September’s Corion Report was aptly titled ‘A Nightmare on All Streets’ after record market downturns, the report did however end on a high note, with the cheery notion that the ‘sun will come out tomorrow’ and it did exactly that in October. The Dow Jones rebounded with returns of 14%, a record not seen since 1976, and the MSCI All Countries Index saw gains of 6%. In this interview Bacher explains why ‘local is still lekker’ with strong value to be found in South African stocks, and why, despite the certainty that we will continue to see volatility within equity markets on the back of geopolitical upheaval it is important to keep a cool head and stick to your long-term investing strategy. Hedge funds also get the nod of approval as an aspect of an investment portfolio, that to date have not been fully taken advantage of in South Africa. Investors shouldn’t be too pessimistic when approaching equity markets and rather focus on first principles to derive lasting gains, it’s better to be in the game than not at all. – Lucy Ferreira
Excerpts from the interview with Corion Capital’s David Bacher
David Bacher on what’s happening in the markets since the September Corion report
Despite how bleak asset class returns were at the end of September, the previous Corion report actually ended with the famous musical song, ‘The sun will come out tomorrow’. Fortunately, for the benefit of our clients, the sun indeed came out. Global markets largely reversed last month’s downturn. If you take the Dow Jones, for example, it returned 14% for the month and that is the highest monthly return since 1976. But I think if you look more broadly, the MSCI All Countries Index is a better indication and that was up 6%. So there was a lot of despair last month. We tried to tell people not to recapitulate. Things tend to overshoot on the upside and the downside, and thankfully there was a lot more green on the scorecard for October.
On the reason for the rally
That is a hard question to answer. You know, in our opinion, there are two probable reasons for this. Firstly, many market participants sought to believe the Federal Reserve will soon take a break from its series of aggressive interest rate hikes. And secondly, the corporate earnings season in America is well underway, with about half already reported earnings. Although earnings weren’t great, many investors’ fear of earnings collapse didn’t happen. So a little bit of good news in this environment goes a long way.
On whether there are any expectations coming from Corion regarding global central banks and how it plays in with the SA markets
In terms of South Africa, I think we are actually in a good place. Our Reserve Bank has been very much ahead of the curve. Inflation is at a much lower level than compared to Europe and America, and our valuations never got to the lofty levels of overseas. So, last month we said local is lekker and that was a relative valuation, mostly compared to the United States and we stand by that. Unfortunately, the strong dollar is something we have got wrong over the last couple of months. But we do think the dollar is at extreme valuations relative to most other currencies, especially the rand. We stand by the fact that South Africa isn’t a bad place to invest.
On whether Corion has noticed big changes in the geopolitical investment community
We are going through big changes in the geopolitical investment community, the polarisation from the left and the right, and the inflation. These are phenomenons, which make people think, that creates some kind of unease, topples governments. So yeah, this is part of the puzzle you have to piece together as an investor. The risks are increasing. We are aware inflation increases the disparity of incomes. This creates tensions but given that you know those risks, all you can say to some extent is the markets have depreciated significantly and come off from lofty valuation. So at Corion, what is our first and foremost principle? As long-term investors, we look at valuations and make our most informative decision or a primary decision based on whether we believe the future revenue streams of income are real. It will give us enough reward for the price worth paying today. Despite the risks you mentioned, we believe we don’t have to shy away from equity markets at this stage.
On whether there are asset classes that Corion is viewing with a negative outlook
I think it’s back to how we define asset classes at Corion. Broadly speaking, asset classes are broken up into equities, bonds, property and cash, and you can probably further break that up into local and offshore. In terms of how we think of things at Corion is probably the most bearish. We have been on offshore dollar investments and offshore dollar cash, specifically for the reasons I’ve already mentioned. We think the dollar has been on a tear for some time, but we think it’s late in the game and other currencies relative to the dollar are starting to offer more value.
On Corion’s view of hedge funds
Absolutely. I think those of us at Corion are well qualified to speak on the topic. We manage one of the longest running hedge funds in South Africa. It spans over two decades. The truth of the matter is that the South African hedge fund industry has done an amazing job, especially during this recent period of budget and volatility; our team was only looking at not our fund returns, but those of our peers and our competitors. And the majority of local hedge funds have done an amazing job for their clients. It’s just such a great pity the South African hedge fund industry has not attracted the assets we believe it should have.
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