🎧 S1E3 | Randolph Oosthuizen, Portfolio Manager, OMIG (Old Mutual Investment Group)
Randolph shares how rising US rates have been affecting African frontier markets, why North African companies are good portfolio diversifiers, and why he's still betting on Africa's long term future.
FULL INTERVIEW TRANSCRIPT
Chipo Muwowo: Great to see you, Randolph.
Randolph Oosthuizen: Hi Chipo. Thanks for having me. I'm glad to chat with you today.
Chipo Muwowo: Fantastic, thank you so much for joining me. I appreciate you making the time.
Now, Randolph, over the last year and a bit, we've seen the Federal Reserve in the US increasing rates incrementally. I'd love to hear about how you're seeing the Fed's shifting monetary policy affecting the markets that you invest in, which are African frontier markets outside of South Africa.
Randolph Oosthuizen: The tightening monetary cycle is definitely making life quite difficult for many of our economies. The IMF refers to it in an earlier report this year as the great funding squeeze. And the impact of that is that governments are under pressure in terms of financing their budgets, it's much more difficult and much more expensive now, and that also leads to significant currency pressure. So what we're seeing over the last year or so is certainly, in terms of our markets, currencies coming under a lot of pressure, not just in terms of the value of the currency, but also in terms of convertibility. We've seen that for a while now in Nigeria, and it's recently emerged in Egypt. But we are hopeful that this tightening cycle is now sort of nearing an end. All indications are that the Fed should be pausing at this level. They've hiked enough and markets generally expect them to start easing again in the beginning of next year. So I think that's certainly good news for our markets.
Chipo Muwowo: Can you sort of break it down a bit more for us? What things are you observing, are you seeing that speak to, you know, impact from what's happening in the US.
Randolph Oosthuizen: Dollar interest rates sort of sets the cost of funding or the risk-free rate across the world. So it's just the base against which all other lending takes place is now much higher than what it used to be in the past. So let's say if a government in the past wanted to attract portfolio flows, if they had a local currency t-bill around 15 percent that might have been quite attractive when dollar interest rates were around, you know, one, two, three percent but now with those rates at five percent or four or five percent, it means that your rates have to be correspondingly higher. And so, you know, the typical sort of carry trade which you could use your sort of the local t-bills check portfolio flows is much more challenged. And then just, you know, sort of in terms of government financing as well. In the past we've seen governments accessing international markets for funding to get dollars that boosted reserves that helped them sort of manage their currency. Again, it has now become prohibitively expensive with Eurobonds for some of the markets in countries in our space [with] the yields being in excess of 10 percent. So that's just too expensive. They cannot they cannot issue at those rates. So it just makes access to dollars and sort of funding options much more limited.
Chipo Muwowo: I'd now like to zoom out a little bit and just speak about your fund and its mandate. So can you give us a sense of where you're allocated at the moment, what your mandate is and perhaps how you've had to adapt your strategy given what's going on in the market?
Randolph Oosthuizen: Our mandate is to invest in companies that generate at least 50% of the revenue from Africa outside South Africa. There's also a certain percentage that has to be listed in African markets, but we can also invest in companies that are listed offshore Africa, but generate most of the revenue in Africa. Typically that’s your resource stocks, gold companies, oil companies, copper producers, but in recent years we've also seen other companies listings specifically these telco tower leasing companies like IHS and Helios Towers. So the first step in our portfolio construction process is to put our universe together which is a combination of the onshore and offshore listings. So in our space the biggest markets are Nigeria, Morocco, Egypt, and Kenya. Typically our portfolio would reflect that to some extent because that's also how the benchmark is put together. I think the other thing is we are liquidity aware so we need to deploy our funds into markets and securities that offer a reasonable amount of liquidity. So what we have at the moment is we have a significant exposure to Egypt. Traditionally that's been one of our markets. Morocco, we've got a slightly lower exposure. Morocco is an interesting example in our universe in the sense that it is a low interest rate, low inflation environment, also a bit of a hothouse investment environment in terms of the local pension fund system so valuations there are typically very high and, you know, we generally don't find it as attractive as in other markets in Africa so we will come to that a little bit later, but when we look at stocks that we prefer, we do like stocks that show a decent amount of earnings growth, and that's quite difficult to find in a market like Morocco, [they are] quite pleased if a company has grown earnings by 5%, which feels a bit light compared to the opportunities we find in some of our other markets. I think at the moment also in the current environment with rising rates, typically banks tend to do reasonably well. We've found that banks are quite resilient through the business cycle, but the current environment with high interest rates that improves their interest rate spreads. There's also opportunities to make money from currency trading. So we tend to prefer banks in the current environment. Of course there are other opportunities as well, but in terms of the overall portfolio, that's typically the elements we would look at.
Chipo Muwowo: You've touched on the banking sector. What other sectors do you like?
Randolph Oosthuizen: So banks, what we have found is that they're quite flexible in terms of the value levers they have that they can rely on through different business cycles. So we've just found them quite resilient in terms of, you know, how they can choose to focus their businesses. You know, perhaps when credit to the private sector is a bit more challenging, they can put more money into government securities. When they're feeling a little bit risk averse, they can focus more on non-funded income, on growing transactional income, you know, they can perhaps focus on trade finance, if that's something that they want to do, or just cross-border finance, you know, they can tilt towards let's say more personal, retail lending versus sort of institutional lending. So there's just so many things a bank can do to sort of defend their business model and keep their earnings growing. Of course, they are exposed to the business cycle. So it's not saying that they're completely resilient, but we find that banks with good management teams, with a good deposit franchise, so where they start off with access to cheap funding are generally very well positioned to grow their business through the business cycles.
