You're listening to Strictly Business Podcast with Lindsay Williams.
The offshore index of the JSC Securities Exchange has recently gone through
100,000.
Now, it's only a number, but it's nice to be able to say that your exchange has an
index which is 100,000.
And that wasn't the case five years ago.
We'll come to that in a second.
But with me to talk about it is Hannes van den Berg, co-head of SA Equity and
Multi-Asset at
91NK.
As I said, Hannes, it's only a number, but 48,000 was only a number and 50,000 was
only a number.
And those numbers were April 2020, 48,000 the all share in April
2020. So five and a bit years more than doubled.
Quite a performance.
Yeah, you're right, Lindsay.
It's only a number.
But, you know, in a world where often people feel we don't have a lot to
celebrate, We just hear about...
wars and tariffs and trade wars and in South Africa is the government of national
unity holding or not now when we
get to something that you can sort of say is a bit of a landmark on getting to
100,000 it's it's something to celebrate and you're absolutely
right five odd years ago when we were in the middle of COVID March and April 2020
the
J All Share or the All Share Index which by the way has been going for 138 years so
it's an index that's been going the JSE
has been going for quite a while.
We managed to get from below 40,000 to above 100,000.
If you look further back 20 years ago, our index, so in 2005, our index was at
12,000.
So from 12,000 to 100,000, quite phenomenal.
I mean, I went to look at some of the stats.
If you invested in a 91 equity fund, or I guess in the benchmark, if you want to
call it that,
the benchmark from 1997, that's as far back as I could get data.
you are up about 14% per year on year from 1997 so 14%
returns if you were invested in the fund you would have had 17%
return but hats off to the people who were involved and over the years have been
helping to manage the
money.
People look at South Africa and they say we don't get good returns we have to go
outside and we have to go offshore But
17% returns year on year for a period from 1997 to today,
it's something that we should celebrate.
You'd battle to find another index that has returned what you've just talked
about, 14%, 17%.
These are phenomenal numbers.
Here's my scenario now.
I like scenarios.
I like to paint these little fantasy pictures.
You're an investor.
You've just made a load of money out of tech or something, and you decide you want
to build a portfolio.
Before you go to your wealth manager or your advisor, you say, I'm going to have a
look myself, do a little bit of research myself.
When you look at all the indices around the world, both emerging market and
developed market,
and you go to the emerging markets and you see the best performer is the all-share
index of the JSE over a five-year period.
It's more than doubled.
So you don't know anything about South Africa and you think to yourself, goodness
me, this must be an economy that's doing well.
Therefore, the all-share index is doing well.
But this, of course, is not.
the case.
The All Shared Index is not the economy, Hannes.
Yeah, there's many ways in which I can answer this question.
I guess, philosophically, if you stand back, the South African economy delivering
GDP growth,
it's around 1%, and we all wanted to go beyond 2% GDP growth on a year-by-year
basis,
doesn't reflect the reality on the ground.
I mean, we've got a fairly skew wallet, consumer wallet, unfortunately, in South
Africa.
There's lots of people that are still operating in the informal sector.
you have to ask yourself how much of that gets captured in data.
I mean, our unemployment rate is mid-30s, 35%, 36% when last I looked.
And those numbers don't look great in a global context.
So if you then extrapolate that to the earnings profiles that we're seeing from
some of these privately listed companies on the JSE,
companies are delivering 10% and beyond earnings growth in an economy that's only
got a 2% GDP growth rate.
Then you ask yourself, well, something's wrong here.
Something's not right.
adding up is the stats wrong or or the earnings wrong but we don't give i think
the management teams in south africa the financial
services companies the consumer companies the retailers the food producers the
mining companies i don't think we always give the management teams
that the quality of the business has enough credit we've got good management
teams in south africa and if you compare our private sector our
listed structure and the compliance and the authorities that look after these
listed companies you know relative to the rest of the world we've got some
of the highest standards.
the world.
So you're right, good earnings growth.
And then another way to answer your question is nobody's really enjoying this
as much as they should,
because globally, the S&P 500, we're talking about the Magnificent Seven and
the other 493 companies.
It's been quite a narrow rally.
As you highlighted, global indices are also making all-time highs.
And now, year-to-date in South Africa, our indices, our all-share index is making an
all-time high, mainly because of resources.
So we're also seeing quite a narrow rally in South Africa, with, you can argue,
gold and platinum companies driving quite a lot of the upside that we've seen
year-to-date.
It's not a broad-based rally.
focused on one particular sector at the moment, Hannes, and it's a sector that you
and I are quite fond of.
