You're listening to Strictly Business Podcast with Lindsay Williams. Welcome, and today we are in conversation with Hannes van den Berghe, Portfolio Manager for the 91 Equity Fund. Another quarter's gone by, Hannes, another extraordinary quarter of volatility, which we'll come to later. In fact, we'll come to all aspects of the last quarter later. But let's reflect on the past 12 months.
It seems to be, looking through the literature, that the Equity Fund had a tale of two halves doing well up until the end of last year 2024 2025 completely different challenging environment and also challenging compared to the index what happened yeah thanks lindsay when we look for investment opportunities we like to invest in stocks where you have good earnings growth and we like stocks where the earnings growth are getting revised
higher so we like companies whether they are what people define as sa in companies banks and retailers or or resource companies, or global companies. where you have the earnings profiles improving. In the last two years, 2023, and for a big part, the initial part of 2024, companies struggled to find earnings growth profiles that were improving.
I mean, if we just cast our minds back to 2023, it was load shedding and high interest rates, low consumer confidence, lady R, port disruption in South Africa. And coming into 2024, we were all nervous about the political environment and government of national unity. Earnings profiles didn't improve. In fact, it was sentiment that was driving deratings and reratings more than anything else.
And as you say, we got to a point in the second quarter of last year where we said, our analysts started to say their earnings numbers have bottomed out. They're starting to see earnings upgrades coming through for some of the SA stocks. And that gave us an opportunity to say, going into the election, sort of May, June last year, The downside skew was limited versus quite high upside opportunities.
So we positioned the fund well, sort of out of the second quarter, third and fourth quarter last year, at very good periods where earnings profiles were improving, sentiment was improving, people were upgrading GDP expectations in South Africa. We started to get interest rate cuts in South Africa, and load shedding was something that we've all sort of forgotten about. So an improving infrastructure with improving sentiment. was what helped us to find opportunities.
Our analysts went from finding only 10% to 15% of our universe of stocks that we cover, having them on buys, to more than half of the universe, close to 60% of the stocks in our universe went to buys because of that. And that, from a bottom-up, gives us a bigger universe to select from when we have improving earnings growth profiles. It's an interesting one, isn't it?
Because, I mean, that government of national unity sort of mini-euphoria, was just a fleeting moment in time, as it turned out, Hannes. I mean, I thought it would have gone on for a little bit longer, and unfortunately it didn't. And again, we'll come to that in a little while. But volatility has been the watchword in the first quarter of 2025. Global markets and local markets, very, very volatile indeed.
Some optimists, some would say cockeyed optimists, say that the market is bottoming out now, the volatility, yeah, there'll be a little bit more, but the worst has passed. Do you believe that? Jeez, yeah. What a first quarter we've had this year. I think there are people who, over the past Easter weekend, were already looking forward to chasing to the end of the year. It's been a lot has happened in one quarter. Decades happened in such a short time. Not only in South Africa, also globally.
It's too soon to say where the markets have bottomed. I think we're going almost through phases. We are in a phase of absolute fear.
markets like to go through these fear and greed phases and everybody's very concerned and and it's because of the uncertainty that nobody exactly knows what next headline we're going to be hit with you know what happens tomorrow what happens after this what is this just the mid-cycle slowdown or is this going to cause a full-blown recession so people are in this period of we don't exactly or uncertainty is quite high and trying to figure it out then we will go to a period i I think
as we know more, as the facts settle down more, as these trades... negotiations play out as the government of national unity agree to a budget and hopefully further path forward on how they can stick and still commit to the growth reform in South Africa, then we'll be able to position ourselves for the cycle, which at this stage it was a cycle till the end of last year of interest rates going lower and growth starting to improve,
not only in South Africa but having trend and above trend growth globally. So I think this period of heightened uncertainty creates An opportunity, what we saw in COVID and what we saw in previous periods of concerns around Asia and concerns around financial, global financial crisis is That gives you an opportunity to buy stocks where the sentiment goes so negative and the fundamentals of the stock actually doesn't deteriorate that much.
So this, in previous cycles we've seen, also in the 91 Equity Fund, tends to lead to a period where alpha is more abundant. And through good stock selection, you can actually outperform your benchmark in the period that follows. Yeah, I go back to my comment about it being a moment in time, the optimism, the GNU optimism that is.
a fleeting moment and that's borne out by the fact that retailers especially in south africa are back at pre-election multiples what's it all about was it about that specific event and then people said well that's passed and there are cracks in the gnu or is it all to do with the basics i.e valuations of these stocks yeah what what hurt our fund and our positioning over the first quarter of 2025 what was our position in retail as mr price for
sheenie truarts where we We did a lot of work and we continue to do the work on what we define as the SA consumer wallet. Our view is that with labor and wage inflation increases to salaries and wages, anything from four to six percent, we've had a bit of extra job creation in the third and fourth quarter of last year, people returning to the tourism and services sectors, financial services, also in the construction sector. So jobs got created.
