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Market crashes happen, but so do recoveries

Now is the time for active managers to stand up and be counted – Piet Viljoen, director at Counterpoint Asset Management.

RYK VAN NIEKERK: Welcome to this market commentator podcast. It’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk and my guest today is Piet Viljoen. He is a director of Counterpoint Asset Management, which merged with RECM in March this year. Piet thank you for joining me. We are in the midst of an international crash of equity markets. There’s a lot of uncertainty going on. How do you interpret what is currently going on?

PIET VILJOEN: Hello Ryk, we took it with difficulty. It’s very hard to make sense of what’s going on on a day-to-day basis with massive swings, markets up and down, today the market is up 6 or 7% yesterday it was down, you know, it’s all over the show, so it’s very hard to make short-term predictions or conclusions about what is going on. I think if one takes a step back and you look at the bigger picture, I think what’s happening is that … – and I’m talking globally, not specifically South Africa – a lot of companies have taken on a lot of debt because interest rates are very low and this is led to a very fragile investment landscape. And now it’s taking something out of the left-field, which nobody could have predicted – the coronavirus – to sort of give this fragile structure a nudge and some of the pieces are starting to fall over and it’s something we’ve been worried about for a long time.

RYK VAN NIEKERK: Now it is happening. Do you think many asset managers foresaw what is happening? Do you think it’s time for asset managers to actually shine in comparison to say passive funds because that’s the big argument of many asset managers: they will be able to protect capital in a crash.

PIET VILJOEN: To protect capital during a crash like this would be very, very hard, but to lose a lot less than the market. That should be the job of an active fund manager and some people – some fund managers have been able to do that. Not all of them because you must remember that many, many fund managers faced a huge pressure from their clients to be fully invested in the index stocks at all times because the market has been going up for 10 years basically and again globally. So that pressure has been brought to bear on many asset managers. So they’ve been tracking the index, trying to beat the index, being fully invested the whole time as a result of client pressure, fee pressure, all those sorts of things.

But I think now is the time that active managers should stand up and be counted and possibly not in the middle of a crash protect capital, but you need to be losing a lot less than the broad market.

Dollar safe-havens and mitigating risks

RYK VAN NIEKERK: Well, there seems to be an interesting trend as well and that is that many investors are fleeing to the dollar as a type of a safe-haven. And this has had a significant impact on many emerging markets, especially South Africa. We’ve seen the rand really depreciate sharply. Does this change an international dynamic? Do you think this is a long-term trend? How do you see it?

PIET VILJOEN: I think one has to, as you point out, see the difference between short term and long term. Right now short-term people are putting in risk. They’re panicking and they’re going back to the safe-haven currency, the dollar. So the rand has depreciated. But if one takes a look over the past three and five years, the rand is exactly where it was against the Aussie dollar against the British pound against the euro. So the rand has not depreciated against those currencies at all over the past five years, it’s held stable. All currencies have depreciated against the dollar. The dollar has been massively strong and arguably has become massively overvalued. But in the short term, you know the market runs back to so-called safe havens and longer-term we are negative on a dollar. We think the dollar is overvalued. And additionally, I’m not sure that the US is dealing with the effects of the coronavirus as well as some other parts of the world. So that adds another overlay on the longer-term view and an [inaudible] overlay is that I think there’s a lot of leverage in the US system and I think the credit markets there are under tremendous pressure. So we’ll see how this plays out. Short term, you know people panic into the dollar, longer term, I’m not sure that it’s the right place to be.

RYK VAN NIEKERK: So what are you doing currently in this market to try and mitigate those risks you’ve just highlighted?

PIET VILJOEN: Well right now it’s too late to do anything. We came into this holding significant amounts of cash in all our funds. We held very conservative positions and we had been criticised for that in the first few months in the year as the market sort of, I don’t know if you remember, but generally the market sort of exploded out the starting blocks for the year. But we maintained that conservative positioning. So we sitting here and we are looking and evaluating things and deciding where to start allocating cash. But we haven’t done very much of that yet at all. But that’s the next big decision is where do you allocate the cash? Because fundamentally in a crash assets get cheap. They were cheap in South Africa before the crash, they are now super cheap. In America and in Western Europe – some good quality assets starting to get cheap and also in Asia.