Can you tell us more about why the JSC has gone to 100,000?
Yeah, I think I'll add that just now that, you know, the resources index, Anglo Gold,
Goldfields,
Harmony, Impala, Platinum, Northam, Volterra, Sabania, those stocks have
doubled year to date.
The momentum behind the gold price and more recently behind the palladium and
platinum prices.
have caused incredible upgrades to the earnings profiles of these companies.
I think post-Mr.
Trump winning the election in the United States and President Trump coming in on
Liberation Day, introducing his tariffs,
there's been a big, beautiful bull that was debated, the deficit, the budget
deficit in the U.S.
All those concerns, trade and tariffs, uncertainty, has pushed a lot of people
outside of the U.S.
dollar, outside of the U.S.
treasuries.
into gold as a physical safe haven.
So the gold price has gone to levels which 12 months ago I would not have expected to
see at $3,300, $3,400.
And that means that these gold companies, from a revenue and earnings perspective,
are seeing a lot of momentum on their income statements.
Similarly, more recently, what we've seen is with the gold price rallying in the
jewelry market,
some people are switching into platinum because the gold price has rallied so
strongly.
And if you look at...
consumer behavior in China and Asia specifically.
Lots of consumers are buying platinum bars and going into platinum jewelry.
So that has caused the delta in demand, as we refer to it,
to cause a short squeeze in some of those commodities.
And therefore, the platinum counters are following.
So if you factor in the fact that the resources index,
which is roughly about a quarter of our index, is up 60% for the year, that
quarter of 60% gives you 15,
16% return and then add NASPERS and process and British American tobacco and
the returns here today on top of that,
that gets you to the strong rally we've had here today.
Could you do a magnificent seven style exercise on the JSC securities exchange
and take out the resources index or the top performers
in the resources index, the top performers elsewhere, i.e.
NASPERS, process, maybe reach them on something?
I don't know.
I don't know what the big ones are these days but if you took them out
Would you have a similar situation as you have in the United States,
whereas it's not as broad-based as the index tells you it is?
The short answer there is yes.
It is a very narrow rally.
If you look at our consumer index, our retailers, they are still down 20% the
index year-to-date.
So for the last, let's say, six, seven months, our banks' index is flat.
There's no return that's come from the banks' index.
And that's, I guess, globally.
as well as in South Africa, what investors are now trying, and we as fund managers
are trying to get our heads around, does this broaden out?
Is there enough growth left?
Is growth resilient through all the tariffs, trade wars, uncertainty, which
potentially causes a bit of a growth slowdown?
We're not in a recession, Cam, so we don't think we're going to go to zero or below
GDP growth.
Yes, there might be a quarter or two where growth is slower than what we wanted it to
be.
Our view is that we have below-trend growth.
for the remainder of the year and that growth starts to pick up again into 2026.
So that means that we're looking to see does this broaden out into the other 493
stocks in the US?
Does this growth and investment profile broaden out into Europe, into Asia and
more specifically China and also in South Africa?
If our retail index and our banks index have not shown any...
great contribution to positive returns.
Does the interest rate cutting cycle, the lower fuel prices, given where the oil
price is currently sitting, the stronger RAND, the better terms of trade,
because we're exporting these platinum, palladium, and gold commodities at much
better prices,
and we've got the benefit of importing oil at a much lower price.
So our terms of trade is helping to push the RAND stronger.
And more recently, the 3% inflation target debate, which is out there in South
Africa,
is also driving a potential lower...
interest rate cycle over the medium to long term.
So do those benefits start to show up on the consumer side?
And do we see the rally broadening out to our insurance companies, our banks and our
retailers?
And all of that, I guess, depends on confidence.
And we need to drive GDP growth and job creation in our country for that to come
through.
Is it possible that the, in my simplistic mind, and you've alluded to it to a
certain extent,
that more money comes into the South African economy via these taxes that, for
example,
a platinum producer will pay and will pay a lot more because they're doing so well.
Therefore, that money is going to be used for projects.
Maybe it'd be an infrastructure project by the government or something like that.
And then in years to come, and it won't be straight away, but in years to come, Local
stocks, SA Inc.
stocks.
will benefit because of GDP growth that has hopefully come from the extra money
coming
into the fiscus.
Is that too simple?
Yeah, I think that's a very good way of thinking about it.
As I mentioned, higher commodity prices means that these corporates will probably
be paying more
taxes than they paid last year and maybe even the year before.
