited from work-from-home, Zoom and the like. We’re going to need to start looking at some sort of back-to-work type stocks. What would be in the back-to-work? Property, perhaps, one of them. Beyond property, what would be your back-to-work stocks?
GARY BOOYSEN: A kind of a theme of work-from-home to back-to-work has almost played out. We’re kind of seeing almost a reaction to back-to-work. So when we got the initial shock in March, April, May, when the markets really collapsed in 2020, the first to recover were work-from-home stocks. That’s where we saw the absolutely stellar gains off the tech counters. Things like Microsoft back at all-time highs very, very quickly. That’s when the market started looking around and saying, okay, these stocks are now full. The valuations are already full. What is going to happen next? And the market took a slightly longer-term view and started moving into what we call the back-to-work stocks. Now, for us, that starts to look like oil. Obviously, the typical one is something like leisure companies. Let’s talk of something like Royal Caribbean and in South Africa, it might be something like City Lodge. And of course, for us, it was really the big banks as well, locally and offshore.
Right now what’s happened is we’ve seen banks recover almost to their highest, just because of the high-quality back-to-work kind of value plays. And they start to look a little bit more full now. So what we’re getting is a little bit of a correction. I think everyone’s watching Israel, just to see them as almost a bellwether for how the vaccine roll-outs work, and whether we’re going to see a shock to the system in that these lockdowns are going to carry on far longer than the market expects.
But if we do see vaccine roll-out progress reasonably, and we see the effectiveness of the vaccines working and we do seem to achieve herd immunity, then you would expect these back-to-work stocks to do better. And there what’s left is, with the banks running as hard as they have, unless we get a correction, which will give you an entry point, you’re probably looking at something like leisure, hotel, hospitality. You could also look at airline stocks, things like Delta overseas also look interesting. But I’ve got to mention (?) this is a long-term theme, at some point, this is going to happen. It just depends on when. There are a lot of moving parts to it. But given current valuations, we think that the banks are now looking are looking full, tech is still looking very full, and we would probably be looking at some of those kinds of more cyclical counters.
SIMON BROWN: I take your point. We don’t have to go and rush out today. We’ve got time. This is going to be a process. It’s going to play out over a year. But in essence, get some stocks in your watch list, folks, and keep an eye on them and see how they’re looking. See those numbers as they come out and be ready so we don’t get caught behind as it happens. Gary Booysen, portfolio manager at Rand Swiss, I really appreciate your thoughts and insights this morning.