The Money Show | Markets are rebounding

Markets have experienced a rebound driven by overselling and underweight positioning, but we shouldn’t be reading too much into it. In his Interview on 702’s The Money Show this week, Portfolio Manager Peter Brooke shared his view on the current market recovery and highlighted the undervaluation of South African assets, indicating the possibility of good real returns from SA bonds, equity, and property.

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Chapters

• 0:03 Peter Brooke unpacks what is driving the recovery on the JSE
• 1:05 Will we see this momentum continue? Peter Brooke shares his thoughts
• 2:36 Is there more confidence in this market than there was 8-9 months ago? Peter discusses using Redefine as an example
• 4:16 Discussing the warnings from ratings agency Fitch

Transcript

Bruce Whitfield  00:03

What a lovely recovery we're seeing, Peter Brooke, who's a Portfolio Manager at the Old Mutual Investment Group. And its days and days of recovery, which takes us to level on the year, which is good to see. I wonder if you think that this market recovery, certainly on the JSE's got more legs.

Peter Brooke  00:21

I think the recovery was really driven by being oversold, and the positioning everyone was underweight. So, it's sort of natural that you have a rebound. I'm not sure if I'd read too much more into it than that. So, obviously, I think there is good fundamental news in terms of US rates peaking. But as always, markets sort of get a bit of ahead of themselves now. We're rushing for lots of cuts next year. So, the positioning data suggested a bounce, we're getting that bounce. It feels a bit more like noise to me than anything else. But I hope it does develop into better things, obviously. 

Bruce Whitfield  01:05

Yeah, absolutely. What are the reasons it shouldn't? I mean, or should? You can pick either one really. Um, do we see this momentum continue? Because in February this year, we were up 12% for the year to date. And then of course, we wiped all of that out. We've recently now got to break-even level once again. Is there any way that we get another 10% out of this market this year? The 10%, that the market might anticipate for next year.

Peter Brooke  01:28

For sure, I'm not gonna give you an answer on what's going to happen till the end of next year. As you know, we tend to think in five-year real return blocks, as opposed to what's going to happen in the short term. What is true is that South African assets are very cheap. I mean, for instance, today, Redefine produced numbers, they're at 12 and a half percent dividend yield. So, if you plug those sort of numbers in, you will get good real returns from SA bonds, SA equity, SA property. When we do the same globally, what we see is there's okay value, and increasingly, there's good value in bonds, so you should get returns. The big driver will be profits. So, generally, profits have been very good coming out of Covid, and we're now starting to see higher interest rates. When those start to bite, does the world slow down and profits come under pressure. So, I think the driver of what's going to happen to global markets, and hence our market, will be what happens to the profits.

Bruce Whitfield  02:36

Exactly right. But what I am taking some hope from, and these are isolated, this isn't a clarion call. This isn't everybody's standing on the desk in Dead Poets Society styles saying, "captain, my captain, you are so visionary". But certainly, there's a growing number of voices in the market, of people saying perhaps the worst may be over, just perhaps. We're not saying it is but just perhaps. Redefine saying, you know what, things are getting better from an economic and a business cycle point of view. We'll talk to the chief executive in the next 15 minutes. But I wonder whether or not you're getting that sense that there is a little bit more confidence in this market than there was eight, nine months ago.

Peter Brooke  03:16

I think Redefine is a perfect example to sort of discuss it, because what you saw is that their profits didn't actually increase. But they've stabilized. So, in terms of a troughing of bad news, you look at... there was a 45 odd million rand of extra costs that they couldn't recover from diesel costs. That's getting better as we go forward. But the big kicker for them, the big headwind, was their cost of debt in South Africa was 9.4%, up from 8.7%. And with a highly leveraged company, like property companies are, that's a big mountain to climb. So, what's important is if rates are peaking, and interest rates fall, that frees markets to get better, it also frees the economy to get better. So, ja, I would think that Redefine should be looking for a better outlook over the next 12 to 24 months.

Bruce Whitfield  04:16

But it doesn't come without risk? Because Fitch warning this evening - Fitch, the ratings agency - saying South Africa may not meet its ambitious fiscal target. We know that. But they especially are worried about the wage bill. We've put money aside for wages, because we've got to keep civil servants sweet and on site, as we go into an election year if we're government. But ja, that's the brutal reality is that a mismanaged economy is still very much lurking in the background.

Peter Brooke  04:43

That's definitely true for bonds, less true for real assets. Because the risk of not keeping our spending under control, is that we get inflation, and the currency weakens. And then, if you've got an inflation hedge like you do in the listed companies and the property companies, that actually protects you in the long run, so I'm much less worried about that risk for real assets than I am for South African bonds.

Bruce Whitfield  05:16

Thank you, Peter Brooke. Peter Brooke is a Portfolio Manager at the Old Mutual Investment Group.