https://www.moneyweb.co.za/wp-content/uploads/2017/02/170210-firstavenueinvestmentmanagement.mp3
Will a US interest hike start a market crash, do you have still opportunities for offshore investing and why automation in mining is not a solution for Africa.
RYK VAN NIEKERK: Thanks for visiting the forex market Commentator podcast, my guest today is Hlelo Giyose, he could be the principle investment officer of First Avenue Investment Management. Hlelo, welcome to the show, we got some fireworks in Parliament on Thursday night. On Friday the JSE was up 1% as well as rand was stronger, is it an instance of the markets increasingly safe local political events?
HLELO GIYOSE: The markets have invariably been, mainly the South African equity markets, have always been [more immune]. I’m sure I may have mentioned to your account once that individuals did a study okay 1960 so we took the ten most socio-economic and political events in 20-year clips, so from 1960 to 1980 we chose the ten worst, from 1980 to 2000 we find the ten worst, from 2000 until today we chose the ten worst and you can have all the features in the administration area, you may have the Sharpeville shootings, one could have the Rubicon speech, one could have the devaluation from the rand relative to the pound by 20% a single day. Today the market industry is a lot on top of it was in 1960 we do not think you will find a country that’s been there as bad as Africa. So the markets always shrug off what occurs politically and economically, on only 1 condition, that the country isn’t going to split up with market-driven principles. Should you part ways with market-driven principles so you pursue a Venezuela-type style than the market doesn’t really know what to price, then you may in the process list the costa rica government to ensure the market can price government entities, which can never happen.
RYK VAN NIEKERK: Ya think we’re also moving towards that? There are many populist policies being mooted.
HLELO GIYOSE: No, no, there is no chance to execute with them either. If we cannot offer the government credit to execute on growing the economy, we cannot offer the government credit on actually changing policy to advance towards everthing else. So, no, we’re not moving anywhere, we’re stuck in neutral.
RYK VAN NIEKERK: Exactly, the market industry does practically nothing in the last 2-3 years, the economy is just not going anywhere quickly, how can you foresee then this short and medium-term future of our market?
HLELO GIYOSE: I’ll explain some tips i think we have to do, let’s separate the conversation about future returns from your political environment; in which the information mill today actually rhymes with previous periods the spot that the market was missing by way of a amount of uncertainty on account of local economic growth. If you ever go through the run-up to the 2008 crisis because our economy was doing very well from 2004 to 2006, the truth is, due to the resource boom this marketplace did phenomenally well but from 2007 to the crash of 2008 the market industry didn’t prosper. But also in that time once the market didn’t flourish that happened because uncertainty was creeping within the financial system, to never the political system, towards financial system. When uncertainty creeps in additionally, the tariff of funds begins to climb before mortgage rates must go, what we plan to call safe assets, safe assets, which investors are willing to pay reasonably limited for to be able to force away bankruptcy or loss of capital, those assets did phenomenally well. Risk assets, which had done well in the run-up to your 2008 crisis, resources, construction companies and furniture companies did phenomenally badly in that period. Consequently we are time for that period, where from 2009 to 2016 the investor was very concerned about what can eventually China, could it have been going to contain a hard or soft landing. Investors were very concerned with the manner in which the US economy was healing itself and also the rate that it absolutely was doing so. So for the point the investors were prepared pay reasonably limited and were able to buy companies that would safeguard their capital, not just safeguard capital but grow. Those are high quality companies. We did exceptionally well in this particular period because we always guard against bankruptcy risk. By 2016 the investor became very comfortable with the truth that China, for a managed economy, landed softly, not hard, that the US is already here we are at trend GDP [5:09] fallen to pre-2008 levels, the housing marketplace is powerful, the car information mill strong, consumer consumption is quite strong and consumer consumption, you may already know, drives many of the US economy, 75% than it. For the reason that period the investor doesn’t need insurance against uncertainty, doesn’t need safety anymore, so he’s very able to reach out a bit further and grab for risk. They did that in spades, they bought commodity companies, which, anyway, taken into account the vast majority of outperformers in the top 10 performing stocks this past year. But to achieve that, to invest in purchasing risky assets while there is non recourse to prospects assets, particularly if the economy is doing well, the international economy does well