We chatted to Dave Foord about his views on investing in a post-Covid world and where the opportunities will be as well as what he thinks about the prospects for global inflation. This is a summarised transcript of the discussion.
What’s your current view on inflation?
Inflation is the enemy of long-term investing and savers. If we look at the big picture, governments are in debt and they need inflation to lessen the burden of that debt, unfortunately.
The Fed is talking about 2% as an inflation target. This was the target when inflation was 4-5% and at 2% the dollar depreciates and halves twice in a person’s lifetime.
So it’s surprising that we have not had inflation up to now given the amount of free money in the world. We study it intensely and our take is that governments have avoided deflation. Deflation was actually quite good but the governments avoided it because it is damaging for the heavily indebted. This was possible due to some deflationary forces in the global markets.
Firstly, China is more efficient at creating goods cheaper and distributing them around the world. The second was the efficiency in food production partly due to the advance of science. The other, less mentioned area is the technological advancements through computerisation has only recently started to pervade around the world creating efficiency and disruption. These forces have subdued inflation. Demographics have also played a key role. Demographics is destiny and the rate of the growth of the population has also slowed somewhat, which has helped.
A fifth item is that the rich/poor divide meant that the demand from the middle sector has not grown as much as it used to. The balance between demand and supply has been in favour of supply, and we have had a pretty benign inflation environment for a while. This has panicked the Fed.
As we move forward what is happening with all those factors? The fed has made it clear they won’t increase the rate, so from our side, it’s clear that the Fed and governments generally will err on the side of letting inflation come through. However, the other deflationary forces are still there. There is still a lot of cheap money around which will not necessarily go away.
There is a lot of disruption around and there is a lot of base effect going on now – with growth, earnings and inflation numbers. We expect inflation above 2% for a while and it will be interesting to see what happens in a few years – will we come back and neutralise at 2%?
In SA, the market is forecasting about 5.2 %. We think that is too high due to the base effects. We think we will get a return to about 4% inflation in SA. So this is not a runaway inflation or scare story but it is something we need to deal with so we must avoid assets that don’t do well in inflation. Equities that have pricing power are the place to be at the moment.
How do you think central banks handled the Covid pandemic?
The central banks coordinated efforts to stem the collapse by pumping money in at different levels. While this could have been done more efficiently if they hadn’t done it the effects would have been far worse. We can see from the short duration of the market collapse that things recovered quickly. However, the consequences of some of the actions have favoured the large and hurt the small. The mom and pop shops and small businesses have been gutted and they have not managed to recover.
If we look at the effect of the interest rates that are below inflation, I think it has been detrimental.
With interest rates below inflation, you get a misallocation of capital. In China, interest rates have been positive and low and things have remained stable. The countries that have been doing well are the countries that have been able to give money away with strong balance sheets. They have been able to hold up their economies, but it has not been good for third world economies at all.
Disruption is opportunity
I’m excited about the world at the moment. There is so much disruption. Any disruption is an opportunity – to either make or lose money. There is a disruption in the cost of money, in Work-From-Home and lifestyle. In jobs and tech across all sorts of industries. It’s a very exciting time and there is lots of opportunities. The pricing in the market is also something worth looking at.
Work-From-Home is disruption property. DNA and genome developments is disrupting pharmaceuticals. Utilities are being disrupted. The ESG world is disrupting the oil industry. The markets are reflecting this, but we don’t buy markets – we buy companies, so we need to look for the growing industries and the growing companies within those sectors.
There is a large exposure to the Chinese tech giants in the portfolio. The G7 is now looking to come after the earnings of some of the biggest tech companies, bringing these organisations under increasing pressure, what is different about the Chinese tech companies?
The difference we see in Chinese tech companies is that they are serving the Chinese consumer – so it’s a play on the Chinese consumer. China is moving from infrastructure-driven GDP to consumer-driven GDP and benefiting from that. China is actually doing what the rest of the world should have been doing – passing on the benefits from growth to the wider population. They are unlikely to be too affected by this headwind.
Having said that, this headwind for western companies is a big one. There will be huge implications from a tax perspective, but the devil will be in the detail. It’s not clear yet who will benefit from those taxes. I think this is an important move that needs to happen. The issue of big global corporates not paying their taxes needs to be addressed and it will be addressed, but I have a concern that it might not be done the right way.
Global fixed-income investments: If there is a progression in terms of rates around the world, when does that section become attractive again?
In my view, you are going to need a serious bear market in corporate bonds, government bonds and high-yield bonds before you want to buy that area. It really is a no-go area.
If you can find an anomaly as we did with the Cambodian bond – we have the 9.25% USD for three years, which we got paid out two weeks ago – it’s great. But generally, in terms of sovereigns and US bonds, you don’t want to be long duration. There is a greater risk of interest rates going up. I don’t think we are going to see over 3% in the US tenure for a long time. As long as the tenure stays below 3% then equities, by comparison, are much cheaper, particularly those equities that have pricing power and are growing their earnings.
You mention that the most important thing about investing in a bond is when you will be paid. What is your view on South African Government bonds – will investors get paid back?
In SA you will be paid back. You are lending the government Rands and you will get Rands back. The question is what the Rands will be to buy you. We have been at the short end in the R186 and we saw the opportunity there a few years ago. We benefitted from eth yield curve steepening and the waterfall effect there. We have achieved 10.6% per annum over the last 3 years.
It’s given 11.1% over the last 2 years and even over the last year, it’s given us 9.2%. Now it is sitting at 7.3% and we believe we will likely get around 8 plus% over the next few years as we expect a pull towards the call rate. With inflation likely to average 4% we are achieving our mandate, so we have 25% of the fund there.
We are attracted by going out a little further by those higher yields that were available at one stage for a little bit of the fund, but in time we will probably want to go for the 2030 as it gets shorter duration and take advantage of the waterfall effect there as long as the yield curve maintains the same shape that it has now. However, we are an open economy and if interest rates go up around the world, they will go up here.
SA hasn’t caught up with the very low interest rates around the world. Our core rates have only recently gone down – and they are likely to stay that way. Furthermore, with the rand strengthening the way it is they have an opportunity to cut rates further – in which case we will do even better with those bonds. This is why we have gone out a little bit with the R186’s – but we are not going out very far.
What is your view on the commodities supercycle? Do you think South Africa is likely to benefit further from that?
We are definitely going to benefitting from that. One of the things we have benefitted from and the reasons for the strength of the Rand 14 months of trade surpluses. That’s been mainly driven by the fact that imports collapsed but export continued. So mining volumes and mining efficiency have held up surprisingly well which has been great for South Africa. This will continue until the imports start to come through. This will be a big moment for the currency.
Your views on Property? What are you seeing in Singapore?
There is a lot of banking here so like many cities in the world we are seeing a huge reduction in the number of people going into the office, which means that the companies don’t need the space anymore. This is as a result of a reduction in headcount, efficient technology and the work-from-home benefits to people’s quality of life.
Cities have been overtraded and congestion is a problem. I think downtown real estate, particularly commercial has seen its best days.
Property needs to be reinvigorated. An A0grade building in 1990 is no longer A-grade. It’s probably c grade whether it’s New York, London or Singapore. That’s a life expectancy of only 20-25 years and people are trading them at 3-4% yields so the payback is longer than the life of the building. This is a problem and you see it in REITs.
Do you see any opportunities in property?
For us the growth area is logistics. Logistics has been the place to be for the last 10 years, and we have been there for the past 4 or 5. Getting goods to shops and people more efficiently all involves logistics and special warehousing, so this plus storage is where the growth has been, and we have benefitted from that.
