Portfolio Manager, Meryl Pick, discusses the latest volatility in the markets and navigating the challenging environment of rising inflation and interest rates.
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Bruce Whitfield 00:00
It was a tough day across markets all over the world today. The UK, of course, was closed, it was a public holiday, a special public holiday declared for the funeral of Queen Elizabeth the II. And so that market was closed for today. US markets opened quite a lot lower, dragging the world with it. And then there was a sudden turn - woof! - and markets came off their worst levels. And by the end, we were down a fraction of 1%. Meryl Pick is the Portfolio Manager at the Old Mutual Investment Group, on the line to us from Cape Town. Are you graying at the temples, Meryl, in these markets? Or are you able to zoom out and look down upon them and say, opportunity will knock eventually?
Meryl Pick 00:47
Sjoe. Good question, Bruce. Good evening, and good evening to your listeners. It can both be true. I think both are true at this point in time because I think the volatility is stressful for investors. If we take a step back at the beginning of the year, even two years ago, as the pandemic was in full swing, our team was doing research about how long pandemics generally last and taking lots of predictions that by... informed predictions that by the end of 2022, we would be coming out of this. So wonderful, we can pat ourselves on the back for that. However, we underestimated Mr. Putin, food, and energy shortages worldwide. So, the combination of those things is certainly leading to sustained levels of inflation. And apart from the structural reasons why you might have higher inflation, there are now these cyclical pinch points, like the energy crisis, like the Ukraine/Russia, war, supply chain dislocations from Covid. And, of course, it's leading to the higher interest rates. And there's nothing so far to show that we are close to the end of that cycle, either locally or in the US, it will continue to be led by the US. So, in that inflationary and interest rate hiking cycle, valuations will come under pressure.
So, yes, to answer your question, I think the only thing one can really do is to take a step back and look from an equity point of view, look for businesses that you want to own five years from now. 10 years from now, and that have got earnings growth potential that is within their own control, for example, market share or a unique business model. That regardless of the macro environment, they can still grow earnings and gain new customers, and there are some of those stories there. And then, of course, at times like this today, never is everything entirely in the red. So, we saw support for the likes of British American Tobacco, food producers, food retailers. So, clearly at a time like this, the market goes to quality and there is a... certainly it's a wise time to be diversifying one's portfolio. But I think it's not a time to write off anything other than those staples in those stores. For example, Discovery, this is the cheapest that it's been, it's getting close to pandemic levels. Again, you know, if you believe in Adrian Gore's vision, the long-term strategy for the bank, the Vitality offering, at these sorts of prices, you can get that optionality with a bigger margin of safety. That is interesting. The same can be said for Capitec, you know, it's got a business bank strategy, if it can replicate what it's done in the SME market, if it can replicate what it's done in the retail market in the SME market with the same strategy, you're getting it today under R2 000, whereas, you know, a few months ago, it was very expensive. So-
Bruce Whitfield 04:18
You're getting close to R1 700, I mean, it's astonishing. The gold sector has been particularly interesting. And we know Goldfields has been given, you know, seven shades of hell for its planned acquisition of the Canadian gold mining company. But that doesn't stop AngloGold Ashanti from coming out with an announcement saying it wants to pay $150 million in cash to buy a mining concession in Nevada in the United States. It's already got mining interests in Nevada. These concessions are next door to what it's mining at the moment. And they're spending $150 million, which in gold mining terms probably isn't that much money. But these guys are expanding despite the pressure we've seen even on commodity prices.
Meryl Pick 05:00
I would say they are... you could look at particularly the AngloGold case as repositioning. Because if you think over the last five years, they have shed basically all their South African assets, sold all of that off. Their exposure to emerging markets in more risky jurisdictions, such as continental Africa and South America is quite high, if you compare it to a Goldfield, whereas the Australia and the US exposure is quite small. So, I see this as them managing the geographical diversification within their portfolio. And there's been a slow pivot away from South Africa and one could now argue Africa as a percentage, towards North America. When their balance sheet was heavily under strain, they sold a very good asset in North America, which I think if they had not had balance sheet constraints at the time, they would not have done that. So, you could look at this as them saying, actually this is still a jurisdiction we want to be in. Of course, they sold it at the gold price of probably 1200 or 1300 per ounce, and they're buying it... they're buying it at a much higher gold price, but yeah, so, you know...
Bruce Whitfield 06:27
Timing is everything, but it's impossible to forecast the timing. But thank you, Meryl Pick, Portfolio Manager at the Old Mutual Investment Group, on the line to us tonight from Cape Town.