So now’s the time to systematically apply your lesson process steadily and surely and people that start accumulating the assets that you want to hold for the next 10 years cause you’re being offered them at really good prices. Now it might be that tomorrow the price even better if the market goes down another 10%, but I think if one looks back in five years, in 10 years time, this is a good time to start accumulating good quality assets with strong balance sheets. I have to say that I wouldn’t just buy any cheap asset. I think you need to focus on assets with strong balance sheets because there’s a hole in the economy happening here as a result of the coronavirus, the effects of the coronavirus, and if you are highly leveraged, it’s difficult to get through this hole. But if you’re a strong balance sheet, you will get through it and there will be business to be done in six months time, in nine months time. The economy isn’t going to just come to a screeching halt. It will for a few months but it will come back again. That is human nature.

Returning to the market

RYK VAN NIEKERK: You are well known as a a value or a deep value investor. Some call it a contrarian investor. I appreciate that many shares are really cheap. We’ve seen some significant declines of ‘blue-chip stocks’ in South Africa. So you haven’t started buying yet, but you’re looking at the moment. When do you think you will start to return to the market?

PIET VILJOEN: Over the next three months. We were very slowly accumulating the shares that we like. I don’t think there’s any rush right now, but right now when I would say it’s too late to hit the panic button – sell everything you’ve got and you said cause you don’t know. I mean the market could turn around tomorrow. We don’t think that’s going to happen but it might just bumble along here or it might if another leg dies. One has no idea, one has no way of knowing what’s going to happen in the future, but every chance we get from here on forward we will be accumulating the shares we like. Those good businesses with strong balance sheets. I think that’s our investment process and that is what we going to stick to and I think in five years time and one looks back, that’ll probably turn out to be a good thing.

RYK VAN NIEKERK: The first crash I experienced was in the 90s with the emerging market crash and there was at the epicentre of that crash there was a desperation, there was no hope that shares would increase in the short term. The same in 2008 and 2009 people were just devastated, but I get a sense that many investors and fund managers now think we could have a relatively quick recovery. Why is there a difference?

PIET VILJOEN: I’m not sure. I have no idea what the recovery will look like. I know there is going to be a very deep hole over the next few months as we see from economic activities have right now it’s basically ground to a halt it’s going to be a very tough time, the next three to six months depending on how long this lasts, how long we have to socially distance ourselves and self-quarantine, all those sorts of things are, I have no way of knowing how long that’s going to last. What I do know is that in five years time we are going to be doing business because it will be up and running again and people will be buying clothes and be buying food. They’ll be buying cell phones, they’ll be spending money again. That is how it works and every time you go through a crash, things look pretty hopeless as they do now, but you know it comes back again. But exactly how, is it a V shape recovery, L shape, U shape – you know, I’ll leave that to the economist and steer clear on that. I have no idea.

Local investment opportunities

RYK VAN NIEKERK: Yeah, maybe even a w shape, but a bit on the local market. We’ve seen a lot of a pullback, especially in financial stocks and there are many reasons for that. Would you look at some of those counters because some of them are really, really well-run businesses?

PIET VILJOEN: They are, I mean we’ve been very light on financials going into this so that is one area we are looking at. I do think that bad debt is going to be a problem over the next six months or a year, but having said that, I think the banks are fairly well provisioned and very importantly if you look at credit growth statistics over the past three or four years, credit has not been granted hand over fist. Credit growth has been very muted, which tells me that the risks on the balance sheets of the banks probably are not huge, but they’re going to take some shots over the next six months or so. But I think that is definitely one thing to look at.

RYK VAN NIEKERK: Another one is Sasol, of course, one of the darlings of the JSE. It’s got a weak balance sheet, but they have plans to bolster that balance sheet. Would you look at Sasol?

