[TOP STORY] Despite current fears, look for opportunity


SIMON BROWN: I’m chatting now with Simon Fillmore, CEO at Independent Securities. Simon, I appreciate the early morning time, talking around some opportunities.

I suppose we start off by saying there are lots of reasons to be fearful right now – inflation, energy costs, interest rates and the like – but sort of sticking our head in the sand is never the option. We need to dig around and, truthfully, find opportunity.

SIMON FILLMORE: That’s absolutely correct, Simon. I think this year markets have been under considerable duress. We see the S&P has lost a quarter of its value and the Nasdaq has lost a third of its value, so there certainly is a lot of distress out there. Specifically for us, when we look at sentiment indicators, there’s a broad variety. The Bank of America, for instance, has one, the American Institute of [Independent] Investors has one. But what they all indicate is that sentiment is at an all-time low, going back many decades. Typically this is a fertile time to invest, and an analysis shows that when sentiment indicators are this low, typically the next five years generate an 83% return.

So we are fairly sanguine and upbeat about the returns that investors still experience going forward from this very depressed level.

We’ve also seen that valuations in the US have come off quite significantly. A year or two ago it was quite easy to argue that US equities were expensive. The PE ratio was fairly elevated, trading close to 25 at one level. But we’ve seen that unwind to around 16 times, [at] today’s level. And that’s just marginally below its long-term average. So it’s reasonably valued at this type of level.

SIMON BROWN: The one thing, particularly with offshores, is the currency and the rand trading at above R18/dollar. A lot of folks are stressed, and how are they going to wait? They’re going to try it. The one thing I’ve learned is that every time I buy a currency and I think it’s [at] a crazy level, at some point in the usually not-too-far future I wish I could get it. I remember buying rands at R16/dollar earlier this year and thinking it was a painful price. Now of course I would love some R16/dollar. Almost as a sense as an investor, kind of ignore the rand. In the long term it’s going to work in your favour.

SIMON FILLMORE: Yes. I think if one just quite simply looks at a long-term trajectory of the rand, it has [tended] to weaken. I don’t think there’s any indication that that trajectory’s going to change any time soon. So I think if one just systematically takes funds offshore over a period of time, then you benefit from the depreciating currency. In the short term there is always a risk with the rand strengthening. We’ve seen that we are in a risk-off environment.

The dollar has been incredibly strong, dollar/cash has in fact been the best-performing asset class year to date. But at some stage that will revert and we’ll probably see the currency, the rand specifically, strengthen somewhat on the back of that. But I think the long-term trend for the rand remains the same.

Interestingly on the JSE, there are some ETNs provided by RMB that just offer you dollar exposure.


SIMON FILLMORE: And you can, for instance, buy single-stock ETNs on the MSCI World, on the JSE, but they just give you exposure to the dollar movement of [those] underlying assets. And in this type of environment, where one is concerned about the rand potentially pulling back, those are potentially good investments.

SIMON BROWN: I’d forgotten about those. Essentially, as you say, that removes the impact of the rand. The one space you’re looking at is mega-cap tech shares in the US – strong balance sheets, huge brands, massively profitable. And, as you made the point earlier, valuations have really come back to earth. I’m thinking Facebook, which I think we can pick up on a low double-digit PE, which is a stock that at times people have been happy to pick up on a 40 or 50 PE.

SIMON FILLMORE: Yes. And Facebook, or Meta as it’s more commonly known, is quite an interesting story. One of the ways we look at it is to build the NAV model and then back out the cash and the losses from its Reality Labs or Metaverse aspirations or business. And what we’ve seen there is that the imputed PE of the core business is around eight and a half times, which is incredibly low for a business. You can either love or hate Mark Zuckerberg, but you can’t argue about that valuation.

And, despite all the competition and the technicality of the advertising industry, I think if you want exposure to three billion consumers globally, there’s still only one place you can go to, and that’s Meta.

SIMON BROWN: It is. And there are three billion, what, monthly active users.

A quick last question. We’ve been sort of directly and indirectly talking [about the] US. You’re certainly preferring the US to Europe, particularly with the energy issues as they’re heading into winter. And, truthfully, it’s going to probably [take] a while is my sense.

SIMON FILLMORE: Yes, I would agree with that. I think even before we saw the energy crisis and the recession that Europe is going through, or is potentially going through, we had structural concerns about Europe, particularly in terms of their demographics. For instance, in Italy couples are having 1.1 children per couple. It just indicates that population growth is declining. Typically, it’s your younger consumers in the economy who spend money and drive these consumer-driven economies. There’s often a saying: Where have all the children in Tuscany gone? I think that’s a significant headwind that that reasoning faces over the next decade or two.

SIMON BROWN: Yes, okay, that’s actually a great point, which I want to dig further into. I like that: where have the children gone? It’s a demographic shift.

Simon Fillmore, CEO at Independent Securities, as always I appreciate the early morning insights.

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