South Africa's Hidden Gems: Unveiling Investment Opportunities

We just haven't been paid well if we've been in the JSE to get a decent return . We've had bad politics , bad economic growth , kind of big cycles that have just not been in our favor . All emerging markets , it feels like , have kind of really struggled . Our currency hasn't done well , and now we get kind of these few green shoots coming around .

We've been through an election where many would argue we've kind of had a miraculous , you know , almost changing of the guard . We've got a Vilderbiss or a GNU , now Government of National Unity .

It seems to me I mean you know at the time of recording that we've gone through , you know , much more now than 100 days of no load shedding and Eskom bragging that they actually had to kind of turn some power plants off because they were generating too much .

And then some news around Transnet kind of trying to kind of get themselves on an Eskom track of fixing themselves . I'm a little bit more skeptical about that , but I'm a natural optimist . So let's watch that space . But then I will sit in front of an investor and I'll say it's been very rewarding , especially just to kind of buy the US stock market index .

It didn't take any skill at all and you've done very well for the last decade , especially if you measured it in South African RANs . But now we've got these green shoots in South Africa and I'm looking at the US and thinking , you know , I mean to my very simple view .

You know , those tech shares in America look very big , very expensive , and history tells me that when things go up for a long period of time , at some point they go down again . And equally in South Africa we haven't been well rewarded .

But telling someone to allocate any money to the JSE after a long period of not getting much return at all I mean often not even tracking inflation for a couple of years it's kind of a tough sell . And so why I've dragged you back on the show , rupert , is you head up multi-asset , which means you're not constrained to buy South African shares .

You're not an SA equity manager only . You're not the guy that only can buy cash . You can look around the world , you can look at all the major asset classes and you can allocate money to the places that you think represent good long-term returns for investors .

Why on earth would you allocate kind of a rand or a dollar to the JSE that you think represent good long-term returns for investors ? Why ?

So picture yourself sitting in London or New York and you've got significant holdings towards US stocks , for example , or wherever it might be , and that stock market looks pretty top-heavy . And it doesn't have to be stocks , it can be bonds , it can be anything .

Really what they do is that they'll look on the screen and they'll say , ok , well , there's actually quite an attractive opportunity right now in South Africa , for example . There might be other cases , but right now in South Africa we're seeing P ratios near all time highs Sorry , lows , not highs .

That's America and as a result , you have quite a good value case . You've got companies in South Africa which continue to earn and distribute .

They've continued to grow despite the headwinds that we've seen for the past decade or so in South Africa , and I think you're right in saying that there's potentially quite a good turning point right now for growth in South Africa . So we have yet to see the results of the GNU . We wait with bated breath .

But you mentioned a couple of other things which sounded quite promising . So no load shedding , improved outlook for the likes of Transnet . I'm actually quite surprised with all of these outcomes , personally being a South African . We got quite used to having load shedding all the time .

But it certainly means that there is a nice tailwind at the moment for South African asset classes . Equities is one I mean . The value case for equity certainly exists . What they do need is a strong recovery and growth , which we're yet to see . Hopefully it comes through with the policies of the GNU .

But then we've got on the other side of the coin the fixed income instruments , which are yielders and yielding pretty high yields right now with a falling inflation rate .

So what that means is that you're getting in , for example , an income fund , 10 , 10.5% yield , current yield and inflation which is coming right in below five , which gives you CPI plus five in a super low risk income fund . Then you put on a bit more risk . You go into the bond space . So SA government bonds You're getting around 13% on SA government bonds .

You're getting around 13% on SA government bonds inflation at five , let's call it rounded to five and that means you're getting 8% over inflation in SA government bonds . So really it's like we're spoilt for choice right now in asset classes in South Africa .

I always will put the proviso in that we like diversification and South Africa is one country , so we do always diversify around the world within our portfolios , but it is looking quite attractive for portfolios , especially in the Reg 28 space that have 55% onshore requirement .

It's looking a lot more attractive for forward returns that we could possibly be achieving Inflation beating returns the most important thing .

