SIKI MGABADELI: You are probably tired of hearing it but, sorry for you, it can’t be avoided. South Africa is officially in recession. I think it’s the first time since 2008/9 that we’ve entered a recession – and that is defined as two quarters of negative GDP growth.
But what about me? For you and your investments, can you recession-proof yourself? Are you in the right place at the moment?
My guests today are Simon Brown, founder of JustOneLap, and Gary Booysen, who is portfolio manager at Rand Swiss. Gentlemen, thanks for your time today.
If I remember correctly, back in 2008 we headed into recession around the third quarter, up to about mid-2009. Between May 2008 and March 2009 the JSE dropped 45%.
SIMON BROWN: Evening, Siki. It was a really, really tough time. I was on the trading floor at Standard Bank at that point and I’d seen other market corrections, but this one was the severest I’d seen. Every time you thought it was going to end it just kind of got worse. Lehman Bros just carried on going down and down. The point then was our recession was not of our making as a country. Second to that, it was relatively short and sharp. It was a couple of quarters and we were back out and growing. We’ve never since then really got back.
If we go back to 2007, we were doing growth of almost 5% GDP – I think 4.4%. We were targeting that elusive 6%, and we kind of thought we might get there. But we’ve never really never got out of the starting blocks. We’ve been drifting around the 2, 2.5%, drifting down. Now we’ve had two quarters negative. I don’t know if this is going to be as short and sharp. The lifting of the drought is going to help, the commodity prices are probably into the last quarter of last year, the first quarter of this year. So the drought going away in large parts of the economy will help a bit. But the rest of what’s taken us into recession – I don’t see when it’s going to exit us. Brazil has had a seven-quarter recession.
SIKI MGABADELI: That’s kind of a worry. It’s absolutely possible. Gary, I think part of the issue is that the JSE has been flat in that time up until now.
GARY BOOYSEN: Ja, it’s been three years. But remember, markets are also very forward looking as well. So, while the economic data are coming through we’ve set our second quarter of no GDP growth. so technically we are in recession. Certainly markets will be forward looking. So, as Simon has alluded, a lot of I suppose the recessionary conditions that we are facing are not of our making as well. We did have the drought, and commodity prices have fallen over the last half decade or so. So to achieve that 6% growth rate, yes, those are external factors as well.
But again, you’ve got to look at local policy as well – and is it growth-friendly enough? But I suppose the good news with it that if we can put in place growth-friendly policies I think markets will react a lot quicker than the underlying economic data. At least investors will probably give them the benefit of the doubt and return to markets very quickly because, when it comes to portfolio flows, it’s very easy to move in and out of stocks or bonds, and you’ll see money flooding back into the country.
So for me it’s very much about getting the correct policies in place to foster growth.
SIKI MGABADELI: Can you recession-proof yourself?
SIMON BROWN: You absolutely can. To Gary’s point, what the data told us was what we pretty much already knew. And whether we are in a technical recession or not, we knew consumers were under pressure.
SIKI MGABADELI: There’s enough data to point us there.
SIMON BROWN: Whether we do a slight 0.2% growth or ‑0.2%, we are fiddling at the edges, in a sense. You can recession-proof a portfolio. Less necessarily about offshore, but it goes back to staples. Let’s look at one of my favourite stocks, Woolworths. We all love shopping at Woolies, but really they do charge top…
SIKI MGABADELI: For avos, about R100.
SIMON BROWN: I always say, Shoprite and Woolies go to the same abattoir, get the same cows, but Woolies manages to charge double the price.
SIKI MGABADELI: It went to private school.
SIMON BROWN: It’s a case of people are going to need to eat, and they are going to become more price-conscious. So the recession will certainly benefit some sectors and some particular stocks, and others will get fairly hardly hit. All those discretionary spends that we really enjoy, suddenly those are off the table. Now it’s about putting food on the table, not fancy jewellery or whatever.
SIKI MGABADELI: Has the defensive stock – there was a defensive stock in 2008/9 – changed and become something else in 2017? Are there different defensive stocks?
