In an insightful interview with Jean Pierre Verster, CEO of Protea Capital Management, he discusses the significant impact of China’s economic developments on global markets, including South Africa. Verster highlights China’s $28 billion local government investment and the World Bank’s subdued growth forecast, which have led to declines in commodities and global markets. He also covers key investment strategies, noting the importance of diversification and exposure to both tech and consumer-facing stocks in China, as well as long positions in US tech giants like Alphabet. Verster shares thoughts on the rand’s fair value, emerging market dynamics, and managing geopolitical risks through diversification and targeted investments in sectors like nuclear energy. Verster spoke to Nielsen Network CEO, Bronwyn Nielsen.
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Highlights from the interview
In this interview, Jean Pierre Verster, CEO of Protea Capital Management, shares insights on the global and local market landscape, focusing on China’s economic impact and investment strategies. Verster highlights the recent $28 billion investment into local governments by China and the World Bank’s more subdued growth forecast for the country, which led to declines in global markets, particularly commodities like gold. The JSE, along with European markets, has felt the effects, and Verster points to unmet stimulus expectations in China as a key factor behind these declines.
He explains his portfolio’s exposure, particularly in Chinese tech stocks like Alibaba and Baidu, as well as US tech companies like Alphabet, underscoring his confidence in long-term growth despite market volatility. Verster also discusses the importance of diversification, holding banking stocks in Europe and short positions in commodities due to concerns over the sustainability of China’s growth.
Addressing the South African rand, he notes that while it remains volatile, it is within a fair value range of R17 to R18, and adjustments to allocation would only occur if it moves above R20 or below R16. Verster concludes by stressing the need for geopolitical risk management through diversification, highlighting sectors like nuclear energy for future growth.
Edited transcript of the interview ___STEADY_PAYWALL___
00:00:14:11 – 00:00:39:19
Bronwyn Nielsen:
Jean Pierre Verster from Protea Capital Management, thank you so much for your time. Looking at the markets today, there is much ado about China. First of all, we have news that China is investing $28 billion into local governments. Then, the World Bank comes out and says China is not expected to continue firing on all cylinders, providing subdued growth forecasts into the spectrum.
00:00:39:21 – 00:00:45:18
Bronwyn Nielsen:
It’s impacting the local market. Perhaps you could talk to us about what is happening on the ground?
00:00:45:20 – 00:01:10:14
Jean Pierre Verster:
Yes, thanks, Bronwyn. I do see the JSE is down about 1.3% today intraday. That is mostly due to the commodity space. Commodities like gold, as well as other sectors, are under pressure. This is partly due to what’s happening in China. World markets, including those in Europe, are also down by about half a percent.
00:01:10:14 – 00:01:30:06
Jean Pierre Verster:
The US futures are little changed, with the US market set to open in just under an hour. It doesn’t seem like the US will be much lower, though. Most of the negative impacts globally are due to China, and the big news this morning was a news conference where people expected further stimulus—but it didn’t happen. When expectations are high and not met, share prices tend to fall, which is why the Hang Seng Index dropped nearly 9% this morning.
00:01:30:07 – 00:01:49:15
Bronwyn Nielsen:
Does that have any bearing on how you view the markets, particularly with regard to exposure in the commodity space?
00:01:49:17 – 00:02:00:08
Jean Pierre Verster:
Yes, it does. Both the commodity space and the Chinese tech space are key areas South African investors need to consider, given what’s happening on the other side of the world. In commodities, stocks like Kumba, BHP Billiton, and Anglo American saw a brief rally due to China’s stimulus announcements over the last two weeks.
00:02:00:10 – 00:02:34:11
Jean Pierre Verster:
China just came out of Golden Week, a holiday that runs from the 1st to the 7th of October, which also gave a boost to commodity stocks. But now the sentiment is shifting, with questions over whether China’s stimulus will be enough and sustainable in the long term. If it isn’t, we may not see increased steel consumption, which would affect iron ore prices. That’s why we have minimal exposure to commodities and are actually short in that space.
00:02:34:13 – 00:02:58:14
Jean Pierre Verster:
On the tech side, we continue to have long exposure in companies like Naspers and Prosus, because we believe there will eventually be a recovery in confidence in China, which would benefit those stocks.
