The value of investments can fall as well as rise and losses may be made. This is not a buy, sell or hold recommendation for any particular security. A year ago, it was fairly easy to predict that the year 2025 might be an interesting one. There was a new and unpredictable resident coming to the White House. Global economies and central banks were behaving differently and creating low pressure here and high pressure there. And of course, we had a well-established bull.
market in gold and of course again ai stocks and most importantly in my opinion a nascent bear market in the u.s dollar but what promised to be an interesting year has turned out to be a remarkable one and look no further than the for example the sa bond market to justify that description looking decidedly shaky at the end of the first quarter yields have fallen sharply for all the right reasons and a full-blown bond bull market has ensued as for equities you
The JSC has been an outperformer with SA Incorporated stocks joining the party. But given the bond's ebullience, have equities lagged a little bit? Interesting question, and it's going to be answered from an icy Manhattan by 91 Value Fund manager, John Bickard. And may I be the first to wish you a Merry Christmas, John, and a Happy New Year. And I think you're looking forward to 2026. I get the feeling.
Yes, I think your introduction sums it up well, that there's been a massive dislocation in SA between equities and bonds. And if you just take a step back and look in the value fund over the last 25 years, the money we've made has really been like four or five what we'd call big fat pitches when there's a dislocation in the market. And I'll go back over that. 25 years and 25 years ago we put all our money in SA Inc at the beginning of the 2000s that eventually worked out really well.
We avoided resources in 2008. We put money into Platinum sort of 2017 to 2020 eventually after waiting four or five years that really worked well. So all the money we've made in that period is by betting big at the time when there's these dislocations and I think this is where we are. right now between South African equities and bonds. And I find it sort of quite amusing because, you know, I listen to commentators talking on the SA market and everyone now is bullish on bonds.
And, you know, I mean, where were these people when the bonds were, I mean, they were 10%, the 10-year at the beginning of the year, I think in the first quarter, as you mentioned. They touched 11%. If I can interrupt you, John, just before Liberation Day, in anticipation of Liberation Day, and then a couple of days after the so-called Liberation Day, I think we went to something like 11.15% on the 10-year, and now we're down at something like 8.3%. It's been an extraordinary time.
Yes. So, I mean, that is an enormous return. I think the bond return for the year is sort of 25 in Rand, but off that March high. you know, the number's probably closer to 40%. So, you know, on a pretty low-risk asset, that is an enormous return. So, you know, to be chasing the bond market at 830, you know, I'm no bond expert, and bonds probably are okay still, but the real money's been made. And the big, the next big opportunity is in SA equity.
So, you know, if, just take another step back, you know, evaluation of an equity is done, is based on... The two key drivers on evaluation of equity is the current cash flows. Well, there are three drivers. The current cash flows, the long-term growth in the cash flows, and the discount rate. And I always think the discount rate is the most underappreciated part of evaluation of an equity.
Because when people talk about you should buy this share or buy that share, they talk about… what the company's doing and how it's going to grow and how it's going to be so fantastic as they guess the future. You don't often hear people say you should buy an equity because the discount rate is low and falling. You know, that's kind of boring because it's kind of mathematical. But the valuation of equity is as much driven by the discount rate as the future cash flows.
And so you've had the discount rate fall from 10 or 11 percent to eight and a half. You've had bonds go up. 30%, that means an equity that was South African rent-based, where there's South African rent cash flows, if it was valued at X on the 31st of December a year ago, it should be valued 50% higher, unless you expect lower cash flows from that equity.
Assuming that nothing has changed in the cash flows, which if anything, the cash flows have probably got better because the SA economy has got better. But let's just say the cash flows are the same. A SA steady cash flow generating business should be up 50% over the last year. And yet, there are many equities that are down in RAND terms. And probably the average SA equity off the top of my head is probably up 10% and massively lagged the market. So that is the dislocation.
Okay, a good dislocation as well. So I'll get to where this leaves you at the moment, where you're positioned and where you might be positioned over the next few weeks and months. But also let's look at fundamentals. I mean, Operation Vulindlela, for example, Operation Phase One of that out of the way, and it's been rather good. Load shedding is a thing of the past, apparently. Freight problems have been solved to a good degree. There's more to come.
The interest rates are... supposedly coming down even further. Inflation is under control. It's all set fair from a fundamental point of view, as well as the technical and mathematical point of view that you've just well described, John. Yeah, so I think those are all important points. So what I've described is if South Africa was the same place as a year ago, you know, an equity should be up 40 or 50%.
But actually, the most interesting thing is actually South Africa is in a much better place than it was a year ago. And that's Just an added bonus that I actually think the change, the most important change is the terms of trade, which is, you know, on the 31st of December, if I'd come to you, Lindsay, and said precious metals will be up 50 percent, 60 percent, 70 percent in RAND terms. And the oil price will be down 15 percent in RAND terms. And bond yields will be 200 basis points lower.
that are trade. that we'd be running a trade surplus and that the current account, the budget deficit would be reduced. And I put all those things in front of you and said, this is what's going to happen over 2025. I think pretty much everyone would say, well, SA shares will be up 40% and they haven't. So why is that? I think the first, you know, people will say it's because there's still problems in South Africa and all that. But the pathetic truth is...