If you get a stock market that delivers well again for a decade , you would be really happy to get 8% a year above inflation . So to be able to buy income funds or government bonds where you're getting that range 5% to 8% above inflation , that is , over time , a spectacular return .

And I know we get spoiled sometimes when we see some share has doubled over a year . But anything that can double in a year could just as easily halve .

So when you look at something which is and I don't want to upset you , rupert , but when you look at something which is relatively boring , like bonds or cash , and it can give you 5% or 8% above inflation , that's as exciting as a company that sells amazing products and has got a great brand and can give you a decade of growth because that's what you're locking

in is basically a good few years of very good growth . That will grow your money faster than inflation will erode us .

But we've come through an election , we've got towards what seems to be a stable government , we've got a fiscal policy which looks pretty stable , monetary policy bringing inflation back down towards target band . You know , things aren't looking too bad at all .

So I think that what we can do in this case is to proudly exercise some home bias and to allocate towards South African investments .

But one of the things I always kind of want people to realize is , if you look at the management teams of the CEOs and management teams of companies that are listed on the JSC that have kind of operated businesses largely in South Africa for the last decade , if those businesses are still standing , those management teams are still in the job and they're kind of

growing their businesses , even if it's just in line with inflation . What you need to realize is this is Darwin at work . These are some of the fittest , toughest , most battle-tested management teams possibly in the world in an environment that has been catastrophic for want of a better word for most of them .

If you've been running any kind of an industrial business here where you've got to now get generators and spend millions a month on diesel and try and get your stuff to a port and out on a ship and all of that , all of the stuff that many other companies around the world wouldn't have to deal with , they would just take for granted , and you're in an

environment where all of a sudden , you can actually get your stuff on a truck or maybe even on a train one day , and you can not worry about the truck getting stopped at not working traffic lights because there's no power and you can actually get the stuff out and you can almost rely on electricity for 24 hours a day .

Just that , without economic growth on its own , I think is hugely helpful for some of those management teams that have just grappled with a lot . So imagine them getting some economic growth . It doesn't have to be 5% a year , that's the dream . But gee , if they just suddenly start getting 2% or 3% growth a year .

Some helpful government policies , maybe some helpful politicians at a national level , and you've got these super fit , super strong , super battle-tested management teams . There is reason to expect some decent returns from these businesses going forward .

So those decisions that those battle-hardened investment teams or management teams are making that is one of the primary causes for growth in South Africa Invest more into new divisions of the business , spend more on new geographic stores or you know , all those sorts of things cause growth in South Africa . So it's really a snowballing effect that we hope for .

But things are looking a lot more favorable than they were , certainly five years ago .

I suspect in most environments Rupert will always have a bit more fixed income than I will , but I'll miss out sometimes and he won't . But I want to just jump to another economy which is kind of moving . It's a major economy and it seems to be moving in a very different cycle to the other major economies , and that's Japan .

It feels to me that you know , we don't focus a lot on Japan for some reason in South Africa . That's not . You know , we always kind of get fixated on the US and sometimes you know the UK , which is now becoming a much smaller economy as the days go by .

But here you've got Japan , which is on its own a big stock market but also a very big economy , and where every other kind of major economy is looking at either peak interest rates or maybe starting to decline their interest rates . We've just been in an environment where the Japanese have actually raised interest rates .

Japanese have actually raised interest rates and the surprising thing is investors are happy about that and I think for me that's just something to kind of you know to understand . Why is that a good thing ?

So Japan has had disinflation , negative inflation , for decades now . They've been really struggling to create inflation and inflation .

Whilst we might think it is really struggling to create inflation and inflation , whilst we might think it is a bad thing , inflation is actually arguably quite a good thing and this goes back to my example of companies in South Africa , because it's like a circle . So inflation can lead to growth , which can lead to inflation , can lead to growth , etc .

Now , I'm not talking about Zimbabwe here . I'm talking about a healthy level of inflation , a little bit of inflation . Yeah , a little bit of it , not hyperinflation . In the United States they target 2% inflation and in South Africa we target 3% to 6% currently of inflation . And why do we do that ?