00:02:58:14 – 00:03:24:18
Bronwyn Nielsen:
How do you balance the local versus international markets, especially in the current cycle? We’re seeing a rally on the local front, partly due to the interest rate-cutting cycle that’s starting to take hold, led by rate cuts on the global front, with another cut expected from the US Fed in November. How do you approach this?
00:03:24:20 – 00:03:49:09
Jean Pierre Verster:
It’s fascinating. Over the last few days, I’ve been thinking about the differences between emerging markets and developed markets, and Western markets versus Asia. But when you look closely at the indices that people often refer to, they aren’t purely domestic. In South Africa, for example, roughly 60% of the revenue generated by companies on the JSE comes from outside the country.
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00:05:35:04 – 00:06:01:15
Bronwyn Nielsen:
So, Jean-Pierre, I’m sure you already know my next question, but I want you to give me some insight into the universe where you see value right now. And when I say universe, I’m asking you to share some of the key stocks in your portfolio at the moment, and why they are there. And why they are a good play for investors in the South African space going forward.
00:06:01:17 – 00:06:22:23
Jean Pierre Verster:
So, for quite some time, we’ve had exposure to the likes of Ping An, Alibaba, and Baidu, which are listed in the US. These stocks have performed well for us, and we still believe the story in China is positive. But we are shifting towards more consumer-facing stocks. Consider the rise of electric vehicles being exported out of China to other parts of the world.
00:06:23:00 – 00:06:41:11
Jean Pierre Verster:
Despite tensions between the US and China, we believe China excels in certain areas, so we maintain long exposure there. Looking at the US, we still have exposure through shares like Alphabet, which many say are expensive. But, as I mentioned earlier, while the US economy has been strong for a while and may slow down, many US companies generate a significant portion of their revenue outside the US, giving them global exposure.
00:06:41:11 – 00:07:00:22
Jean Pierre Verster:
We also maintain long exposure to Alphabet and other US tech stocks. In Europe, we have some banking exposure. We’ve seen how well banks can perform as interest rates normalize, especially over the last two to three years. For instance, Spanish banks have done quite well for us, although I might mispronounce them with my non-Spanish accent! Those are some of the shares that have performed and continue to perform well.
00:07:01:04 – 00:07:24:02
Bronwyn Nielsen:
I just want to get your thoughts on the rand. Yesterday, speaking to Magnus Heystek, he mentioned that he believes the upside on the local currency is overdone. It’s still holding its own at around R17.48 intraday. Do you pay much attention to the rand, or is it simply too volatile to factor into your investment thesis?
00:07:24:08 – 00:07:45:11
Jean Pierre Verster:
The rand is volatile, but we try to act when we believe it’s at extreme levels. When we think it’s near an extreme, we make significant changes to our allocations. For example, within a worldwide fund, we might adjust the portion allocated to South Africa versus overseas markets. At the moment, we don’t think the rand is at an extreme level. R17 to R18 seems fair value, considering interest rate differentials and purchasing power parity.
00:07:45:11 – 00:08:23:22
Jean Pierre Verster:
If the rand were to move above R20 or below R16, we would consider that extreme and make significant changes to our allocations. But right now, in the R17 to R18 range, we believe the rand is fairly valued.
00:08:23:22 – 00:08:49:23
Bronwyn Nielsen:
Jean-Pierre, final question. The geopolitical environment and escalating tensions in the Middle East—how do you protect your portfolio from such potential scenarios?
00:08:50:01 – 00:09:01:04
Jean Pierre Verster:
Yes, it’s been a year since the tragic events in Israel, and tensions remain high in the Middle East. Plus, we still have the ongoing Russia-Ukraine conflict. The key strategy has been diversification, and in a hedge fund, using shorting as a tool is also quite useful.
00:09:01:06 – 00:09:48:18
Jean Pierre Verster:
One of the areas we’ve focused on is energy, particularly nuclear energy, as oil prices fluctuate and countries shift toward alternative energy sources. Uranium stocks and companies involved in nuclear energy have performed well. By looking at specific stocks with diversified global exposure, we believe we can deliver value while mitigating risk. Diversification allows different parts of your portfolio to perform at different times, helping to balance overall performance.
00:09:48:20 – 00:10:09:23
Bronwyn Nielsen:
Jean Pierre Verster, CEO of Protea Capital Management, thank you very much for your time. Diversification—definitely the name of the game. We appreciate your time here on BizNews.
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