Is it time to replace fear with FOMO?

0:00Welcome to the Denker Capital Podcast, where our highly experienced team of in-depth thinkers and other experts share their insights on a range of investment-related topics. In this podcast, we have conversations about developments in South African and global markets and what these may mean for investors. We analyze specific stocks and sectors and explore general themes relating to the fundamental principles that underpin sound investment decisions in an ever-changing world.

0:34Today is the 17th of October 2022, and we have all of the Denker Capital Portfolio Managers chatting to Nigel Barnes about the current and near-term prospects in the local and global areas that they cover. Hello, everyone, and welcome. Quite a big crowd in the room today because I'm joined by all of the Portfolio Managers from the team here at Denker Capital. Going around the table, Koki Koiman, Claude Mancake, Jan Mankeys, Madeleine Sessions, and Jacobus Ostezen. We have 11 or

1:10so weeks to the end of the year. So I thought it might be a good idea to get the team around the table and really just ask one question. What do they see as the prospects for the year and how this might impact any material changes they make to each of their portfolios? So it's a uniform question to each of you guys. Welcome to you all. Let's start at home. Claude, can I throw this open to you? I'm going to ask everyone to keep their response quite short, and then we're

1:46going to come to Madeleine at the end to wrap up from a multi-asset perspective. But Claude, welcome. Thanks, Nigel. I think, Nigel, the first point to make is from a prospects point of view, the near-term outlook is likely to remain, I think, very challenging and pretty volatile. We've seen high inflation across the board, and in particular, if we look at food inflation, which if you listen to the likes of Pick and Pay and ShopRite, they're talking about food inflation at around about a 10% sort of level. So if you add this with high energy costs and rising

2:21interest rates, there's no doubt that it's likely to squeeze the SA consumer. And we must keep in mind that if we look at food, energy and the cost of credit, it forms a pretty large proportion of the consumer's budget. So, you know, the impact will be felt, especially over a period where we typically move into a fairly busy Christmas festive season. So in a nutshell, I think we'll start seeing that negative impact coming through in terms of retail sales data over the coming quarters.

2:54And I think if we add to that, if we look at the impact of the Transnet strikes on the resources sector, that's also something we need to keep in the back of our minds. We've been unable to export key commodities, including platinum, coal, and the likes of iron ore. And that will rub off on the fiscus. But having said all of that, this is not new to us. South Africans, I think, have dealt with these issues many times over. So I think very much it would be business as usual. And we must also keep

3:28in mind that the market is forward-looking. So a lot of this, these sort of impacts are already reflected in share prices, already reflected to a large extent, potentially in the currency as well. On the second part of your question, in terms of the material changes, we haven't made any significant changes. A lot of these risks, we factor into our thinking and overall positioning in the portfolio as part of our risk management process. We also run pretty diversified portfolios across industrials, financials, resources, also mid and small and large cap stocks. And we do have

4:03the benefit relative to our peers that we do have larger exposure to what we believe are fairly attractively valued smaller and mid-cap shares. And I think maybe the final point to make where we have made a few changes in the portfolio is the recovery that we're seeing in the hospitality sector. So if we look at quick service restaurants, activity levels have increased quite dramatically. We see that benefit coming through, we believe in the likes of famous brands. Hotel occupancies are

4:34improving on the back of both business and leisure travel. That we believe will be good for the likes of City Lodge. And then the recovery in the gaming sector and that together with the improved activity we're seeing in hotel occupancies should benefit the likes of Sun International. So all three of those counters we have added more recently to the portfolio and hopefully our clients will see the benefit of that over time. Okay, great. Well, thank you. Jan, you sit as part of the local equity team. I mean,

5:08from a small and mid-cap perspective, what would you add to what Claude's told us? Yeah, I think Claude's covered most of it, but I think it's true that the world is a different place compared to maybe six months or so ago. Interest rates are now expected to go quite a bit higher. The cost of living is now pushing through onto the SA consumer as well. So there has been in the last few months been a lot of talk around the health of the consumer and how that comes through into

5:42company earnings. So from that point of view, we are seeing some stress out there from the consumer point of view. But we do believe that focusing on good quality companies, companies with strong balance sheets, these companies are often well placed to continue to thrive in this environment. So from that point of view, I think banks are probably very well placed, they're well provided,

6:15strong capital, and they're getting the benefit from the endowment effect of higher rates. Probably the credit retailers could be under a bit more pressure. But as Claude said, the recovery in a number of the leisure stocks is something that we see as an opportunity. We continue to see value in small and mid-caps, a lot of the stocks that I cover. But you will notice that all the names that Claude mentioned are in that small and mid-cap space. And I think from that

6:48point of view, it is a part of the market that is a little bit isolated from some of the global headwinds that we are seeing. And then also we've had some very good updates from some other small and mid-cap stocks like Carp Agri and CMH. We're looking forward to their results in the next few days. And I think those companies will continue to do well, despite a slightly tougher environment. Okay. Brilliant. Thank you, guys. Thank you, Phil. And thank you, Jan, on the local side.