The main reason why SA equities have lagged is that fund managers in South Africa went into 2025 very underweight platinum and gold shares. And platinum and gold shares have given the entire return of the JSE this year and basically have gone to like 25% of the index between the two of them. And SA fund managers have been underweight that. So in order... to buy more platinum and gold shares to reduce their underweight to keep their jobs.
They've had to sell the SA Inc. shares, and that's really what's happened. So, you know, people are going, well, why haven't they responded? And then people start to worry about maybe there's something I've missed. Well, the principal reason they haven't is they have been used as a funder for fund managers to reduce their underweight in precious metals, which makes no sense at all because SA Inc. is actually very cheap, as we've discussed, and it is actually a beneficiary of precious metals.
So you're selling the cheap thing to buy the thing that's helping the cheap thing that's gone up 200% in a year. It just doesn't make sense. But if you're lagging the index and you've got a half weight in platinum and gold and your chief investment officer says, what are you doing? You narrow that underweight and you sell. Okay, so what's the chief investment officer going to say at the beginning of the new year? We'll sit down and say, right, chaps, 2026. We messed up a little bit in 2025.
We've got maybe another, according to this podcast with Bickard and Williams, we've got another maybe 40%, 50% to go in SA Inc. stocks or certain SA Incorporated stocks. Anyway, do you think it's going to be a bull market? And are you positioned accordingly? So, yes, I do. and I think To go back to what we said at the beginning, at the moment we are basically more overweight SA Inc. shares in the funds than we were prior to the election.
So the last time there was a real opportunity was just prior to the election when everyone was so negative about the outcome of the election and we basically were fully loaded SA Inc. shares and they rallied 40 or 50% after that. We then sold them out and now we've bought back and we've actually bought more now.
So, excluding one big position we have in commodities, which is African rainbow minerals, which we think is a very good way into platinum and gold, which is the biggest position in the fund. Outside of that, everything else in the portfolio. is in South African shares. And we used to have quite a lot of banks. Banks have actually been the better performing SA Inc. I mean, I think they're still cheap, but they've kind of led an underperforming pack and they've done okay.
So what we've done is sell our ABSA and we've rotated that money into the SA Inc. shares that have lagged.
And so our biggest positions are Bitvest, which is a real... it's you know it's always been a proxy for uh inc and a popular stock for foreign foreign shelters and that is massively lag and on 11 times earnings we think is just completely underpriced especially considering that they are big in logistics and they've got a lot of good businesses in there our second biggest holding is woolworths which has also lagged the retailers and we see concrete signs that that's
turning around and then we've brought back into the hospital companies net care and life health care. And if I say something about hospitals, hospitals are interesting because hospitals are really a bond proxy in equities. There's not a lot of growth. They grow patient days at 1% and they grow their top line at 5 or 6 and they're getting a bit of efficiency. So they're growing their earnings at 10 to 15%. But it's an annuity earning business, just churning out rents. It's almost like a bond.
but with some inflation characteristics. And this is exactly the kind of stock you want. So instead of going to buy SA Bond on 8.3%, as we said, you can go and buy Life Healthcare or Netcare and their free cash flow yield. In other words, a direct comparison to the 8.3% in the bond is probably more like 12%. And it's growing. And they have not rallied at all, really. They are the worst performing because people are worried still about national health and other things like that.
But they are just generating rent cash flows and are trading at a massive discount considering where bond deals are. So those are the kind of interesting stocks. And then we've got a lot of mid-cap shares. So mid-caps, you know, banks have led because they're the most liquid. And in the last few months, we've seen some foreign buying. in SA equities and they've come first for the banks. So they come for the liquid shares first. So that will be things like the banks.
And then eventually the money trickles down to the mid caps and there's a whole raft of mid caps that if you think, but based in Woolworths and the hospitals are cheap, the mid caps are crazy. I mean, they, you can buy any mid caps on most mid caps in South Africa trade on three or four times cashflow, which means they trade on like 20%, 25% free cash flow yields when the bond yield is 8%, which is... So there we have names like Italtile, Sogo Sun, Rainbow Chickens, Invicta, City Lodge.
City Lodge is one we've just bought where things are getting a lot better and basically it trades at a quarter of the market value of its properties, which is quite interesting. So you've bet big in the past and you bet big... again. And this is all very well, all the things I've said, all the things you've said.
And again, going back to Operation Vulinglela, they say that by 2030, South Africa's GDP will be 3% per annum, suggesting that perhaps there's a four, five year bull market for SA Incorporated stocks coming. Any chance, as has happened in the past, any chance you might be wrong? I mean, not you're going to be wrong, but the South African situation might disappoint you. So So obviously there's always a chance you can be wrong. I guess I'd say the only, I mean, the valuation is the valuation.
The gap to bond yields is the gap to bond yields. The improvement in SA is pretty widespread. You know, it's not all one thing. You know, we're not putting all our money on ESCOM. As you say, it's Transnet and ESCOM. And so it's a number of things are getting better. So I guess probably the only wild card is, I guess, politics. is, which by the way, always has the smallest effect on the stock market. You know, politics is not as big as the discount rate or growth, but it is a concern.
So I would say where we could be wrong is, you know, a Zuma type problem with respect to the leadership of the country, which is always a possibility. I think it's unlikely, but that's probably the wild card where we could be wrong. Okay, so politics is an outside chance of a wild card scuppering the very rosy picture that you've just painted. John, thank you very much for your time. A very exciting way to end 2025. John Bickard is Portfolio Manager, Value Fund at 91.
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