Regarding… Vol 3 no 17 – #Fail

Here in South Africa, there is a strong consensus that our government finances are in a mess and that we are rapidly heading into a debt trap. At least that’s what long-dated bonds yielding almost 12%, with inflation of less than 3%, seem to suggest.

But if we’re in bad shape, some other places should be worrying us a lot more. Interestingly enough, South Africans are happy to move their externalised funds to some of these places. Grass greener, and all that.

Have a look at this picture:

South Africa is towards the bottom left, in the second circle from the outside. Some countries are in (much) bigger trouble: Italy, Japan, the USA, France, Canada, China, the UK, and Brazil.

My take: Don’t @ me with all sorts of caveats about growth rates, off-balance sheet items, etc. The countries mentioned have their own problems outside this headline number. For instance, how many have a fully funded government retirement program like South Africa?  In many ways, we are one of the cleanest dirty shirts around.

In finance, everything is relative.

Recently, a scandal in the motor finance industry in the UK was uncovered, centring on the mis-selling of car finance agreements, particularly involving undisclosed commissions paid to car dealers by lenders. Lloyds is by far the most exposed, with its provisions at £1.2 billion, substantially higher than those of other major lenders involved in the scandal. You wouldn’t say so from looking at its share price:

Lloyds’ provision of £1.2 billion amounts to around 2.5% of their market value. But the share price gives you no clue that they are embroiled in a scandal. You can see the blip in October of last year, with the share price quickly going to a new high.

FirstRand was also involved in the scandal, once again proving that South Africans are highly innovative when it comes to finding new ways to lose money in foreign markets. Their provision of £140 million is less than 1% of their market value. But the market has penalised them heavily for it:

FirstRand sold off in October when the news broke and has since struggled to recover any of those losses.

My take: South African businesses do themselves no favours with their offshore expeditions, and local investors view them with jaundiced eyes. Despite their good work elsewhere, it’s super hard for them to win back any ground lost. I know that’s unfair, but whoever said life is fair?

If you think South Africa is a tough place to do business, I’ll raise you Georgia and Kazakhstan. Sharing a border with Russia creates a huge risk premium; ask Ukraine how that’s working out for them.

However, both countries are growing at rates above 5% per annum, driven by a shift from agriculture to higher-productivity services and manufacturing, alongside high levels of investment and ongoing infrastructure improvements, as well as an influx of migrants from Russia since 2022(!)

As a result, their banks are doing well.

Here’s the share price of Bank of Georgia:

And Halyk Bank (HSBK):

• Both banks maintain RoEs over 30% and are conservatively capitalised with Tier 1 ratios in the high teens.
• All returns over the past 5 years are attributable to earnings growth, share buybacks and dividends with little-to-zero multiple expansion. 5y Total return for BGEO = 905% and HSBK = 500%.
• Over the past five years, both banks have continued to compound meaningfully against a very challenging macro backdrop: significant regional and local political turmoil, bouts of high inflation, and currency devaluation.
• HSBK still trades at less than 3 times forward earnings, and BGEO at 4.4 times.

My take: Firstly, we own both in the RECM Hedge Fund. Secondly, imagine how our local bank shares or prices can perform if we get some growth going in this country! Finally, you don’t have to buy JP Morgan or Bank of America. There are much easier pickings in other parts of the world.

Here is a chart of the Top 40 stocks of the JSE All Share Index:

Although it doesn’t feel like it to us negative ninnies here on the southern tip, that’s a bull market if ever I saw one.

People elsewhere in the world are starting to notice. According to a recent research report from Gavekal, South African assets have reached their highest level in 15 years, in US$ terms. After 13 years of essentially going nowhere, South African bonds and equities broke out on the upside in 2024, delivering double-digit returns for the year. The positive momentum has continued in 2025. As the report notes, “It is unusual for South Africa to make the headlines for good news stories. Usually, the media prefers to focus on rampant crime, electricity blackouts and political corruption. But here is the interesting thing: yes, there is still crime and corruption. But the electricity shortages have become much less common. In emerging markets, it is often the case that if a situation goes from really bad to just plain mediocre, it can often prove enough for a big rerating.”

Here’s the picture they showed:

Gavekal went on to make the point that South African equities weren’t cheap, but they weren’t expensive either:

But the large-cap stocks conceal significant undervaluation within the small-cap segment of the market. Small caps have not yet reached new highs, but their turn will come. This is the JSE Small Cap index:

But it’s not all about South Africa. Emerging markets are generally performing well. Bond yields are declining across the board. Again, this chart from Gavekal:

At the same time, bond yields in developed markets are trending up:

Bond markets are generally regarded as the “smart” market. Higher yields typically imply lower asset valuations, while declining yields imply higher valuations.

My take: Foreign investors are generally underweight emerging markets, particularly South Africa. Here in SA, local investors are in a similar position. If capital continues to flow out of the US, emerging markets would likely be a fairly obvious destination. And within an emerging market allocation, South Africa will get its small sliver of a bigger pie. And that’s all it needs to push stocks – and other assets – significantly higher.

The MW Worldwide Flexible Fund (aka The Cockroach) is overweight emerging market assets, specifically bonds. It holds no developed market bonds.

Capital markets are alive and kicking in Asia: Hong Kong is on course for a record IPO year. Their most recent IPO is that of CATL, the world’s largest electric-vehicle battery maker. It was also the biggest IPO in the world this year, and its share price jumped 16% on listing.