Chipo Muwowo: So it sounds like the bulk of your portfolio is, you know, focused on the banking sector. You mentioned, I think, energy earlier, the sort of resources. Any other sort of sectors like, you know, consumer staples and that kind of thing. Can you give me a sense of that?
Randolph Oosthuizen: Yeah. So I think in terms of our investment universe, what's interesting is that the banking sector is around 50% of listed stocks in terms of the onshore markets. So that's why we do spend a lot of time on the banking sector and understanding it and the various companies that we or banks that we can invest in. Historically in Africa, the other sectors that we saw sort of a fairly significant representation was cement, brewers, telcos, and also some consumer businesses. And what was interesting about these were that they were typically subsidiaries of multinationals. So the brewers, we had Guinness subsidiaries, we had Heineken subsidiaries, we had AB InBev subsidiaries, you know the telcos, we had the famous example of Safaricom in Kenya. And what was interesting in terms of a recent trend is that MTN has listed quite a number of their subsidiaries across the continent. So we've got an MTN Nigeria, MTN Ghana, Uganda, Rwanda, and that's quite good because it just increases the investable universe. The other one is cement. That was also typically the subsidiaries of multinationals, Lafarge, Holcim and so on and so forth. Although there were some very notable independent producers in that space, notably Dangote Cement of Nigeria, which is sort of a massive Nigerian success story. And then some consumer businesses as well. So I think what's interesting is that across Africa, we have found those sectors to dominate whereas in North African countries, where we have some larger markets, there has been some, well more variety. So some interesting healthcare businesses in Egypt and Morocco, some interesting fintech businesses, education businesses. So I think that's also why we also quite like the North African markets because it adds a bit of diversity to our investable universe. And then in terms of the oil and the gold companies, you know, they're much the same as any gold company or any oil company, you know, you just need to understand, you know, the resource and, you know, where they are in terms of, you know, their production profile. So that's pretty standard.
Chipo Muwowo: The majority of companies in the opportunity set aren't covered by sell-side analysts so I'd love to hear how you go about doing your own research on these companies.
Randolph Oosthuizen: The sell side in Africa has sort of ebbed and flowed. I originally started on the sell side in African markets back in 2007. Those were still sort of early days and we had to kind of build out the whole profession, training up the analysts, but also the management teams, explaining to them, well, we'd like to come and see you and this is why we do it. But especially the smaller markets, it's difficult if you have only a stockbroking business because liquidity can be quite challenging. So it's sort of hard to keep a fully fledged stockbroking service going. In our case, basically, how do we address that? Well, we do a lot of the research ourselves. And I guess it's just having been around the block a few times after a while, you obviously get to know the companies quite well yourself. So since 2007, that's quite a long time, we've met most of the companies that's listed numerous times. We've analysed them numerous times, so we know the space very well by now. I think that's perhaps the only way to answer that. If you had to start from scratch, it might be a challenge.
Chipo Muwowo: Now you're obviously based in South Africa, but you're not investing in South Africa. South Africa obviously has the most advanced capital market ecosystem on the continent. I'd love to hear what you've learned or what you've discovered about the rest of the African equity market ecosystem being located as you are in South Africa.
Randolph Oosthuizen: Well, it's actually quite interesting. The biggest difference is that most countries in Africa report quarterly, whereas in South Africa, it's still semi-annually. So there's actually, you can argue, better reporting in many of these African markets. So you could have a better and more up-to-date feel for what's going on with your companies. So actually, I think that's the surprising thing is that reporting in our markets are actually quite good. Which was a pleasant surprise. If you're on the sell side, it's not a great thing because you know, there's more reporting that needs to happen. But yeah, I would say for me that's one of the probably the most notable differences.
Chipo Muwowo: And final question, as you look ahead to 2024, what are some reasons for optimism around African equity markets and some reasons for caution from your perspective?
Randolph Oosthuizen: Well, I think the key thing about Africa is that the long term investment case, we think is still very much intact. And I don't want to go into a long discussion about the investment case for Africa. That's perhaps a different sort of interview or discussion. But just earlier this year there was fairly big news about China that now population growth has peaked [and it's starting to contract. We're [also] seeing it in sort of the developed world where population growth is slowing and declining. Whereas in Africa we still have positive population growth, so that's very strong demographics. You combine that with urbanisation, you then, once the population growth does sort of peak, then you start getting things like the demographic dividend. So Africa's population growth will be positive for itself, but also for the rest of the world in terms of providing skills for the rest of the world. So that's that long-term value driver that's still very much in place. Africa is very well positioned in terms of the energy transition, you know, copper, in terms of alternative energy, solar, wind, massive resources in that regard. So there are so many opportunities across the African continent, so that makes us very confident about the long-term investment thesis. And then in the short term, things are quite difficult at the moment, as I explained at the start of the discussion. But the offsetting factor there is that valuations are very attractive at the moment. We've seen companies trading on very low multiples. Our fund is trading on a PE ratio, a forward PE ratio of around five times with a dividend yield of seven, eight percent, which is very, very attractive. And that's still with earnings growth in the 15% range. So it's a very attractive time to get exposure to the African investment story.
Chipo Muwowo: Randolph, thank you so much for sharing your thoughts and insights with me. Yeah, I appreciate you making the time. Thank you.
© Capital Markets Africa, 2023
Founded by journalist Chipo Muwowo, Capital Markets Africa aims to raise the profile of African listed companies. Whether you're a retail or institutional investor, based in Africa or outside, we want you to be better educated about the investment opportunity set and the broader African equities market ecosystem. Subscribe today!