and, not surprisingly, the US economy is 25% of world GDP, China’s economy is 15% of world GDP, so that’s 40% of world GDP being successful. To purchase paying for risk assets, to improve their risk appetite, they’d selling something, in any case investing is usually a zero-sum game, you must sell something to get something. So they sold safe assets that this investor had used as the protective layer as insurance against uncertainty, they sold Anheuser-Busch, they sold British American Tobacco, they sold Woolworths, they sold Truworths, they sold all the wonderful companies, they sold Clicks so that you can buy, will you accept it as true, DRDGold. Companies that were actually deep within bankruptcy risk like Anglo American, where bonds were trading at junk status but that is simply a objective of risk in the same a way versus investor did from 2004 especially 2005, 2006 and 2007. However it all ends, whenever risk leads the market up it eventually leads it down, it all ends in tears. This occassion it will likely be just like 2008, it will likely be just like 2001 when the tech bubble, that had virtually no net income generating companies leading the industry up, as well as at that period you could recall that Berkshire Hathaway, which is actually a collection of high-quality companies, shrunk 42%, it declined 42% but not lots of individuals know that, Berkshire declined 42% inside the run-up for the 2001 tech bubble. Moreover, Berkshire declined 45% inside the 2008 crisis, lots of people don’t appreciate that but what you may want to do is never ever lose faith, lose confidence in high-quality companies because, as you can see, from 2001 to today Berkshire has compounded in the huge rate higher than the market, without selling the companies he held, he held a similar companies, these were just compounded off those lows.
RYK VAN NIEKERK: But a good deal changed in the last several months, you will discover a new US president, who may have interesting economic policies and also the markets appear to love him, you think that could return some economic uncertainty available in the market, which often can drive people back to more conservative assets?
HLELO GIYOSE: I think it will eventually do a pair of things, first of all , it should do is always that it should boost profitability. Be the the very first thing it’s going to do. It may boost profitability of companies, especially financial services providers that were highly regulated. You may already know Trump ran over the campaign pledge of per new regulation which will come done to you need to use out two and that he signed a professional order 2 weeks ago for exactly that purpose. But additionally we understand that he thinks the fact that US tax code is very complicated and also the US seriously isn’t competitive on the tax basis, he really wants to bring the tax rate down 15%. That may benefit everyone, this is a tide that raises all boats.
RYK VAN NIEKERK: When you can take action since the US has massive debt.
HLELO GIYOSE: Well, what he will do alternatively, and that is where a large amount of the uncertainty will come from, to invest in that guess what happens text messaging isn’t do, he will cut all, or even most social spending the us govenment has engaged in thus far. So mandatory cover by ObamaCare, some programmes which are to children in college and so on, he’ll almost certainly proceed line by line cutting them in order to fund this while he will figure that if you narrow the tax rate you might stimulate the economy to create jobs, so that people can look after themselves in lieu of being funded because of the government. It can be true now and again but it will surely cease true in other instances but because the economy flexes to try to cope with this that’s exactly what will cause uncertainty. Nevertheless, you don’t even need to crystal gaze, let’s you can forget whatever say about Trump because, all things considered, I shouldn’t really take economic views with people’s money, their guess is concerning as well as mine, let’s simply examine valuations in the country , the valuations are high. Endure most of the sectors, let me know which sector is inexpensive? With good valuations, rising rates of interest, rising inflation, what goes on, the marketplace comes off. It doesn’t matter what Trump does the market comes off, it’s as elementary as that. So when you objective on investment perspectives versus handicapping what politically Trump may do and just how that may lead to the economy because I’m not really sufficiently good to achieve that, maybe some people are. I will simply let you know that yearly Year, otherwise 18 months, we need to employ a market crash. It is impossible that rates go up in the united states and never elevate in Europe in due course, and never climb in China in the end, and marginal [11:19] companies inactive a winner. Then a market is here we are at seeking certainty.
RYK VAN NIEKERK: An incredibly interesting perspective. Within that context do you believe you can still find opportunities for South Africans to take money offshore? Remember that it is a template of recent years, specifically when the rand devalues, it’s got strengthened now slightly, is this fact a possibility or in other words be conservative and turn into in your house?
