SA Inc results, the risk-on environment and possible interest-rate rises

SIMON BROWN: I’m chatting now with Deryck Janse van Rensburg from Anchor Capital. Deryck, morning. I appreciate your time after the long weekend. There are two points I want to touch on this morning. Firstly, we’ve seen the results largely come through for the December year-end for companies on the JSE: South African Inc results, our retailers and the like – how are they? My sense is [they’re] not a bad set of results, considering we had a pandemic last year. I think they mostly came out perhaps better than expected.

DERYCK JANSE VAN RENSBURG: Morning, Simon. I think that’s really what it’s all about. As we chatted before on the news, obviously the lower-based effect that’s [going into a lot of these] prices at the moment. But just coming out of the back end of obviously the last year, and coming into where we are now at this stage of the game, I think a lot of companies have thinned out costs and taken a lot of emphasis on the stuff that they can control, and you are sitting in a position where these companies are doing okay at this point in time.

So obviously we are seeing some …… in the Shoprites and things like that which have obviously bounced. But I think it’s commendable results that we’ve seen out of a lot of the JSE-listed companies at this stage of the game.

SIMON BROWN: I liked your point there around thinned out costs. Almost in the same sense – and it’s a bit perverse (that) it took a pandemic – the companies that really attacked their cost bases during 2020 are going to be better companies in the years ahead because of that improved cost base. Some of them have got rid of non-core assets or non-performing assets, and ultimately they really are going to be better looking.

DERYCK JANSE VAN RENSBURG: Absolutely. And I think that’s the position we’re in at the moment – is somewhat of a leverage effect that starts to plough from this point on, where there has obviously been a very tough economic environment that we been through. We all know there is the stuff that you can control: we’ve obviously cut the costs and now you get some kind of pent-up demand, some kind of consumer demand, economic growth. Even if it’s slight, you start to see the effects of how you’ve actually really streamlined these businesses and what that earnings impact is. A small movement in the needle makes a huge difference to the bottom line at the end of the day.

So for the first time in a long time I’ve been quite positive about a lot of the SA-listed businesses and you’ve seen that in the share prices where they’ve started to deliver a degree of return.

And I think that they’re well positioned for a very tough economic environment to get the backdrop for a bit of economic growth and a bit of, as I said, pent-up demand – and you start to see the needle move quite significantly.

SIMON BROWN: Yes, we have seen some moves – and the base effect – we’ve certainly seen those moves. The one space which maybe is still having a bit of a tough time, although some of the prices have been moving, is the leisure space. We’ve seen City Lodge really starting to move again. This is in part base effect. Is leisure perhaps the one sector where we are maybe jumping a little early, or is it a case of starting to position ourselves? It might be late this year or even early next before we start seeing the earnings come through.

DERYCK JANSE VAN RENSBURG: I think leisure is a bit different. I think we need to accept the fact that the world has changed and the ways that we move, how we live and how we stay in accommodation is obviously a very different place at the moment. And if a meeting can be done by digital platforms, then people will choose do that.

So I think there’s going to be a bit of a lagged effect within the tourism leisure space, whether it’s for business or pleasure. I think that is going to be a little bit of a lag-effect, a cautious approach as we move to the later part of this year, and as we start to see vaccine rollouts come into effect.

So I’m not that excited about the leisure and hotel stocks, or even property stocks at this point in time.

I think there are a lot more things that need to happen within the property sector and how you actually start to see those companies adapt and change. But I think they’ve got the ability to do it, and, as I said, [there’s] a lot of pent-up demand. I think our only sort of handbrake at this stage is actually getting the vaccine rollout to become effective and start kicking in. And so I’m keeping an eye on it, but holding off at this point in time.

SIMON BROWN: Property was going to be my next one, but you preempted me on that; still a tough space there. I quickly want to jump more global. We are seeing the VIX in the US sub-20 for the first time in a year, which is the fear gauge in a sense. We saw really good moves from the S&P and the Nasdaq over the last couple of days. Are we perhaps moving back into a bit of risk-on, which is not necessarily just emerging market, but could also be those tech stocks, which everyone had kind of started to take a bit of a jaundiced view of?

DERYCK JANSE VAN RENSBURG: We are obviously seeing a bit of risk-on at the moment. We are seeing [things] starting to rally and push to new highs. To be honest with you, I’m actually being a little [cautious] at this point in time. I think that there is a lot of risk in the market at this stage, where things seem a bit frothy from a valuation perspective.

And I think that those US treasuries are something you’ve got to keep an eye on. I think the moment that the language out of the Fed starts to change – and I think it’s going to be sooner than everybody expected, and this low interest-rate environment would be very positive for equities as an asset class – but as soon as you see that language start to change out of the Fed, I think there will be some rerating. We’ve seen it already in some of the tech spaces, where you’ve seen movement out of tech and into value, and some of the tech stocks sort of correcting 20%, and in some cases more than that. But they’re starting to bounce back.

I think it is risk-on, but you got to be very careful at this point and keep a very close eye on the language coming out of those Fed meetings from here on out.

SIMON BROWN: I take your point there – risk on. But let’s be clear that this is risk-on in a high-risk environment. It was different a year ago when valuations were being crushed. We were chatting early this year, late last year, in terms of “priced for perfection”.

DERYCK JANSE VAN RENSBURG: Absolutely. I think that’s really what it is. It’s been a one-way street for equities, and we all understand that. Obviously you’ve got the backdrop of Covid and coming out of Covid, but interest rates are low. People are looking for a home for that lazy money and it’s a natural place to flow into equities. But, the world is bouncing back a lot quicker than what people expected from a developed world perspective, and the US in particular. The moment that starts to change, from a Fed language perspective, you are going to see the handbrake being pulled up and you might see a little bit of a revaluation in the equity markets. It won’t be somewhat of a calamity, but there will certainly be some normalisation I think taking place.

So at this stage I’m keeping an eye on all those offshore stocks, but really just taking a shotgun approach, looking at valuations, looking at stocks that I want to own over the next three to five years, and be comfortable with a 20% drawdown from here on out.

SIMON BROWN: And the trick is that as soon as the interest rates start to rise, some of that cash goes from equities into interest rates. And that’s where the sell-off then starts to happen to a degree. We’ll leave that there. Deryck Janse van Rensburg from Anchor Capital, I so appreciate your early morning time.

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