Well , inflation can actually encourage growth in an economy in that circle that we talk about . Japan has been struggling to get inflation on the go for many , many , many years and they've now started to be able to , or started to experience , at least some inflation . So interesting divergence from the rest of the world .

They have other headwinds , like geopolitical risk in Japan , which we see a lot of , but it's a large part of MSCI world of , but it's a large part of MSCI world . It's a large economy within the world and often we as South Africans look too much towards the West and too little towards the East , so I often think we're biased towards the West .

We've got Japan in the East , we've got China , we've got India as another emerging market , very strong growth cases in all of those markets and I think there will be a lot of a big shift towards and I'm talking about structural shift here towards allocating into the East in the coming decades .

And I was a bit shocked the other day to see a graph of the RAND against the dollar and then emerging markets as a basket of currencies against the dollar and it almost looks like the same movie . You know , we kind of moved in this long big pattern of just trending weaker and weaker and weaker .

And if we're getting a major economy like India kind of , you know , growing and growing and growing well , and I mean I don't know what China does , but if they start to kind of resurrect their growth hopes and other emerging markets sort of come to the party , then looking at the globe and having that very US-centric view could be quite a destructive investment

decision for the next decade . Not to say , you know , have no money there . But you know , allocating money to emerging markets , to Japan , and then you know , a chunk in South Africa again could be the right investment decision . But you're tilting things right . I mean , I think it's important .

I don't want to put words in your mouth you wouldn't look at this and say , okay , I'm out of the US , I'm 55% in South African equities , 45% in Japan equities and I'm going to borrow some money and leverage up in South African bonds . I mean , that's not what we're talking about here .

They don't just sell iPhones in America , they sell iPhones in China . So it's not so much a problem with the United States , particularly although you do get a lot of US exposure . What I do find , though , is that when you buy stocks or broad-based indices in the likes of Japan , generally you're getting a lot of exposure to Japan . Likewise in South Africa .

Despite what people do talk about , when we come to round hedges , it's primarily South Africa that drives that market . So I think interesting to always just dig a bit deeper into what you're investing in . Look at the companies within the index , look at the companies you might be buying and think where do they make money ? Is it via India ? Is it via Taiwan ?

Is it via Japan ? And then think that through in that context . It's not just about where things are listed .

You know , there is a little company there that's kind of like the world's biggest monopoly in making the machines that make the very advanced machines , that make microchips , and for some reason I almost want to say like it's wrong to say it's an accident of history , but there is a kind of a dominant player in the world and it's probably got a 10 or 15 year

head start over everybody else who would like to compete . And to kind of look at that and say , well , that's a play on the Netherlands is crazy . It's a play on global tech . So I think it's a powerful point . Rupert , we're kind of coming to the end and I just wanted to give you a chance to kind of maybe close this out .

If you're looking at this kind of multi-asset space and you're looking at the world , you know how do you think about it .

Now , when you kind of look at all of this and say , well , there's good news , there's bad news , there's so much going on around the world , how do you then make the kind of rational call to allocate money in all of these assets and all of these geographies .

We structurally allocate towards global markets , including the United States , including emerging markets , south Africa , all around the world , across different asset classes , and to try and align that with your different investment objectives . So if you want CPI plus six , then take on more equity exposure , because equities have a higher premium .

They get in general through the cycle , get paid up more , a little bit lower . Cpi plus four . Less equities , equities , more bonds , even lower than that . Take on an income fund . It's about the mix of asset classes when it comes to building wealth .

It's not really about the , the um , the pick of your uh , your tech uh manufacturer in holland over the tech manufacturer in hong kong , for example . And what's most important in this environment is to pick asset classes and to structure your portfolio according to your investment needs .

And getting excited about them because that's that's what kind of gives you an adrenaline jolt , you're doing it wrong . You know investments need to be kind of very long-term , very rational , and , and you know it's it's nice to see compounding over a decade , doubling or halving over a day or a week or a month or a year . That's you're doing it wrong .

That's called speculation and and it's a great way to lose money , in my opinion .