PIET VILJOEN: No.

RYK VAN NIEKERK: What other sectors do you think are worth a look?

PIET VILJOEN:

I do think that the small and mid-cap industrials in South Africa are extremely cheap.

And I think what’s very interesting right now, and it’s the first time in a long time, you’ve seen two things happening. You’ve seen net insiders buying at a substantial level and you’re seeing buyouts and delistings. That trend is accelerating specifically in the small- and mid-cap sector of the market, which I think tells you that the insiders think that the companies they run or own part of are very, very cheap. So that’s definitely – if we go into a period – we will be going into a tough economic period those shares aren’t going to rebound tomorrow. But I think that is for me the most exciting part of the market to start accumulating in over the next six months.

RECM/Counterpoint Asset Management merger

RYK VAN NIEKERK: Just lastly, RECM merged with Counterpoint Asset Management, the merger now being completed. Tell us how is it going and how does the market currently impact the merger?

PIET VILJOEN: Yeah. So the merger isn’t completed. We started, we put the two firms together on March 1, but we’re still running our funds separately and it’ll take about six months for us to merge our respective funds together. The interesting thing is that when we joined forces on March 1 and we looked at each other’s funds, they’re very, very similarly positioned. So that told us that I think we have joined up with the right partner and we’ve been working together for a month, almost a month now. And they’re very trying circumstances and we’ve worked very well together. My new colleague, Sam, he leads the investment team here, is a tremendous investor, a good value investor and it’s a pleasure working with him and the rest of his team. And I think the people we brought across RECM are also enjoying the interaction. So it’s actually going very, very well. And the important thing is our funds are doing relatively well in relative terms. Of course, you know, you’re not making money. But uh, because we, so conservatively positioned both the Counterpoint funds and the RECM funds, our funds are looking good right now.

RYK VAN NIEKERK: Will you merge some of the funds?

PIET VILJOEN: Yes, we will merge our equity fund with their value equity fund. We’ll merge our balanced fund with their balanced fund and our global fund with their global fund. Our global flexible fund will stay as it is because Counterpoint doesn’t have a similar fund, the RECM money market fund will just become a Counterpoint money market fund as they don’t have a money market fund. What Counterpoint has and what RECM didn’t have is an enhanced income fund, which is quite popular at the moment. So that’ll stay as it is. And another fund that Sam runs is the global owner-managed fund, which I think has a very exciting future that stays as it because RECM didn’t have similar funds. So there are three funds that will be merging and the rest of the funds will stay as they are.

RYK VAN NIEKERK: Piet thank you so much for your time and good luck with these volatile markets.

PIET VILJOEN: Thank you very much Ryk and yeah good luck to all your listeners as well.

RYK VAN NIEKERK: That was Piet Viljoen. He is a director of Counterpoint Asset Management.

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”There are interesting failures. There are prestige failures, and there are financial failures, but this is the sort of failure that gives failures a bad name”
Jean Kerr novel 1960

Dr Gerhard De Kock (ex SA Reserve Bank Governor) – when he addressed ACI Johannesburg on an FX monthly meeting – made this remark:

“If you jump in the water, you will get wet”

I only really experienced that in 1985 with PW Botha’s Rubicon speech (and the Debt Moratorium thereafter) and the 1987 when I worked in London in the FX market, for the first time.

The Financial crisis in 2008 was bad, but we all stayed on our ”feet fighting” – this time it’s so different as we all seem to be forced ”away”- behind closed doors.

I agree with Donald Trump’s thoughts on the ”war” of the hidden enemy – which we will overcome eventually.

The market is ”never wrong”, and it will recover again – like it did every single time after a major crash – it’s now time for ”staal-balletjies”, and we should just stay calm and also take Moody’d possible Junk grading blow on the chin, as ”benoude bobbejane maak benoude spronge”

Here is a truth somebody said about stock exchanges: “they came down with the elevator, the went up with the stairs”

End of comments.

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