<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Simon Fillmore. He is CIO at Independent Securities.<\/p>\n
Simon, good to have you back on the show. A recent production you had, a Webcast, talked around local equities, I suppose in a sense continuing from where Jimmy was just talking.<\/p>\n
One of the stats that absolutely stood out at me: 12 years of foreigners selling our equities, an astounding stat. But you make the point that that we are cheap as a market \u2013 and we\u2019re not talking necessarily the small and mid-caps, Optasia\u00a0or anything.<\/p>\n
These are large Top\u00a040 stocks that are offering really good valuations in some cases.<\/p>\n
SIMON FILLMORE: Yes, that\u2019s quite right. And I think it has just put a ceiling on our market for a decade plus, because of foreign sellers. At the beginning of this year we looked quite well placed, but then we saw the conflict in Iran with interest rates going up.<\/p>\n
I think the other big dynamic that has been at play has been what has happened in AI.<\/p>\n
We have seen a lot of money sucked out of emerging market tech companies specifically, and that has gone to places in South Korea and Taiwan \u2013 the likes of Samsung and SK Hynix.<\/p>\n
It has just put a lot of pressure on emerging markets generally, but I think specifically on South Africa.<\/p>\n
Read:
Samsung profit up almost nine-fold with memory chip windfall
Big money left the JSE 10 years ago
South African stocks tipped to end decade of foreign outflows
South African stocks set to ride broad EM rally: Momentum<\/p>\n
And if we look at our market, it\u2019s cheap. Emerging markets generally are cheap [compared] to developed markets. Then within emerging markets South Africa is cheap in that regard as well, and you see the valuation in terms of the PE multiple close down to eight times forward, which is very cheap for our market.<\/p>\n
SIMON BROWN: Eight times forward on our market. Just for a bit of reference, what is a sort of longer-term average, to get a sense of where we are sitting against that average?<\/p>\n
SIMON FILLMORE: Yes, it would be around 13 or 14 times.<\/p>\n
SIMON BROWN: Wow, okay. So it is giant. The point is \u2013 and I talk around this often \u2013 you find a great stock, you find a great market; what you need is that catalyst. What is going to get buyers \u2013 local and foreign \u2013 noticing the market?<\/p>\n
And in South Africa, we have those catalysts. Our government of national unity is two years in. We are getting ratings upgrades. We\u2019ve got operation Vulindlela. We\u2019re kind of doing the hard work, doing what we need on the ground.<\/p>\n
At some point, the investors are going to notice.<\/p>\n
SIMON FILLMORE: Yes. We had a client ask us a couple of weeks ago what would be the right environment for South African equities, and listed a whole lot of points like political change.<\/p>\n
I think high GDP growth probably is at the top of that stack. We\u2019ve seen GDP growth below 1.5% for way too long. We need foreign investment, we need infrastructure and investment.<\/p>\n
But I think we also went back and looked at the share price chart of Mr\u00a0Price \u2013 we could have used any other SA-centric company \u2013 and what we saw there is good news.<\/p>\n
For instance, when we had Ramaphosa back in 2017, or the post-Covid boom back in 2020, or even the formation of the GNU in 2023, that was very positive for South African equities.<\/p>\n
Read\/Listen:
SA\u2019s rising private sector participation, improving economic fundamentals
Operation Vulindlela: SA \u2018will hit 3%\u2019 growth by 2029 if reforms continue
Bond market jitters, global yields, and political risk
Unanimous GNU agreement on fiscal anchor for SA
Ratings upgrade on the cards after Moody\u2019s thumbs-up<\/p>\n
Mr\u00a0Price over that period on average rallied between 98% and 133% on those three last political economic catalysts.<\/p>\n
So there\u2019s definitely the ability, especially because we\u2019re off such a low valuation base. And one of the catalysts could potentially be this election that we\u2019re going through in South Africa. And then the national election in in the next two years could create just a change in momentum in terms of what we are seeing.<\/p>\n
SIMON BROWN: Yes, we do do democracy well. We have elections, people win, people lose, leadership changes \u2013 and that is hugely important. Not every country does that.<\/p>\n
I want to change tracks slightly to AI. You mentioned up top that AI is kind of sucking all the money out of the room. It absolutely is, and lot of it has been into chips and the kind of expected sort of places, memory.<\/p>\n
You mentioned SK\u00a0Hynix, Samsung. I\u2019ve been looking at a chart of SanDisk and the like. But you\u2019re saying, hang on a second, you actually think the value is going to accrue more at the application layer.<\/p>\n
Tell me what you mean by \u2018the application layer\u2019.<\/p>\n
SIMON FILLMORE: Certainly. When we look at AI, to simplify it, we break it into four different buckets. You\u2019ve got the infrastructure, which is the chips; the data centres, networking that powers all of that. You\u2019ve got the models like Claude and ChatGPT; you\u2019ve got the cloud providers; and then you have the application layer, the software tools that are built on top of that and utilise a model to create some sort of answer, optimise a process in a business.<\/p>\n
And we think over the long term that\u2019s where the ultimate value will accrue, where companies start deploying these tools in their businesses and start seeing some sort of economic benefit from them.<\/p>\n
Read:
How Netflix is using AI to save cash
Netflix acquires Ben Affleck-founded AI moviemaking business<\/p>\n
I think one of the most readily citable examples is Netflix. For instance, in one of their recent earnings calls, they said when they use AI to create content, they can do it at twice the speed and half the cost. So it\u2019s enormously beneficial for a business like that in terms of its efficiencies.<\/p>\n
SIMON BROWN: Yes, absolutely, and I think Netflix is actually a great example. There will be others as well who use AI and many can kind of get that level of benefit.<\/p>\n
A last question. One of the changes over the past many decades has been offshore bond yields suddenly becoming much more attractive. We\u2019ve got the US 10-year hovering around 5%. It is below at this point in time; has been above recently as well.<\/p>\n
You make the point that these are attractive yields in developed market currencies.<\/p>\n
SIMON FILLMORE: Yes, they are. And I think the interesting thing we\u2019ve observed in our office the last couple of months is people who have been in markets for 15 years and have never seen a US 10-year at 5%. It is quite remarkable how just artificially low bonds were for such a long period of time.<\/p>\n
But you know, now you can actually look a client in the eye and recommend bonds because the returns there are significantly higher than they would have achieved over the last 10 or 15 years.<\/p>\n
Read:
Elections, valuations, and long-term strategy
US bonds for South Africans: What is your money meant to do?
US bonds: What will you actually earn?
The 5% bond yield reality<\/p>\n
So yes, it has brought another asset class into play, which for too long was just too expensive.<\/p>\n
But I think one needs to be careful where you look. If we look at China for instance, I think their bonds are still at about 1.6%, 1.7% and I don\u2019t think that makes a rational investment choice. But certainly elsewhere in the world where there has been pressure on yields over the last couple of months, they are starting to look fairly compelling.<\/p>\n
SIMON BROWN: I take your point. There are people out there who didn\u2019t realise that you could get a 10-year at around 5%, which is a real return in a hard currency and deeply attractive.<\/p>\n
We\u2019ll leave it there. Simon Fillmore, CIO, Independent Securities, appreciate the early morning time.<\/p>\n
#Valuation #equities #artificial #intelligence #markets<\/p>\n","protected":false},"excerpt":{"rendered":"
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