That helps to increase the size of the wallet, the sort of purchasing power of the South African consumer. And then On the expenses side of the South African wallet, people forget that interest rates are lower. So the interest costs have actually gone backwards. It's lower than last year. And also if you look at fuel prices, which has come down quite a lot due to the lower oil price and slightly stronger rent, that is a negative number.
So you've got expansion in the consumer wallet of greater than 6%. Actually, our numbers show 8% increase in spending power from a consumer perspective. So our view is that... If you look at the fundamentals of the retailers, it actually looks quite good. We attended a conference and spoke to all of them about a month or so ago.
They're talking about 10% plus growth in top line, and they're telling us that there's less promotional activity, which means they're selling at a better price, therefore better margin. So if you have margin improvement plus a decent top line, that's a very good earnings growth environment. What happened over the first quarter was, again, sentiment, as you rightly mentioned, made these stocks derate. The earnings profile of the stocks moved by 1%, 2%, 3%, but the stocks are down 30%.
It's because of that additional concern, not only government of national unity, but also global tariffs and trade wars, which has caused a derating. So we actually think the fundamentals of not only the retailers, also the banks, look very good and very strong. The sentiment has taken them to levels where, as you say, they look like you should be topping up at these levels.
Yeah. Let's talk about something that has always been... something that you and I have been interested in over previous interviews, and that's gold. I was sitting watching telly the other day, as I do, watching business programs, as I do, and I saw 3,500 gold. And I thought, gosh, I better go to the optometrist because these glasses are failing me. But no, there it was, $3,500 an ounce. It's captured the imagination of central banks, professional investors, the man and woman in the street.
Now, you've always had a little bit more than your competitors. And that's the impression I get anyway. It's obviously stood you in good stead, I'd say. Yeah, gold is always a hot topic to debate. What's happening globally is, and what's happened over the first quarter is phenomenal, as you've mentioned. Some of the gold stocks have gone up over three months, 60 to 70 percent, as things stand today, harmony. gold, the share price has doubled from the 1st of January to April this year.
Similarly, Anglo gold and gold fields are up close to 100%. So what we had in our portfolio as 6% to 7% literally doubled, which is now 12% to 13% in the portfolio because of the share price moves. Essentially, people were talking $2,500, $2,600, and people were forecasting $3,000 for the gold price. Now they're talking $3,500. We've actually seen analysts come out with a $4,000 gold prediction.
What's happening is that people, through all this data of straight wars uncertainty, have taken a view on safe havens. And they've decided that the U.S. dollar for one, maybe even U.S. treasuries, those that are sort of common in God and places to hide, are not so safe and secure because of, you know, can we trust, can we not trust what is happening politically between the U.S. and the rest of the world? And they're moving the money to where they now believe.
the money would be safer and gold has clearly been identified as not only for us as investors or retail investors looking to invest it but also for central banks across the world where they are looking to shore up their reserves to make sure that they've got enough on their balance sheet. Clearly, they've identified gold as one of those places or assets together. Long may it continue, although it does look a little bit stretched at the moment. That's my opinion, not 91's.
When looking at your offshore component in your portfolio, let's have a look at US exceptionalism. I mean, I talked about fleeting moments earlier on. This is a throwaway phrase because it has been thrown away by many. Do you think it's just sort of hiding in the shadows and ready to come out again as Trump weaves his magic? Or do you think it really has gone? Yeah, we reduced our U.S. exposure coming into the year.
So in January, and I'm not going to claim victory on this at all, but our view was that there was concerns about a slightly sort of a growth slowdown in the U.S., this U.S. exceptionalism theme and concerns around that. And with the sort of rest of the world, potentially fiscal stimulus in Europe, and we saw that in Germany and the Chinese standing ready to support their economy to continue to achieve four and a half or five percent growth.
We took a bit of a view and we said the differential, the growth differential is shifting from US exceptionalism to other parts. And we went underweight US, we reduced the US trade in January. Now what has happened post-liberation day and the tariff announcements, tariffs essentially in our minds are a tax being levied on imports and exports. So the big demand from the US consumer is getting affected.
So you're going to have less demand because of essentially a tax on everything that they want to import. And the rest of the world has to deal with the supply disruption because what they rooted to the U.S. has to go into other places. So we took a view and we said the European sort of framework have already started to stimulate and support. And that's coming off an incredibly low base.