7:19Jokobo, it's over to you now. Global headwinds, as Jan said. It's been a challenging year from a global perspective. Your thoughts? Nigel, it's been a challenging year. I think that's what you could expect after 10 years of easy money in the system. Very low interest rates. We're coming from very low low interest rates, massive liquidity injections in the global money system. And we're experiencing the unwinding of that. And so we're seeing a lot of volatility. And in the market, the market is very

7:55much fixated on when we'll pivot to a more established policy. And so it's all about when will inflation and interest rates peak. So we think it's going to be very difficult to bring inflation under control. We're dealing with structural issues like deglobalization, tariffs, sanctions, labor constraints. We think government's ability to service interest rates, high interest rates, is very limited. And also

8:27the political will to push up rates sufficiently to bring inflation under control is going to be very limited. So we are seeing a lot of opportunities in the market due to this because of the higher cost of money. There's a lot of full sellers in this market. And we see a lot of the companies that could actually benefit from this environment are selling off. So two examples is Ashtead and Ferguson, which we think both could benefit a lot from capex spend in the US and from on-shoring as manufacturing capacity is

9:05brought from Asia back to the US and Europe. You can just think about recent developments around semi-chips where the US is putting a lot of sanctions on manufacturers in Asia. A lot of that capacity will have to come back to the US and Europe. And these two names will actually benefit from that. And they've sold off for the rest of the market. So we think it's one of those markets where good companies get sold off due to no reason. And we've been buying more of those two specific names.

9:39Okay. Brilliant. Thank you. To you now, Jan mentioned the endowment effect of rising rates on the banking sector. And that's something you've been talking about for a while now. But just from a global perspective in the financial sector, your thoughts? Yeah, Nigel, I must say in the 35 odd years that I've been in the markets, I've never seen the bank sector as strong in terms of capital and reserves. And as healthy in terms of their loan books. And that's largely thanks to all the regulatory changes

10:16post 2008. And at the same time, being as undervalued in terms of this price to NABs. So clearly, the market is following the traditional pattern of selling banks when you're heading into a recession because of the fear of their debts. But missing the changes that have taken place. And the results coming through now again, and it will come through this month, will clearly show that. But the market is still driven by fear of the bad debts. We do know that

10:50once this cycle ends and the recession has passed its speed, then banks do rally strongly. And so we think that will definitely happen because then you get stronger loan growth again. And then the market sees that the bad debt's worth is bad. So we're very confident about and sleep well at night at the moment. The outlook is still poor, so hence the market's emotionality. And especially in the UK, where the recent changes has almost changed into a dog show. I mean, the stress might be gone

11:26by the time we sent this podcast out. And how do you invest in times like that? But UK banks are already down 35% in a few weeks. So the market reacts immediately. And so UK banks are almost now rather a buying and a selling opportunity because of what the market's already done. So in terms of our own changes, we've made very few changes. We actually did sell a bit of UK banks in the run up, you know,

11:57getting worried about what could happen, never anticipating it could be that bad. And with hindsight, we always should have done more. We should have cut half the position. We moved then into countries like Brazil, Indonesia, that are quite far away from the war, far away from the UK, benefits from you know, the resources, from food, inflation. So yeah, in terms of what the rest we're doing now, we're actually really happy with the portfolio. We've got the results that are starting to come through, show that. And so the outlook is now, I think, way past the part of the cycle where you

12:35want to withdraw money or increase cash, you're getting much closer to where the risk of turn is positive. So you want to replace fear with FOMO. I mean, the next part of the cycle, you're going to be missing out. You know, once it turns, and it can happen very quickly, China exits COVID, strict, strong rebound, the wall ends, that's unlikely, but we've been surprised before. But I think with the valuations and now you're much more poised for a positive shock than negative. The

13:11negative shocks are already priced into the bank sector. Okay. Thanks, Scotty. Madeleine, let me come to you now. I think just overall, each member of the team has talked about the challenging environment, but have all talked about the opportunities that exist. You run the multi-asset business here at Denker Capital. So you, in effect, talk to each of these guys on a day-to-day

13:43basis and the building blocks make up a lot of what you do. How do you see things? I'm very grateful that everyone started with all the risks and then moved on to the opportunities. That's nice. All this shows, people have heard me. Risks are important. What do I think? I think if you look at the market, by and large, the market no longer really worries about long-term inflation risks. I think that is quite surprising. So we worry about it. And so our portfolios continue

14:20to try and mitigate against inflation risks, both unbalanced and unstable. But also, as you heard from everyone in the room, there are opportunities out there. And we try and bank them. So we are on the margin allocating additional capital offshore to the equity markets. As you well know, we don't know what the future is. The future is definitely different from what the market used to think it would be. But you are now buying that future at 20, 20 odd percent cheaper than it used to be.

14:55So it is inappropriate to have had an equity allocation in December, have taken some losses on that and not reallocate capital into that position. So on the margin, we are increasing our exposure to risky assets, doing so in a measured way, all while trying to protect, not downsize them as much as specific inflation risk to investors, which is a hidden downside. If your portfolio is

15:26not maintaining the run rate of the inflation, you are actually losing capital for your investors. So we are desperately looking for assets to help us do that while banking the opportunities. Thank you, guys. Claude, as you said, markets are forward-looking. Thank you all for your thoughts as you run up towards the end of the year. You got a, what was it, change? Fear for FOMO, Conky. I quite like that one. So I will stretch it out. So thank you all. All the best for the rest

15:56of the year. And I'm sure we'll speak to you all again over the next few weeks.

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