Investment interrupted

Patrice Rassou, head of equities at Sanlam Investment Management (SIM)

Tesla? Bitcoin? Apple? Where should South Africans put their money now that the JSE is mostly moving sideways? Or is there still value on the JSE? Patrice Rassou, head of equities at Sanlam Investment Management (SIM), argues there are bargains to be found locally.

The stock market must be the only market where, when items go on sale, nobody wants to buy them, Warren Buffet has often observed. Perhaps investors forget that in the short term markets are driven by irrationality - greed and panic – Patrice Rassou said at the recent All Access Summit hosted by Sanlam Investments.

With the local stock market trending sideways over the past three years, investors are wondering if there is any point being in equities. Over the time of the ANC elective conference and while the Ramaphoria sentiment lasted the JSE rallied 10% in Rands and an eye-popping 22% in Dollars. Hot money rushed in – until the news of the technical recession came out – and the money rushed out again. The market has been down more than 9% in Rands this year and down about 30% in Dollars to the end of October!

SA is being punished with other emerging markets

“It’s near impossible to make forecasts when one tweet by Donald Trump can send a currency like the Lira down by 30%,” Patrice said.

“We are not operating in a good environment; we are being grouped together with other emerging markets. So, what is really impacting us at the moment is that we’re being ‘mugged in a bad neighbourhood’ – that of emerging markets. And the US has been the market outperforming all markets creating the illusion of strong global equity performance.”

But how do the opportunities look outside of SA?

Tesla – is the market expecting ludicrous growth?

What about Tesla, the company of South Africa’s “prodigal son”? Again in a tweet, Elon Musk announced that he’s taking Tesla private, that the funding has been secured and he even gave the price at which it would happen. Two weeks later the story reversed and now Tesla is staying public. “Tweets are really disrupting investment markets in the short term,” Patrice said. The only rational way to invest is to consider the fundamentals.

Patrice used Tesla as an example of how many participants are no longer looking at the fundamentals when buying a stock. Even though BMW is producing nearly seven times more cars per year than Tesla, their market caps are similar. “The market thinks these companies are worth about the same, i.e. Tesla is worth around seven times more per car than BMW. Not even our most optimistic calculations for evaluating Tesla can bridge the gap between true value and what the market is willing to pay.”

Some assets are near impossible to value

Another favourite among South African investors who have given up on the JSE is Bitcoin. “Bitcoin as a currency is incredibly difficult to value. It doesn’t offer interest, there’s no cash flow, and it’s impossible to know the extent to which it will be adopted, and how it will fare against rival currencies,” Patrice said. Some people will make money from cryptocurrencies, though. “In the gold rush those selling the shovels to the miners were the ones making the money. Similarly, it will be the people providing the trading platforms, not the ones trading that will be making the most money.”

Are big companies bad investments?

With the likes of Apple valued around $1 trillion, another question that investors currently battle with is: are big companies bad investments? Over the past 10 years, Naspers has outperformed Google and Facebook to become the media and tech giant it is today. And then there’s TenCent. When Koos Bekker first invested in what was then a little Chinese company, who expected that to be the top performer in the tech space globally?

“Even now TenCent may be in the early stages of its life cycle,” Patrice observed. “It’s still dominating the Chinese market. Yes, the share price has pulled back recently but that doesn’t mean it’s all over.” The increased regulation surrounding it can be seen as a negative, but on the upside it makes it very difficult for competitors to enter the market. As a holding company of TenCent, Naspers is currently trading at a discount, according to Patrice, and he has therefore allocated 20% of the Sanlam Investment Management (SIM) Top Choice Equity Fund to Naspers. Naspers is also one of the reasons for the strong performance of the SIM Top Choice Equity Fund: 12.83% over the past 10 years to October 2018.

Tech is disrupting almost every industry

With disruption being the new norm, the line between investing in a tech company and another type of sector is blurring. Take the tobacco industry, for example. Patrice noted that one would think that this is an industry in decline with people smoking less in ageing populations. But British American Tobacco has been growing its earnings at 10% p.a. - through cost-cutting, focusing on niche markets and it’s paying steady dividends.

“Even tobacco can be disrupted,” Patrice said. Competitor companies like Juul specialise in vape and heat-not-burn products (e-cigarettes). “Does that mean British American Tobacco is dead? No, it’s launching a whole range of new products – tobacco tech – which will transform the company going forward,” Patrice said. They are looking for 30-50% of their future revenue to come from new products and the valuations have discounted this information. Still, it is trading at a PE of 12, much cheaper than most of the companies on the JSE.

Do not let the recent poor performance of the local market put you off and interrupt a sound investment strategy. “You need a contrarian mindset if you want exceptional returns,” Patrice reminded investors. “It’s when the markets are down and no one wants to invest, that you need to look for bargains.”