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SIMON BROWN: I’m chatting with Nolan Wapenaar, co-chief investment officer at Anchor Capital. Nolan, I always appreciate the time. It’s been a slightly wild year, although truthfully perhaps not as bad as we had thought coming into it. The bear market in the US is over. We don’t have the horror of recessions that we thought coming. Interest rates are perhaps peaking, inflation perhaps done. We are sitting perhaps pretty, halfway through. Or am I getting complacent?
NOLAN WAPENAAR: I do think that the outlook is a lot better than many anticipated, a lot better than we anticipated. If I look at interest rates I think the comment we’d make is that we’re probably 80% to 90% of the way there. I’m not quite ready yet to hoist the banner and say, ‘mission accomplished’, but I do think that by and large 80/90% of the pain has been taken, [with] maybe one or two interest rate hikes to come. So that puts us in a lot better position.
Markets are forward-looking, so obviously the outlook is a lot rosier. But, as you say, we do think that there is an element of complacency creeping in and it certainly isn’t beyond the realms of possibility to see a market wobble, a bit of a sort of dip, as you meet realism through into year-end.
Overall, looking through that I think it’s a good environment.
SIMON BROWN: It is The big worry is perhaps a recession. A soft recession is not necessarily the end of the world.
NOLAN WAPENAAR: To be fair, I think if we look back at what Anchor was publishing in January, we were saying we didn’t buy into the recession story. Fortunately this one has played out as expected. The main reason for that – and we stick with our view – is that the stronger labour market in the US has meant that people keep their jobs, they are still earning. It’s difficult in an environment where your earnings are going up, as a sort of consumer to really find yourself in a recessionary environment. We therefore do think we skirted the recession. In the rest of the world I think a couple of pockets of recession.
But overall, yes, we were positive and it’s probably turned out even better than we expected.
SIMON BROWN: That is my sense so far midyear. Let’s look at some assets. Let’s say local bonds. We are getting almost equity-like returns from bonds. Is that still a space to look at, or is this perhaps also going to start to fade as we sort of move back to normal?
NOLAN WAPENAAR: We like bonds. Basically you’re earning 1% a month right now in terms of effective yield, depending a little on what bond you look at. And for most investors actually 1% a month is definitely worth looking at. As we move through the cycle, we think interest rates [will] have probably peaked by year end. You’re now talking about 1% per month plus potential capital gains. Definitely very interesting. It remains overweight as a class domestically.
SIMON BROWN: Yes, of course because yield up, price down; or in this case yield down, price up.
Reits is a sector [about] which I keep on thinking surely this is going to be the year for Reits, and locally they just continue to struggle. It’s property – office, rather – but it’s also diesel and all the other challenges in a struggling economy.
NOLAN WAPENAAR: It is maintenance of portfolios; it is vacancies that just gradually sort of inch down and then pop up again – as you say, the operating costs of putting in infrastructure. I’ve noticed [at] a couple of shopping centres around where I live suddenly the generators are getting old. They’ve been rather well used of late, and it just is never ending.
So on the domestic front it’s tough to see significant earnings growth. It’s tough to see the growth rates that we were accustomed to maybe five or six years ago. And as a result of that property continues to find itself in a bit of an uphill battle.
SIMON BROWN: General equities locally – banks are cheap. They have been for a while. Miners are cheap, but they’re perhaps struggling with commodity prices. I almost get the sense that our equities are well priced, but maybe I don’t get a sense we’ll be rushing into [them] just yet.
NOLAN WAPENAAR: I think you actually sum up our view pretty well there. If I look at the discussions we’re having with management, the tone has definitely changed. It has definitely improved from the discussions we were having with these companies maybe three, four months ago. It’s a little more upbeat. We’re getting the sense that we are getting towards sort of trough earnings, and that a lot of the bad news, a lot of these additional costs are in the base and then we can get back into a sort of growth environment. But we just don’t sense that we are there yet, and from that perspective we’re picking up domestic equities.
We do see some opportunities. Retailers have been beaten down quite severely as you know, potentially with good reason. We do like banks as such. A little bit of a question mark on some of the non-performing loans as we move through this part of the cycle. [We are] cautious on commodities. I think that earnings can actually go a lot lower than people expect. There’s a little more hesitation on our side around that side, but overall definitely interesting. Certainly you’re picking up companies at values that haven’t been available for a long time. If you’re going to hold for a reasonable period, it’s definitely worth doing. But I think this is one that you just phase into over time, if you’ve got time.
SIMON BROWN: Yes. And [with] that statement, you said the earnings can go lower than you thought. It resonates. I’ve been exactly that thinker and [been] caught.
Let’s look global and let’s look at the US for a moment. A stellar year, although of course people talk around the Magnificent Seven and the like. You are in earning season right now. Your take on US equities?
NOLAN WAPENAAR: ‘There are pockets that are interesting’ is probably a good way to sum it up. As you say, the big stocks that have gained a bit from the sort of AI boost and have shot the lights out have pulled the index up just by virtue of significant weights within the index. But below that, if I look at the PE of the remaining stocks, it’s probably around about 16.5-ish, which is in line with historic norms but probably not fully reflective of the fact that US earnings growth is going to be tough to come by for the next 12 months, whereafter again we think we get back into that steady heady growth environment that has so supported these stocks over many years.
SIMON BROWN: Different regions? I’m thinking Europe in particular. I was chatting with BlackRock earlier in the week. They’re very bullish in Europe. Do you look at sort of other geographies around the world and think there may be better options?
NOLAN WAPENAAR: We do, we do periodically invest in these different regions. I think in Europe we look at a couple of select stocks rather than a broader basket. Europe is cheap, but it always seems to be cheap. There’s always a good reason that it should be cheap. Fundamentally over the long term I think the company quality in Europe is generally a bit weaker. You don’t tend to see the sort of earnings growth and growth in value of a company that you would see elsewhere. They operate under stricter regulatory regimes. For instance, if you look at the banking regulations, European stocks feel like they’re constantly driving with the handbrake up, if I can put it that way. So a very, very select one or two key stocks have found their way into our portfolios, yes.
SIMON BROWN: Last question is the rand, and I think we can all agree fools there try and predict short term. But longer term there certainly could be a bullish case for the rand – although then something happens like greylisting or Lady R, and we get smacked in the face.
NOLAN WAPENAAR: We do. I think the global environment for the rand has been negative for two years, and I look forward to when that’s a bit more positive. We can kind of claw back some of the losses.
As we stand here, though, I think the rand has probably fairly devalued for a couple of reasons, partially for what I guess we can call our own goals. So longer term our perspective is that the rand certainly could claw back some of the losses. Two years ago the rand was trading at I think R15.50/dollar. Do I think we could claw all of that back? No. But do I think a sort of mid-high R16/dollar is reasonable? I think in sort of 18 months’ time that’s a very plausible scenario.
SIMON BROWN: We’ll leave it there. Nolan Wapenaar, CIO at Anchor Capital. I always appreciate the insights.
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