Much has been said and reported lately about emergent golden opportunities for investors while the herd stampedes away from markets. Kokkie Kooyman, a director at Denker Capital and the portfolio manager of the Denker Global Financial Fund and its rand-denominated feeder fund, is particularly confident that his investment glass is full and deserving of serious consideration by investors.
Leon Kok spoke to him.
Is there a case to invest in global financials at present?
Very much so. True, there are strong fears in the market, for instance that banks’ net asset values (NAVs) will be considerably written down via bad debts. Our experience and research point to the market being wrong. Bad debts will be high, but we are confident that banks will remain profitable in 2020. Further, we believe that the banking sector will surprise and come through this current crisis fairly well and be ready for business next year.
You’re on record as having said that in your 30 years of financial analysis, you’ve never seen equivalent opportunities to those being offered now. Correct?
Yes. Due to the fears that abound globally, investors have pushed well-capitalised and well-managed European banks to 60% to 70% discounts to tangible book value. I’ve seen Turkish (2002) and other emerging-market banks trade at 0.3 NAV, but never developed-market banks. US banks are at their lowest price-to-NAVs relative to the shareholder value they are forecast to report in 2021 and thereafter.
Why then the enormous negative sentiment to global financials?
A host of reasons, ranging from the uncertainty of the current virus and how it will affect life and business activity, to investors basing their fears on the 2008 banking crisis. The reality is that banks and insurers are well-positioned to come through this crisis and indeed fare better than most industries.
Unlike 2008, banks and insurers are not as excessively geared as they were then; they now have more diverse portfolios; and they aren’t using shareholder funds to bet on markets. Further, regulations introduced since then have largely de-geared the banks, while new rules and regulations have placed a major dampener on irresponsible market behaviour.
You’ve hinted that the media has played a role in downplaying global financials. Your comment?
Without any doubt. By its very nature it tends to be short-term focused, and when there is good news it doesn’t necessarily present longer-term perspectives. Social media enhances this phenomenon and public mood swings are exacerbated. As famous American investor and economist Benjamin Graham said, “the market hints to mood swings in the short term but in the long term it is efficient and will reflect the true value of growth potential and the true value of businesses, giving the intelligent investor excellent investment opportunities”.
As the world starts moving to the right direction of the Covid-19 infection curve and lockdowns are reversed, the good news will be extrapolated positively to the banking sector again.
Your strategy in identifying attractive global financial stocks?
An essential part of our process is back-testing past decisions, and we do this every year, particularly after 2008. Considerable emphasis is placed on businesses (in our case, on banks and insurers) that are both entrepreneurial yet conservative. Coupled with that, we look to businesses that have excess capital; that have used good times to build reserves; have low cost-to-income ratios; have good track records; that allocate capital generated rationally; and are technologically advanced and have an advantage relative to peers.
At present these would include the likes of TCS Group, ING Group, Essent Group and Arch Capital. The South African equivalents would be Capitec, FirstRand, Santam and Sanlam. The problem in SA is that the runway isn’t long enough compared with those of the aforementioned international companies.
Why should any smart investor want to invest specifically in your global fund?
The sector currently presents a once-in-a-decade investment opportunity. From this point on, it’s reasonable to anticipate annual growth of 8% to 10% in NAV per share plus a 50% rerating. Secondly, the fund is diversified across the financial spectrum and geographically, especially benefitting from the best investment opportunities in different countries. But, most important, our experience of previous cycles is key to generating good returns in the next few years.
Small- or mid-sized, high-growth companies get sold down the most in a negative environment.
Our most important learning has been to always question the assumptions, but then to believe in our research and back our views, especially when the market panics. Historical data supports our view that the price-to-NAV of the fund (and especially the growth opportunities) should re-rate sharply over the next 18 months.
What could be the worst scenario for SA banks or financials during the next five years?
Government policies that cause capital flight or make investors withdraw capital from the banking sector due to potential poor returns. A rand flight scenario could trigger inflation and negative interest rates after sustained currency weakness. Bad scenarios could include the Reserve Bank losing its independence, foreign exchange controls, introduction of a banking tax, and forced government-directed lending or quasi-nationalisation.