Invest with Perspective

Fund Manager, Meryl Pick, talks latest market activity with The Money Show’s Arabile Gumede

• Old Mutual Investment Group

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Meryl Pick discusses the market turmoil that started off the week and whether this is the correction the market has been expecting – following a period of sustained buoyancy – as well as the state of the banking, resources and construction sectors and where investors are likely to find long-term outperformance.

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Arabile Gumede  00:00

Meryl Pick, Head of Research at Old Mutual Equities, joining us then as well. Thank you so much for the time there, Meryl. It certainly is very difficult, right, at a time like this. Where do you even pick the positivity?

Meryl Pick  00:14

Good evening, and good evening to your listeners. Yes, you know, there's a song "Sunday, Bloody Sunday", I think it should be "Monday, Bloody Monday" today (laughs). But you know what has been confounding us at Old Mutual? Broadly, we have a valuation bias and we tie that to fundamentals on the ground. I must say, I've been looking at these markets as buoyant as they've been; we had such a sharp correction downward in March, but it's been one of the sharpest recoveries. 

And yet, around us, we still see the effects of COVID-19 in full force. We see certain economies going back into lockdown states, for example. So, it has actually been quite difficult to tie up the stock market performance to the reality on the ground. And to be honest, I've been waiting for some sort of correction to come. It has just been somewhat too smooth of a recovery.

Arabile Gumede  01:19

Is this the correction in mind though? Is this the correction we expect? So, perhaps to last a little bit longer? Or is this just perhaps that sort of bounce that you'd expect, I suppose, in the midst of all the negativity happening around the markets.

Meryl Pick  01:33

So, quite soon after the first correction seemed to have bottomed, Howard Marks, from Oaktree Capital, put out a note saying that they've looked at various corrections over time. And often these things happen in three stages of rather significant ‘fall, correction; fall correction; and a third fall and correction, even up to the magnitude of 15/20% or more. So, we saw a few weeks ago the tech sector starting to show some resistance and show that it was reaching somewhat of a ceiling. Now we've seen the spread into the broader market. 

Could there be more to come? Well, quite possibly. And I think it will be quite dependent on news flow, which remember last week we've seen start on vaccine trials. We've seen Donald Trump talk about a vaccine before November, now he's talking about April. There's a lot of gridlock it seems on the next leg of the stimulus package in the US to consumers. And in the last few days, we had Supreme Court Judge Ruth Bader-Ginsburg pass away, which seems it's potentially going to derail the relief and stimulus package talks, as the attention now shifts to replacing a justice before the election. 

So, it is quite news flow dependent. The truth is, until economies truly open up, where is the recovery? What is the recovery grounded on? So that's my point. 

Arabile Gumede  03:17

Yeah, I suppose the question will become, should it even be grounded on a vaccine, which in and of itself doesn't necessarily do away with Coronavirus and the effects thereof, right? It only helps in the long run. So, we'll certainly see over on that front. Meryl, if I could pick your brain then with regards to perhaps the banking saga happening, particularly out in the Far East and of course, then out in Europe as well. I mean, Standard Chartered, HSBC, this isn't the first time this has happened for them as well. What sort of impact does a scandal like this sort of have on the local market, though? I mean, if any at all.

Meryl Pick  03:56

Yes, so it's hard to tie it to the local sector, specifically. The South African banks, and I suppose pre-Steinhoff South African companies in general, had a rather good reputation in terms of governance and accounting standards in general. You know, no bank is incident free. But the policies and the governance have proved to be relatively robust. We've had these types of scandals before, for example, in ethics trading, that might have affected you know, Barclays – when Absa was still part of Barclays – you know, that sort of thing. 

I think with the banking shares in South Africa now, the main concern on South African and global investors' minds, with regards to our banks, really is about consumers' and corporates' ability to repay debts; the bad debt outlook. You know, I think any once-off kind of breach of governance is unfortunately not going to be the overriding concern for investors. Unless it proves to be something systemic, which at this point I don't think that appears to be the case.

Arabile Gumede  05:15

Yeah, at the present moment that is, but it certainly could be, as you said. Things are perhaps a little more difficult to kind of call out, you know, as we've made note of quite a bit as well. But one would look for value maybe at a time like this, or maybe even, you know, just something to find a bright spark in. Is there perhaps a sector that you're looking at to think well, this provides enough for me to perhaps look at long-term wise. Is it the resource space? I mean, that seems to have done pretty well of late.

Meryl Pick  05:48

Yeah, I think on a three- to five-year view, we would tend to look for things where a) they have perhaps not been as popular. So, resources have done well and would likely continue to do well, if the global post-COVID recovery is stimulated to infrastructure spend. So that could well be a strong driver to continue to kind of add a further tailwind to the resource rally. 

The very banking sector that you refer to is still trading at valuations of multi-decade lows, you know, they're trading around valuations on price-to-book ratios that we've not seen since the 1980s. Granted, perhaps the news in South Africa isn't as bad as 1980. But things are… the outlook is quite weak currently, and is probably as weak as it's been since 1994. But it's those sorts of contexts and that atmosphere of negativity, it is that that gives you bargain entry points into stocks, and stocks are relatively unloved. 

So, sectors like banking sectors, like construction, offer a lot of value, if you can look on a three- to five-year view past the turmoil that's been caused by COVID. And find the ones with robust enough balance sheets and good quality management that can navigate the next two to three years. There is value to be found in some of those names. For example, First Rand Bank, or Raubex. 

Arabile Gumede  07:27

Yes. Which construction firms, though? I mean, haven't all of them sort of delisted, or getting to a point of delisting as well? It's been very difficult for construction.

Meryl Pick  07:37

Yes, it has indeed. And I mean that paradox between the opportunities. So, we've gone from, I think, something like eight listed construction players down to really just two, being Wilson Bayly and Raubex. And it's not a coincidence that the companies have delisted, in fact, many of them have just ceased to exist. 

So, when you are a Raubex, essentially, you're in a last man standing position. Should the government get coordination together in terms of tenders, spending money on restoring, you know, road quality or infrastructure spend. There really are only two big players in the game around to take that work on.

Arabile Gumede  08:20

Yep, it becomes absolutely difficult to really choose where to go into and how to even stay in that market for a sustainable period as well then. Well, Meryl, thank you so much for the time, really appreciated this evening. Meryl Pick is Head of Research of Old Mutual Equities, at Old Mutual Investment Group. 

The market itself has been absolute turmoil on a completely different scale. Indeed, more than two and a half percent lost on the JSE All Share this today as well. Really, you can take your pick of any stock and it probably has gone down. It's really the likes of Blue Label Telecoms, which have actually seen somewhat of gains, so perhaps staying positive on that front with that share. Altron, AECI also going into some positivity today, but not much else, as well. 

British American Tobacco as well also going up today, so enjoying a 10th of a percent uptick. The rest have really suffered quite heavily: the likes of Bidvest 5.4% down, Alexander Forbes 5.3% as well, Amplats more than 3% weaker, Aspen 3.4%. So, massive, massive falls there on the JSE All Share. It is, however, 20:30 though, we'll go from business to your news.