HLELO GIYOSE: The biggest value-add to investors with time, the best value-add is not irrespective of whether offer your offshore money into a US manager or perhaps a local manager to control global equities, the most significant value-add is the place don’t you take the money out? That’s the biggest value-add. Whenever you can determine that, that is a very, really hard thing, I’d personally personally the critical for if you do it right is very simple, if you need to take your money out, never carry it back. In case you put many of your cash in dollars and you simply put some in Swiss francs and you just put some in pounds and you leave some in rands, have that being a standing allocation but you just have that for a standing allocation because what you look for to try and do is do 2 things, possibly you have consumption that you might want to complete afterwards overseas, you should invest in your kid’s university fees later on or maybe you might just understand that structurally the rand will depreciate in accordance with those currencies. So over time if you have to subsist or even to exist on some profit from the US when you convert it returning to rands it will enhance your quality of living, it will eventually raise your income levels in Nigeria. That is las vegas dui attorney apply it but whatever you do not do is say, well, it’s cheap to adopt against each other today, it’s a good time for them to remove it today after which whenever it hits R15 or R16 you see it back. So now you are playing the currency and you will be poor enough to accomplish this. Make sure you consider the money from condition it serves an intention that you saw whilst it in this allocation.
RYK VAN NIEKERK: Worth it to read perspective. Hlelo, let’s consider your equity fund, it’s actually a very worthwhile fund and I’ve compared the January fact sheet with all the December fact sheet, the hottest one that will be available, and it also looks like the most notable shareholdings have remained very stable, maybe you have kept those shares and have you done a great deal of trading?
HLELO GIYOSE: We’ve kept the shares, the primary objective of your investment strategy is to compound shareholder value and compound wealth for investors. To compound the thing you need to do should get is countless times requires yourself to possess the temperament to be the course. Therefore we haven’t changed the most notable holdings and we’ll change, anyway, if we’ve developed a mistake. In that regard were intellectually honest, you shouldn’t have to compound a misstep because if you compound a misstep that’s decaying. In case you are will be compounding, it is important to tell the truth. So we’ve kept the holdings the identical, we haven’t changed one bit. In actual fact, a year ago, only recall, we simply did three trades, put three trades while in the portfolio, when I say three trades, less reducing and increasing but actually exchanging one for that other.
RYK VAN NIEKERK: The superior shareholding is Naspers, then you’ve got British American Tobacco, Woolworths, Aspen, Discovery, FirstRand and Spar, good solid companies. Let’s begin with Naspers, it is additionally a tad up and down, this reveals to become just about everywhere currently and there’s a big discount on the valuation of the Tencent share, exactly what are your expectations of Naspers?
HLELO GIYOSE: A lots of folks may have given an investor credit if he previously had purchased Naspers really at the start of Tencent and, as you know, Tencent has really discovered perfectly. People would’ve asserted that was great stock calling. Well, that was speculation actually. Nobody would’ve known just what probabilities of Naspers succeeding really was, because no person knew whether or not Amazon could be successful business. If you get back on Jeff Bezos’s letters in 1997 every time they listed, vehicles couldn’t let you know, they had been just doing the suitable things. But today Naspers is following the law of networks, that relating to networks there is basically be few, so trust in your one hand today what amount of networks there are actually in the credit card industry, five. Count today the amount of networks there are in the social network sites business, five. The barriers to entry are significant, not just financially, you will find enough money to undertake anything, smart or stupid, money is no problem. The issue is today merely desire to develop a network that connects people to sellers, that connects individuals who want to contact eath other through WeChat, such as, I’ve got to go and convince every one of these folks to get off Facebook, to obtain off KaTalk in The philipines, to have off Tencent in China also to get onto mine. That, regardless how much money you give me, is surely an unthankful task, I can’t take action. So today Naspers, like Facebook, like Amazon, is generating a whole lot cashflow that they’ve an option, they might actually reduce their development spend and start to more traditionally allocate capital towards things aside from just growth. Now whether or not are going to do that this year or next season I’ve got no clue. But, like Microsoft, they’ll arrive at this point, where they’re going to allocate capital towards stuff like share buybacks, items like special dividends, items like increasing the dividend payout ratio and the are definitely the styles of things, in addition, that distinguishes an outstanding company from the growth company.
RYK VAN NIEKERK: Just lastly, there won’t be any commodity stocks as part of your top 10, that had been the big success story a year ago, do you buy commodity stocks if not, have you thought to?
HLELO GIYOSE: No, There’s no doubt that commodity stocks you actually need to consider them very carefully, plenty of what’s written about them by folks that counsel you to order or sell them