I mean, those commodities, the platinum prices went what we call into the cost
curve, so the margins.
essentially got eliminated for some of those producers.
With these price increases, their profitability goes up and they are quite
big contributors to our fiscus,
as you rightly mentioned.
We've just gone through quite a big political debate about a 50 basis point of
that increase,
which went forwards and backwards for a number of months.
But the numbers that we're now potentially going to get from these corporates are big
numbers.
They can potentially be quite big contributors to our fiscus.
What I think is also interesting, just to highlight as well, Lindsay, is A lot of
global allocators are now sitting and thinking,
do I remain in the US or do I think that the political regime and potential growth
slowdown
because of all these tariffs and trade wars means that I should look wider and
also potentially into emerging markets to allocate my
capital towards?
I mean, we've actually in the last two months had six big global pension fund and
allocators
contacting us.
to dust off our slides on why the case for South African equities is good for a
foreigner.
And remember, they also look at it in dollar terms.
So with a weaker dollar and our emerging market currencies going stronger,
that suddenly becomes a tailwind where previously it potentially was a headwind
because of the better fiscus, because of the weaker dollar.
I mean, there's global arguments and local arguments why the RAND is doing what it's
doing.
And they are coming to us and they're saying, please can we again understand the
case for investing in South African equities?
obviously these Allocators have got quite a big decision to make.
As one of them said to me just a few weeks ago, he has to decide whether he sells
Microsoft, NVIDIA, Apple and Amazon and buy some SA Inc.
stocks or resources stocks in South Africa.
That's quite my eyes opened when he said that.
That's quite a difficult decision to make at this stage, given the narrowness of
market rallies.
But these guys are coming and they want to understand.
what's happened in South Africa from a political perspective, a fiscal
perspective, as you mentioned, a growth perspective.
And again, these companies are generating, because we've got good quality management
teams, decent earnings growth profiles,
which looks quite attractive at a very attractive valuation or price as well for
some of these global allocators.
It's very interesting that you say these allocators have suddenly contacted you.
I mean, are you saying that because of our conversation or are you saying it because
it's an unusual occurrence or you haven't had those allocators?
in the last couple of years coming to you, and suddenly it's become a phenomenon.
We haven't had calls from these global allocators, global pension funds in years,
Lindsay.
So to suddenly through our 91 client group, where we are based in certain
countries,
obviously engaging where these allocators are asking questions about emerging
markets, firstly, and then secondly, inside emerging markets,
they obviously got these screens and their databases that they run, and then they
filter that in certain ways.
My gut feel is that they're filtering that on a valuation basis and they're saying,
well, I can see some cheap destinations and
South Africa is probably one of them.
I mean, given where our bond yields were 12% at one stage, that's rallied nicely to
10%.
Our banks are trading at single digit forward PE multiples.
They obviously, according to those screens, have said we need to make a few
calls and do a bit more work, don't kick the tires.
And for the first time in years, these client group people are calling us up and
say, please, can we have your latest pitch back?
for what is the case for South African equities.
And that's refreshing.
It is refreshing.
And it's also very encouraging because if the money that comes into the Fiscus that
we hope will come into the Fiscus does create
a growth in the medium and longer term, then you've got a load of companies that
are run by these super management teams
that you spoke of earlier.
They're lean companies now.
Their costs have been cut to the bone.
They've been rationalized.
And when the good times come, they're ready to take advantage of it.
Some are already doing quite well outside of the Resources Index, SA Inc.
And I know you're keen and you've got a few of those in your portfolios.
Hannes, can you tell us, you know, the ones that have done quite well from a 91
perspective?
Yeah, we've been big supporters of stocks like Capitec for a while now.
I mean, we've often said that the aggressive and the good earnings growth
profile of 20%
earnings growth from one year to the next deserves the premium that you have to pay
for Capitec.
And as you mentioned, the management teams are broadening out the drivers of that
earnings growth
specifically for Capitec into the business banking sector and also capturing more and
more of the informal market into the banking system.
We quite like First Rand as well.
We feel that First Rand is trading at a discount relative to the quality business
that it's been in the past.
In the insurance space, we quite like Discovery, a business that's also
diversified itself in South Africa and abroad,
but specifically in South Africa, starting to deliver on some of the insurance and
other strategies.
And Discovery Bank, a few years ago, I wasn't sure about all the capital that
they allocated towards building that bank,
and that seems to be going better than expected for them.
And on the consumer space.
We quite like Tiger Brands.
We feel that the turnaround strategy that the new CEO and management have
implemented there is starting to bear fruit.
