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JIMMY MOYAHA: Today, we’ll delve into the financial sector’s performance in 2024, with a glance at the prospects for 2025. Joining me is Kokkie Kooyman, director at Denker Capital, to discuss the year’s movements and accomplishments.
Good evening, Kokkie. It’s a pleasure to reconnect. This year has been quite dynamic for financial sector stocks, influenced by interest rate expectations, inflation, and other elements. What are your insights on the performance of the financial sector this year?
KOKKIE KOOYMAN: It unfolded as we expected, and sometimes our predictions are accurate. We’ve been alerting our clients about this since December of last year. The situation was that global inflation had peaked and was beginning to fall, suggesting that high interest rates could also decrease.
Although our forecast may have been somewhat early, it’s notable that decreasing interest rates typically benefit the financial sector.
Interestingly, I was surprised by South Africa’s top performers this year. Thankfully, we invested in both, although they weren’t on my initial list. The leading performers were OUTsurance and Capitec, with Capitec achieving a 67% year-to-date increase, dividends included. OUTsurance posted a remarkable 69% rise. Both firms exhibit exceptional management and have effectively maneuvered their businesses for growth.
Read: Capitec now has as many clients as Standard Bank, Absa and Discovery Bank combined
Earlier this year, Capitec was viewed as premium-priced, with a price-to-net-asset-value ratio of 5.56 compared to Absa’s one times. It wasactually five times costlier than Absa, but has now seen a re-rating to 7.28.
It is now among the most heavily priced banks globally when assessing the price-to-NAV ratio.
Clearly, the market is perceptive—though the actual outcome remains to be seen—anticipating future potential and the inherent value in these franchises.
Nedbank and Absa also performed commendably, with Nedbank rising by 44% this year (including dividends) and Absa by 32%. Both began the year trading near book value, with Nedbank re-rated to 1.4, while Absa remains reasonably priced.
For insurers, we hold Momentum in high regard, especially under Jeanette Marais’ management, who has significantly advanced the platform established by herself, Hillie Meyer, and Risto Ketola over the last three years. Metropolitan also increased by 49%, coming from a price-to-book ratio of 1.1.
Looking back, it’s evident that the financial sector was undervalued at the year’s start, as seen in most shares within the index.
With declining interest rates, the sector experienced considerable benefits.
A pivotal event for South Africa this year was the election and formation of the GNU (Government of National Unity), which instilled investor confidence.
If a GNU had included the Communist Party—a body not particularly favorable towards market capitalization—interest rates may not have had the same impact. This is certainly a result of various factors aligning.
Let’s not forget other entities; asset managers like Quilter and Coronation, as well as the JSE, have witnessed notable gains.
PSG Financial Services and multiple property firms—such as Wilson Bayly, Hyprop, Attacq, and Fairvest—saw increases of roughly 50%.
Consequently, interest rates played a significant role in reevaluating financial service stocks, banks, and insurers.
JIMMY MOYAHA: Kokkie, many examples you’ve mentioned exhibit double-digit growth in year-to-date performance. Does this suggest the South African market faces more hurdles than other markets as we approach 2024? Could it indicate strong momentum as we move into 2025, especially with elections concluded?
With new governments in place and the return of figures like former president Donald Trump in the US, is there room for ongoing positive momentum, or could this momentum start to wane?
KOKKIE KOOYMAN: I’d assert that while our current conditions may not be explosive, they are certainly favorable—Capitec and OUTsurance, among others, are witnessing approximately 60% increases. Interestingly, this trend is not isolated; we’re observing similar movements globally.
The average US bank sector index increased by 44%, and European banks also enjoyed a lift of around 60%.
This global reaction to decreasing interest rates suggests that we may continue along this trajectory into 2025. Particularly in South Africa, inflation rates are dropping significantly, with discussions surrounding potential interest rate cuts by the Reserve Bank, possibly even three times next year.
Read:
Inflation inches up, leaving rate cut hopes intact
South African inflation expectations decline to three-year low
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The US’s trajectory relies heavily on incoming president Trump, whose policies are viewed by some as potentially inflationary. It’s still unclear if further cuts will materialize; perhaps one could happen next week, but thereafter it may remain unchanged.
Thus, I foresee that the financial sector will continue to sustain positive performance, particularly in Europe.
In South Africa, we’ve already excelled; numerous sectors remain reasonably priced. Absa’s price-to-book ratio is at one, while Momentum stands at 1.2, yielding capital returns of 16%-18%, with Absa offering a 7% yield. I believe that should interest rates decline, the sector may experience another robust year.
JIMMY MOYAHA: Considering the financial sector’s performance in South Africa, do you think our greylisting status would have impacted this performance? Would sentiment among investors have differed under varying circumstances?
KOKKIE KOOYMAN: Jimmy, that’s an insightful question. Initially, it’s crucial to acknowledge that negative sentiment was prevalent at the start of the year. Markedly, the rand has appreciated by 3% against the dollar and over 7% against the euro since January 1st.
In my view, the effect of greylisting was present, though somewhat limited. It raised financing costs and slightly hampered growth.
Nevertheless, the main catalysts were the formation of the GNU and decreasing interest rates. If greylisting is lifted next year, it could enhance local sentiment further, but these previous developments played vital roles.
Interestingly, while I noted Capitec’s 66% growth and Absa’s 32%, remember that the JSE only experienced an 18% rise this year. When juxtaposing these numbers, the performance of financial stocks is particularly notable.
JIMMY MOYAHA: Certainly. Financial sector stocks are surpassing many counterparts, especially when compared to resource stocks that are facing substantial declines.
Kokkie, looking ahead to 2025, we hope for more consistent governance from global leaders. Are you optimistic about the financial sector moving forward?
KOKKIE KOOYMAN: Absolutely! A frequently overlooked aspect by investors leading up to this year is the extensive efforts regulators have implemented since 2008. They’ve aimed to fortify the financial sector, which has negatively impacted returns by necessitating firms to maintain excess capital and reserves while improving their lending practices.
As a result, the financial sector is positioned strongly, and we shouldn’t expect conventional levels of bad debt.
As interest rates decrease, credit demand usually rises. Although there may be slight decreases in interest margins, transaction volumes are expected to rise. I anticipate significant earnings growth, whether Capitec, OUTsurance, or FirstRand continue their re-evaluation for larger profits. They should still target around 15% growth.
It’s also worth noting that Investec has been among the underperformers this year, trading at a 20% discount to book value. It’s a robust firm but is facing challenges from the UK market, along with wider economic factors affecting growth and vehicle leasing.
In a similar vein, Old Mutual has only recorded an 8% gain this year. While fundamentally solid, it is navigating some management issues.
Overall, there’s significant potential for undervalued investments in the financial sector, and I’d argue that roughly 70% of them are currently mispriced and possess re-rating potential.
JIMMY MOYAHA: Here’s to a promising year ahead for 2024 in the financial sector and an even brighter outlook for 2025.
Let’s conclude this discussion, Kokkie. Thank you for your valuable insights and contributions as always.
Kokkie Kooyman, director at Denker Capital, shared his thoughts on the financial sector’s anticipated performance for 2024.
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