And you look at China and their potential support and additional support that they can further provide to deal with the sort of consequences of the tariffs and trade wars. Made us tilt the portfolio more into other. regions and geographies, and also from a stock perspective, what we were looking for and continue to look for are stocks that, even though you're going through the trade war and tariff disagreements, which companies have got purchasing pricing power?
Which of these companies are in a position where they can deal with the extra essential tax or tariffs through adjusting their prices and still maintain their margin? And then also important to remember, certain companies are not exposed to the manufacturing sector. They are exposed to the services sector. If you look at a tech company, Amazon is very much exposed because they need to import 30% to 40% of their products from China. So they're very exposed.
But a company like Microsoft is a completely different business model because they essentially don't manufacture. So which company's telecommunication company provides a service and doesn't necessarily produce or manufacture a product? Pricing power as well as exposure from which sectors you sit in is super important in how we now decide on the equity allocation. Let's have a look at your offshore stock picks, first of all.
You've been talking about certain companies that might even be tariff-proof. But have your picks done better or worse than the benchmark? We've done well on the offshore side, and credit here to Rana Khan, who helps and sort of holds my hand in navigating us through our offshore selection.
We leverage off what our global colleagues does on a global scale, and we can also see certain geographies where we invest in Europe only or in China only or in emerging markets only, see those investment ideas that they generate. So we've been able to allocate out of manufacturing and more into financial services as an example. We're slightly concerned about consumer discretionary, so you really have to sort of think about how you allocate capital there. And as I said, focus more.
on services companies. So we've been quite fortunate in how we've reduced our exposure to some of the US tech stocks, as I've mentioned, to go underweight and allocate that sort of capital into Europe and other emerging markets. Let's see what's come in and gone out. In other words, have you trimmed some of your holdings? Have you got rid of some of your holdings? Have you brought new ones in or added to the ones you already had? What have you done? Yeah, we reduced stocks such as Nvidia.
We've trimmed Amazon, as I've mentioned, because tariffs and trade wars are not great for them. We've increased some of our financials, our banks in the European sector with some of that capital. We were in a position where we went from overweight U.S. to 4% underweight U.S. and reducing some of those U.S. manufacturing companies. We were in a position where we could reduce Apple even further. We were underweight Apple and we said, well, there's a little bit left.
We can just reduce that to very much close to zero and allocate some of that capital. into companies in other spaces and other geographies. On the South African side, we were in a position where we had gold and we said maybe we should add here and there.
Out of December, we were slightly concerned because the Federal Reserve said they're not going to cut interest rates as aggressive as people thought and usually that withdrawal or less liquidity and what people thought is not a good read-through for gold. So we were mildly underweight relative to the benchmark, but in January, February, we were able to add to that gold trade, so we were quite fortunate. And now we allocated there.
On the SA Inc. space, as I've mentioned, it's been a volatile quarter. Some SA Inc. stocks are down 30%. Gold stocks have doubled on the other side. So it's quite wide dispersion in performance. But on the SA Inc. side, talking to some of these companies, we've actually added to the likes of Pepcor. We've continued to add to the likes of Fushini, topped up on even more Capitec as we saw the right opportunities. Also in the insurance space, we own Sunlum Discovery and Outsurance.
So where we saw some pullbacks there, we were able to add to some of those opportunities in stocks. We reduced some of our resources, Anglo-American, because if you go through a trade war growth slowdown, that tends to, from a demand side perspective, not be great for resources stocks. So we were able to sell a bit of our Anglos. We own zero BHP bulletin and Glencore.
We'd rather allocate those to companies where the earnings growth profiles are still looking strong, even though there's tariffs and trade wars out there. Final question, Hannes. Are you happy with your current positioning? Yes, I think we've got a portfolio that looks different. We've got quite a big exposure to, like I said, the SA consumer, banks, insurers, and retailers.
On the global side, as you've mentioned, the U.S. exceptionalism is opening up into a broader rest of the world trade, and that's great for stock pickers. So the fact that we could divest from that very concentrated market where everything was driven by a few stocks. to allocate to other opportunities. And if you think about it on a global scale, Acqui has got these, let's call them seven or eight big stocks in it.
So anything else you put into your portfolio is an off-benchmark position on a global scale because you've got quite a big tail of smaller positions that represents the Acqui benchmark. So if we take 1% and 2% positions, that's 1% and 2% away from benchmark. And as this rally is broadening out to other geographies, other sectors outside of the Magnificent Seven, that's great for stock. picking and for alpha generating opportunities. Hannes, thank you very much for your insight.
Very good luck with the next three quarters of 2025. That was Hannes van den Berg, portfolio manager for the 91 Equity Fund. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position or opinion of any other agency, organisation, employer or company associated with StrictlyBusinessPodcast.com.
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