It's a company that lost its way, unfortunately, over the previous decade.
Went into Africa, did a U-turn in Africa, had to come back,
sort of lost capital on trying to do that diversification strategy.
It had too many SKUs, as we refer to it, trying to sell too many premium products.
So the strategy about bringing in more value, they got that wrong.
and the private label.
segment of retail took some market share away from Tiger Brands.
So they're repositioning themselves there and also repositioning themselves in the
bread market and improving their margin.
So Tiger Brands is one that we have built quite a big position in.
And then in general retail, we like Fashini and discretionary retail space.
We still like Pepcor, also driving double digit.
I mean, the earnings CAGR, the earnings growth for the next three years are 13 to
15 percent for some of those retailers like Pepcor.
And you're buying them at a very attractive.
So we've got some of those in the portfolio.
We've got 20% of the portfolio exposed to gold and platinum.
So we have got a nice position there where, as I said, there's a lot of
momentum behind it.
And then Tencent and NASPA are still doing very well with the new CEO at NASPA who's
very
much focused on delivering strategy and free cash flow.
We're starting to see some of that come through.
On top of good Tencent returns, you're starting to see the Rump assets starting
to go into positive free cash flow territory,
which is good for us to see.
Okay, so you've got plenty on your plate, and hopefully more will come to you as
well, because I know you like earnings revisions.
I wonder how long it'll take before SA Inc.
starts to see those earnings revisions coming in because of what's happening
elsewhere, Hannes.
I've been saying for a while now, Lindsay,
that we reached a cyclical low in GDP growth in South Africa in 2023 and the
initial part
of 2024.
And we've also had a cyclical high in inflation and interest rates.
the cycles peaked in interest rates and inflation then and bottomed out, I think,
in GDP.
I mean, our GDP growth, if we just cast our eyes back to where we were 18 months
ago in the middle of load shedding, lady
R concerned about port delivery, a big logistical mess that all these companies
had to deal with and going into
Christmas periods without having the appropriate stock on the floor in some of
the shops.
Fast forward to where we are now, the lights have stayed on for quite a number
of weeks now.
The electricity availability factor is a lot higher.
We We've reached that improvement in GDP growth, and some people are upgrading
their GDP growth expectations for next year.
Stronger RAND, inflation had added two handles on it, so below the 3%, the lower
end of the band,
and that's why we're having this 3% inflation target debate.
The Reserve Bank sees an opportunity to move our inflation targets lower.
So I've been saying that from 2023-2024, and I still say that we are at an
improving GDP growth cycle.
And we look forward to maybe an additional one or two interest rate cuts in South
Africa.
And the delayed impact of that is starting to filter through the economy as the
environment for the consumers is improving.
In five years' time, it'll be 2030.
So given what's happened between 2020 and 2025, i.e.
the all-share doubling when we speak in 2030, Jonas, it'll be 200,000 the
all-share.
I hope we can still cheers to...
another five years.
I look forward to doing that when we get to 2030.
It's difficult to say.
Our returns are going to move from now to then.
What I can tell you is there's definitely a valuation underpin.
We, as you said, don't buy stocks because we think they're cheap and they're going
to have a value unlock.
But value in our minds are supportive.
What we focus on is the earnings growth.
And over the next year or two, our view is that the earnings growth is going to be
double digits.
The JSC tends to give you around about a 4% dividend yield.
Some of the banks are currently giving you an 8% and a 9% dividend.
So you just buy a bank.
such as APSA today, you're going to get a money market return just from the
dividend.
You're going to get all the earnings growth and potential re-rating in the
valuation for free.
So I think from here for the next five years, our focus will remain on earnings
growth.
We like companies where the earnings growth profiles are underestimated and
therefore getting upgraded or improving.
We like to avoid those where the earnings profiles are deteriorating or getting
downgraded.
So if we stick to that philosophy, it's worked quite well for us.
since 1991 in the 91 Equity Fund when that fund launched.
So these funds have been going for over 30 years.
And that philosophy and process has worked well.
We stick to that.
And hopefully we can continue to get the earnings growth profile and the dividend
and free cash flow yields right and invest in the right companies to
hopefully in five years' time speak again and maybe discuss another milestone at
that stage.
Yes, maybe one or two other milestones as well, Hannes.
Thank you so much for your time.
Great analysis.
Hannes van den Berghe.
is co-head of SA Equity and Multi-Asset at 91 in Cape Town.
The views and opinions expressed in these podcasts are those of Lindsay Williams and
various contributors and do not reflect the policy,
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