GARY BOOYSEN: I think the gold old stalwarts are still there, the likes of British American Tobacco. You talk about the consumer staples but really I suppose what you are looking for is a company that has an inelastic product, and by that I mean something that people won’t do without, no matter what the economic environment is like. And really sin stocks fall straight into that. People smoke, no matter what.
SIKI MGABADELI: Especially when they are stressed.
GARY BOOYSEN: And if you look at the likes of British American Tobacco – Simon spoke about it just in the beginning – another big way of recession-proofing yourself is to move to geographic territories that aren’t in recession, because there’s certainly been a divergence globally between the South African economy and what’s happening in the rest of the globe. You can look at geographically diversifying yourself.
But if you go back to the point of whether the stocks of round 2008/7 are the same stocks, yes, there are some. But I think valuations also certainly come into play. So what Simon was talking about, Woolies – if you look at the high PE stocks as you start to move into recession, they have taken an absolute pounding. If you look at stocks that used to trade on a 30 PE – as their revenue lines flattened out, as you couldn’t quite expect the growth that the market was pricing in, the share prices unwound very, very quickly.
And now you can kind of go and look at those defensive stocks, but you just want to find things with a margin of safety, where the valuations aren’t too stretched, but you think that’s there is not too much more significant downside.
SIKI MGABADELI: Ten years ago we were talking about resources being the heavyweights.
SIMON BROWN: Platinum stocks were paying special dividends back then that are almost akin to them over that commodity boom. Over a three-year window, Amplats and Angloplats paid special dividends that are now pretty much what their prices are. Our big stocks were Billiton, Anglo American. It’s now Naspers. Ten years ago Naspers – we knew about it and we even kind of knew about Tencent, but we didn’t really know what it meant. We didn’t even have an iPhone ten years ago.
SIKI MGABADELI: Now we live with it.
SIMON BROWN: So there has been some shifting. Some of the staples , a Shoprite or something like that, is still there. You mentioned the 45% sell-off. Shoprite was the star performer of that period. Now the star performer – I think it was down only 5%, but it was still down. The point is, people were still eating and the like. It’s had a stellar run since then, of course.
But there are always going to be some that will stay and others will come and go. British American Tobacco arrived only in about 2008/9 on our market. Of course, back then we had SABMiller – a great defensive stock. It’s now gone and we’ve got AB InBev, which is because of its global nature sort of almost a classic defensive. It’s going to increase its amount by a little bit every year. It’s never going to shoot the lights out.
SIKI MGABADELI: So what are you buying today, then?
SIMON BROWN: Every time Shoprite goes down into the R180s, I’m a buyer and I’ve been buying Shoprite for years and years. I love Whitey Basson and Shoprite. The Woolies shop is not suddenly lurching into check.
SIKI MGABADELI: Because it’s tough out there.
SIMON BROWN: And the Woolies shoppers will return to Woolies one day. But that’s the sort of defensive stock. People are going to eat, they are going to want to make their trollies go further. The returning rains are going to help its pricing power and margins at the Shoprite level. They oddly enough did get well ahead of themselves. Gary mentioned stretched PEs. Shoprite was up there with a 30 times PE, which is completely ridiculous. It’s till frankly expensive – just a lot, lot less than it was five years ago.
SIKI MGABADELI: There have been suggestions that we might need to spend – I don’t know where we are going to get the money – our way out of the recession with infrastructure. [Chuckling] Do we have the money? Should we be looking at construction stocks?
GARY BOOYSEN: Ja, looking at tax recoveries at the moment, I think that’s going to be a very, very difficult ask. The finance minister is talking about approaching the IMF now – I don’t think that’s going to happen. But I think it’s going to be very difficult to see fiscal programmes pushing us out of a recession. [Sigh] A difficult question. I think it’s going to difficult about significant policy change…
SIKI MGABADELI: So stay away from those stocks that are …
GARY BOOYSEN: Again, if you look at specifically the construction industry, which would benefit from…
SIKI MGABADELI: Or even steel, and ArcelorMittal…
GARY BOOYSEN: Absolutely. But look at the conditions for the Murray & Roberts, Group Fives, and what’s been handed out by the Competition Commission, and how there’s been severe dilution for shareholders as well.