The company has a market share of around 38%, according to SNE Research, which is roughly double that of the next closest competitor. Last year, it generated $7 billion in profit on $50 billion in sales. The company has already stated its intention to use some of the funds raised from the IPO to dramatically expand its production and sales outside of China. Earlier this year, it unveiled a new battery that it claims can be fully charged in just a few minutes.

So, it’s not just hype.

CATL, which has traded on the Shenzhen stock exchange since 2018, is helping fuel a $22 billion surge in listings in Hong Kong this year. Chinese firms have increasingly tapped both exchanges, though they typically price their Hong Kong “H-shares” at a roughly 25% discount to their Shenzhen “A-shares” to entice more buyers. CATL, however, listed its H-shares at a much slimmer discount than usual. Trading at HK$306.20 at the closing bell on Tuesday, the H-shares reached a price 1.2% higher than CATL’s A-shares.

My take: Comparing this listing with the most recent new listing in New York, eToro, basically a financial gambling site, tells you just about everything you need to know about the direction of the two major economies in the world. Also, Hong Kong has not gone away as a financial centre, as many market commentators seem to think.

To be underweight developed market assets and overweight emerging market assets is a contrarian stance. Fortunately, Professor Damodaran recently penned an article highlighting the appeal – and dangers – of contrarian investing, which you can read here.

The essence of contrarian investing hinges on resisting herd behaviour, maintaining a long-term perspective, and exhibiting emotional resilience. However, evidence regarding “loser” versus “winner” stocks and high transaction costs suggests that there is no guaranteed success in following such a strategy. Success depends on discipline, thorough analysis, and the ability to withstand market volatility.

Just like any other investment strategy.

My take: To achieve outcomes significantly different from those of the average investor, one must take actions that are markedly different. This often entails finding oneself in an uncomfortably distinct position compared to most other investors – a contrarian stance. This is not done for the sake of being blindly contrary but is based on insights gained from research and careful observation of asset valuations.

Our investment holding company was featured on “Unlock the Stock” last week. “Unlock the Stock” is a knowledge-sharing platform hosted by Mark Tobin and The Finance Ghost, which makes JSE stock information accessible to retail investors seeking information on these stocks.

You can watch it on YouTube here.

My take: Astoria is one of those massively undervalued South African small-cap stocks I spoke about earlier.

That is my unbiased opinion.

Grinderman was a side project created by Nick Cave alongside three members of his primary band, Nick Cave and the Bad Seeds. The lineup featured Nick Cave, Warren Ellis, Martyn P. Casey, and Jim Sclavunos. The name was inspired by the Memphis Slim song “Grinder Man Blues.”

I was blown away by their first album, “Grinderman”, in 2007. It was a full-on visceral assault on the senses, brimming with distorted guitars, screeching violins, and machine-gun drumming. It’s an album you listen to at full volume – wild, untethered, and exciting.

Grinderman was Cave masterfully expressing his mid-life crisis.

It is the 20th anniversary of the formation of this side project. To commemorate this, they will release their full discography next month. They have also launched a Grinderman YouTube channel, which features videos for some of their best-known songs, including “No Pussy Blues,” “Grinderman,” and “Electric Alice.” Oh, and “Mickey Mouse and the Goodbye Man.”

However, my favourite Grinderman song was “Palaces of Montezuma”, which I wanted to play as the theme song at our wedding.

Amanda said no.

Book No. 6 for the year – Capitec, Stalking Giants, T.J. Strydom (2024)

My business partner, Jan van Niekerk, gave me this book a while ago. It’s an enjoyable read, especially for someone who lived through the entire history of the business. I still remember when PSG unbundled Capitec, and the share price almost immediately sank to less than half its listing price – and remained there for a long time.

I also clearly remember not buying the share at that price. It still hurts that I could have held such preconceived, ill-formed, and rigid ideas about the business and investment opportunity. Gerrie Fourie once personally invited me to visit him in Stellenbosch, where he attempted to explain to me what they were doing. I simply didn’t want to hear him. They say your worst investment mistakes are those of omission, not commission. Well, this story proves it! Reading the book was like rubbing my nose in the worst investment mistake of my career.

The book highlights management’s singular focus on the customer, delivering better service at a lower cost than anyone else. If there is one thing that can create a valuable moat around a business, it’s the ability to provide good, low-cost service, which Capitec did exceptionally well.

Founders Michiel Le Roux and Riaan Stassen, together with Gerrie Fourie and the team they built around them, are true unsung giants of the South African business community.

It’s challenging to write about a business where the principal actors are reluctant to be in the limelight and are not readily available for interviews. However, T.J. Strydom has done a commendable job of bringing to life the trials and tribulations – and successes – that this business and its leaders have experienced.

Given that I began this piece with an analogy about cycling, it is fitting that I conclude by highlighting the remarkable efficiency of cycling as a means of transportation. The chart below illustrates the energy (measured in calories) required to move objects based on their weight. A human on a bicycle demonstrates an outstanding level of energy efficiency.

I know our mayor, Geordin Hill-Lewis, reads this letter, so I have a message for him: We need more – and safer – cycling lanes in our city! It’s the best (and most joyful) way to travel

But be careful out there – especially if you are on a bicycle!

Piet Viljoen
RECM