Dear Fellow Investors and Friends

Today is Thursday the 31st of August. It is the last day of the month and this is our first attempt at putting out a weekly commentary regarding financial markets.

Appropriately (I think), it is also the day after Warren Buffett’s birthday.

Before sharing your audible groan with whoever is sitting next to you, I know there are hundreds of newsletters out there all demanding a slice of your time. This one will be no different. You will need to set aside some time – hopefully, less than 10 minutes – to read it.

If you want to, of course.

So, why would you want to? At RECM, we think differently about the market – and many other things, for that matter. Amongst other things, I will use this missive to share my thoughts on aspects of our investments. Sometimes, I will have a view on market moving events, or events that should move markets but haven’t. And might never do so, for that matter – but are still interesting to discuss.

I will only share the worthwhile stuff. This leaves me with a lot of discretion – but also a lot of responsibility, to make it worth your time.

RECM manages a number of different investment vehicles, with different types of investments, so there is a broad array of possibilities for the choice of discussion points. And if I have nothing to say, I won’t say it. And that’s a promise.

This letter is NOT for you if you want to know what the daily or weekly changes in the market have been or want forecasts about what I think will happen next. There will be no stock tips or investment “salesmanship”. We don’t do those. The market has many ways of making you look foolish, quite a few of which I have been subject to over the years. I won’t be adding stupid forecasts or useless tips to that list.

So, with all that said, here goes. I’m following my conviction and you should follow yours.

“New highs are bullish”

Over the past week, both FirstRand and Standard Bank have made new 12-month highs. The market is so uninterested in South African investments at present that this event has garnered no headlines at all. Both Bidvest and Shoprite have done the same.

I will write more about Shoprite next week, but for now I want to focus on the banking sector.
Emerging market banks have been outperforming their developed market counterparts for over a year now. In developed markets, only UK and Japanese banks have been doing well.

The following chart shows selected emerging market banking sectors:

Now it looks like SA banks want to join the party – FirstRand looks like it is in a bull market in absolute terms:

And, relative to the JSE/FTSE All Share Index, it is also making new highs:

For completeness’ sake, here is Standard Bank relative to the ALSI:

FirstRand is on a P/E of 12 and a Dividend Yield of 5%, while Standard Bank is on a P/E of 8 and a Dividend Yield of 7%.

Isn’t it amazing that nobody is talking about this?

Stocks on low valuations making new highs don’t come around very often. The market is worried about bad debts exploding, and that banks have not raised enough provisions for this. Given high interest rates, low economic growth and struggling consumers, banks are about to be hit by a tsunami of loans going bad. Or so the story goes.

My view: I don’t think you can have a debt tsunami without a debt bubble in the first place, and it has been a long time since South Africa has experienced a debt bubble. The man in the street is, on average, not overextended.

Also, Banks are generally a good leading indicator for the economy. Positive price action in the banking sector can mean there is something good on the horizon. Let’s see; maybe it’s different this time.

FirstRand and Standard Bank are amongst the top holdings in the SCI Merchant West Value fund, which I co-manage with Brian Pyle on behalf of Merchant West Investments.

“New lows are bearish”

The 1892 book, The Memoirs of Sherlock Holmes by Sir Arthur Conan Doyle, is a collection of short stories. One of the stories is “Silver Blaze,” a mystery about the disappearance of a famous racehorse the night before a race and the murder of the horse’s trainer. Holmes solves the mystery in part by recognizing that no one he spoke to in his investigation had heard barking from the watchdog during the night.

Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my attention?”
Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”

The fact that the dog did not bark when expected to do so led Homes to the conclusion that the evildoer was a not a stranger to the dog, but someone the dog recognized. Holmes drew a conclusion from a fact that did not occur (the expected barking), which can be referred to as a “negative fact”.

Another “negative fact” is that long-dated US Treasury Bonds have hit new price lows. While all the market chat has been about the implosion of the Chinese property sector, no one is talking about the chart below.

(The chart is the price of TLT, a US ETF which holds long date bonds. Remember, with bonds, the price is the inverse of the yield. So new lows in price mean yields have increased)

US long-dated interest rates are probably the most important prices in the world. This is the ultimate risk-free asset, off which all other assets are priced. Some US banks went out of business due to their bond holdings souring earlier this year. Since then, prices have resumed their decline. Yet, nobody is talking about this.

Two generations of investors have been used to rising bond prices/declining interest rates. What is happening now could be a structural change. If so, the investment world is not prepared for it. I have no firm views about this at present, but it occupies a lot of real estate in my head.

Speaking of real estate, China Evergrande group – one of China’s biggest property developers – has also hit new lows at around the same time. Its share price has declined from around HK$25 to HK$0,30. Eventually I would be surprised if equity holders get anything at all.

As Sergeant Phil Esterhaus used to say in Hill Street Blues (40 years ago!): “Let’s be careful out there.”

Did you know?

  • That India landed a rocket on the moon last week. Russia also tried, but it crashed. Is it an accident that these attempts coincided with the BRICs conference? My take: the “Global South” is flexing.
  • That Woolworths’ final bill for its ill-conceived Australian expansion came in. Unsurprisingly, they don’t make it easy to work it out, but I estimate it to be in the region of R14bn. My take: when a company you’re invested in announces a significant offshore acquisition, run. Run as fast as you can. We still don’t own Woolworths shares.
  • That Remgro has increased its NAV per share by a miserable 6% p.a. over the past 13 years. Over the same time two things have happened: the JSE All Share Index has compounded at close to 12% p.a., and Remgro has paid its executive directors a ton of money. All in turn extensively justified by very well-paid compensation consultants. My take: like so many other JSE listed businesses, its better to work there than to own it. We don’t.

What I’m watching:

If you’re interested in the whole energy / climate change / greenwashing / net zero debate, here is a great video with Doomberg (an anonymous expert) and Nate Hagens, the Executive Director of The Institute for the Study of Energy & Our Future (ISEOF). It clocks in at 1h45, but every minute is worth your time:

What I’m listening to:

I subscribe to an email communication called “The Red Hand Letters” by one of my favorite singers, Nick Cave. This week, he used a combination of his fans input and ChatGPT to put together a playlist of his 15 best songs. If you’re not familiar with his work, here is a YouTube video of the number one song on the list, it should give you an idea of what he is about, and why I like his stuff so much. (Careful: There are some NSFW scenes toward the end)

That’s all for this week. Be careful out there!
Warm regards
Piet Viljoen



This weekly commentary is for information purposes only and does not constitute advice or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investment.  Opinions expressed in this commentary may be changed without notice at any time after publication. RECM therefore disclaims any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.

The value of an investment may go up as well as down, past performance is not necessarily a guide to future performance and no guarantees are provided. Before investing, the reader should seek appropriate advice as to the suitability of an investment.

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