ON THE SPOT
Markets are turning, but ‘they will not shoot out the lights’
Business Day asks RECM chairman Piet Viljoen his views on market trends
The Dow Jones’s performance this week capped what some investors have called the "most hated bull market in history", tearing through 22,000, partly due to gains in Apple’s share price following its quarterly results.
JP Morgan’s strategists also assess present market conditions — low interest rates, low inflation, decent earnings — as "better than Goldilocks", though, as the Financial Times reminds us, let’s not forget how that fairytale ends.
Business Day asked RECM chairman Piet Viljoen:
Are we in a better-than-perfect world for stock markets?
Globally you’ll see that earnings growth is fairly healthy. We think economies are turning, they’re doing better, but we also think they’re not going to shoot out the lights. The key is interest rates — at zero or 1% or in some cases negative — also tells you that things are not massively strong. If so, we would probably be higher by now.
In the case of some South African companies, their shares are at records highs and yet earnings will probably disappoint. What do you make of their rally?
There are quite a few companies that have gone to record highs, but most of them are the market favourites — Naspers, Clicks and Dischem. The earnings growth is not fantastic so the market is paying up for that earnings growth, which is very risky — it’s not something I would be paying up for.
Why though? People can’t plead ignorance about the state of the South African economy or consumer?
Dischem and Clicks are fantastic businesses. They have very stable earnings. So what people are saying is, well at these low interest rates of 6% or 7%, I just use a low interest-rate discount to cash flow and I present-value it and that gives me a big number … it’s present value of future cash flows and at low interest rates, those are higher. But there comes a point where you probably pay too much and I think it’s happening.
What about companies that are at the other end of the spectrum? Those SA Inc stocks that have been in a bear market for months now, is that a fair reflection or are they overdone?
By and large it’s fair with exceptions: there are companies there that have been thrown out like having thrown out the baby with the bathwater. SA Inc is tough, but some industrial and possibly retail companies are starting to look interesting on a price-to-value relationship. That is where I would want to look because of the negative sentiment around it. [For example] MTN — the market has just gone supernegative on Africa and we think that might be a good opportunity.
You recently tweeted a link to an interview with Bob Rodriguez, a former US asset manager who talked about how the big rise in passive investing, where index funds are capital weighted means more and more money goes to fewer and fewer stocks. Is this dangerous for markets?
Indexing is a good way to invest money if you’re not willing or able to do the research. It’s a very healthy … strategy, but as with all good things, we think the financial markets might have taken it a bit far.
These days you get exchange-traded funds on subsectors of the market, on types of stocks and things and countries … indexing works when you get broad exposure to an asset class. More and more, these index funds are being sliced to give you specific exposure to certain things that you then have to put together in some sort of stock-picking strategy and that’s not passive investing anymore. So we think a lot of that is happening and we don’t think that’s very good.
Because the index has done so well over the past five to 10 years, people are extrapolating that and saying well the index is generally a safe place to invest, I’ll just put all my money into the index. And by the way, none of the active managers have outperformed the index.
Look at what’s happened over the past five years. If you didn’t own Naspers in SA or the FANGs in the US, you underperformed. So more and more people are buying an index and that’s fine until you get the next market shock, not when you get the next market shock, because we will get one, at some point down the line. So you have to ask yourself, all these people who are buying indexes at the moment, will they be able to sit through that shock or will they become sellers?
My gut feel is that many recent converts to index investing will be selling.
So the same forces that are driving a smaller and smaller grouping of stocks higher will drive that same group of stocks probably too low.
And as a sensible investor you have to say, that’s a dangerous situation.…
I’d rather not play the game.
Until you get that correction, it must make life hell for active managers?
You have to live with it. You’ve got to make sure your business is set up to weather the storm.
You have the choice — either you play the game and get out in time, or you play your own game.