Construction is a very difficult business. But it is one of the sectors – not in the South African context – that you could potentially look at because, when growth does flag, you do see big spending programmes coming in, and often construction booms do fall outside the regular economic cycle. It’s an interesting sector. It’s not somewhere that we are investing at the moment for recession-proofing.
I think another sector that you might want to look at as well is very much the pharmaceutical sector. It’s one that you have to mention. There we’ve got really world-class operations that are a lot cheaper, the likes of Aspen. The share price has come off dramatically.
SIKI MGABADELI: They are under some anti-trust spotlight at the moment.
GARY BOOYSEN: Absolutely. But again, if you look at some of the court cases that are going on in Italy and that, it doesn’t seem like there’s a huge basis for it. – the likes of them raising prices 600%, but they haven’t raised their prices in 60 years, kind of thing. Again, generic drug manufacture. Yes, there is an economy of scale as well, but there’s nothing stopping other competitors coming into the market. Again, we’ll see how that plays out in the courts. But certainly it is sector and you don’t necessarily have to go with an Aspen. You could go with an Astro Chemical.
SIKI MGABADELI: An Intertek .
GARY BOOYSEN: An Intertek as well. Obviously that’s a very good business. When people are sick they will use hospitals. The thing with Mediclinic, again, a lot of the territories that Mediclinic operates in are not in recession. Again, it comes down to geographic diversification.
But Mediclinic as well has its own set of issues that I think the stock has worked through now. There were regulatory issues in Switzerland, there were problems with doctors in Dubai as well, and the tighter co-payment system all through the markets. I think Mediclinic at these prices is a lot cheaper than it used to be, a very good quality defensive stock, and probably worth picking up.
SIKI MGABADELI: Gary brings up an interesting point about geographic diversification, because you are seeing our clothing retailers doing a lot of that.
SIMON BROWN: Absolutely. A bit of my concern there is rushing offshore and buying the wrong product, and we saw Brait do that. Brait might get New Look back, might get something out of it in time, but they seemingly way overpaid for it.
But there are some fairly easy wins there. Just an ETF, but also counters on our market that we look at and consider – these are JSE-listed, but global players. I take Richemont. There is a lot of debate around Richemont in the valuations, but they don’t sell that many of their exceedingly expensive watches even in Sandton. They are selling them in Paris and London and places like that. And to a global market of rich people [they represent] a level of richness, recession or not. If you are only worth $4bn today, and yesterday you were worth $5bn, it absolutely doesn’t matter.
And that is one of the functions I think we have seen in our market in the last decade – a lot more geographically globally diverse stocks and big, chunky ones that we can invest into. Gary mentioned British American Tobacco. We touched on AB InBev, which bought SAB Miller. It’s suddenly incredibly easy, notwithstanding simple enough, to get money offshore and invest offshore. But it really is easy to buy them in rands in South Africa. And then also you get the currency hedge in the process if the rand does weaken out.
Short term, currencies will do what they want. Longer term, our currency will weaken, if only because of the difference in inflation. If we are 5% higher than the US in terms of inflation, our currency should weaken by that 5% going forward.
SIKI MGABADELI: If the currency weakens, it’s a good thing for certain sectors, obviously. What about commodities? [General laughter]
GARY BOOYSEN: I think people have to look at investments a little more holistically. Commodities fall in a different asset class from stocks. We get so bogged down in buying company equities, but we forget that there are all these wonderful other instruments that are available. Commodities are one of them.
But one of the products that we are looking at, at the moment, are the structured products being offered by the banks, which come with capital guarantees. So you can go into a five-year structure where you have a guaranteed return of 5%. But you can still take market upside up to, say, I think the last one we did was 63% over five years in dollar terms. Now they’ll invest in the underlying – the underlying is actually the bond, with an option structure on top of it.
But essentially it’s giving investors a huge level of certainty around the investment return. It’s bringing down the risk of their portfolio dramatically, but it’s still linking them to equity-market investments. When you look at what, an eight-year bull market, starting to buy into something and just giving you the option that for five years, if we do see a market correction, you can then release cash at any stage later on and go back into the market at far lower levels. That is for me a really smart way of recession-proofing, of trying to protect yourself from a very uncertain environment.
SIKI MGABADELI: We’ll leave it there. Thank you both for your time.
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