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Top performers Capitec and OUTsurance lead in financial review.

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JIMMY MOYAHA: We’ll now examine the financial sector’s performance in 2024, and perhaps even touch on prospects for 2025. I’m joined by Kokkie Kooyman, director at Denker Capital, to discuss the movements and achievements throughout the year.

Good evening, Kokkie. It’s great to reconnect with you. This year has been quite eventful for financial sector stocks, with significant movements primarily driven by interest rate expectations, inflation, and other factors. What’s your take on the financial sector’s performance this year?

KOKKIE KOOYMAN: It unfolded as anticipated, and sometimes we do get it right. We had cautioned our clients about this since December of the previous year. The backdrop was that global inflation had peaked and was beginning to decline, which indicated that high interest rates were likely to follow suit.

While we were somewhat premature in forecasting, it’s worth noting that falling interest rates are generally beneficial for the financial sector.

Interestingly, when we look at South Africa’s best performers this year, I’m somewhat surprised. Thankfully, we hold both, but they weren’t on my initial list. The top two performers were OUTsurance and Capitec, with Capitec seeing a 67% year-to-date increase, including dividends. OUTsurance recorded a 69% rise. Both companies have exceptional management and have effectively shaped 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 pricey, with a price-to-net-asset-value ratio of 5.56 compared to Absa’s one times. In fact, it was five times more expensive than Absa, but it has since seen a re-rating to 7.28.

I think it is among the most expensive banks globally when looking at the price-to-NAV ratio.

Clearly, the market is astute—though we’ll see how that plays out—anticipating future potential and the value inherent in the franchises.

Nedbank and Absa also performed admirably, with Nedbank increasing by 44% for the year (dividends included) and Absa by 32%. Both were trading near book value at the year’s inception, with Nedbank re-rated to 1.4, while Absa remains quite affordable.

In terms of insurers, we like Momentum very much, particularly under the management of Jeanette Marais, who has been pivotal in building upon the platform established by herself, Hillie Meyer, and Risto Ketola over the past three years. Metropolitan gained 49% as well, coming from a price-to-book ratio of 1.1.

Reflecting back, the financial sector was undervalued at the start of the year, evident in most shares within the index.

As interest rates declined, the sector benefitted significantly.

A key event for South Africa this year was the election and the formation of the GNU (Government of National Unity), instilling confidence in investors.

Had there been a GNU with the Communist Party—a group not particularly favorable to market capitalization—interest rates might not have produced the same effects. It was undoubtedly a result of various factors coming together.

Let’s not overlook a few other entities; asset managers like Quilter and Coronation, along with the JSE, have seen substantial gains.

PSG Financial Services and various property companies—including Wilson Bayly, Hyprop, Attacq, and Fairvest—experienced increases of around 50%.

Hence, interest rates played a crucial role in the re-evaluation of financial services stocks, banks, and insurers.

JIMMY MOYAHA: Kokkie, many of the examples you’ve mentioned reflect double-digit growth in year-to-date performance. Is this indicative of the South African market facing more challenges than other markets leading up to 2024? Could it point to strong momentum heading into 2025 now that elections are concluded?

With new governments in position and the return of figures like former president Donald Trump in the US, is there room for continued positive momentum, or could this momentum start to wane?

KOKKIE KOOYMAN: I’d argue that our current conditions might not be entirely steaming, but they’re certainly favorable—Capitec and OUTsurance, along with others, are showing increases around 60%. Interestingly, this trend isn’t just local; globally, we see similar patterns.

The average US bank sector index rose by 44%, and European banks enjoyed a lift of approximately 60% as well.

This global response to declining interest rates suggests that for 2025, we may continue on this path. Particularly in South Africa, our inflation rates are decreasing significantly, with discussions about potential Reserve Bank interest rate cuts, perhaps even three 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 depends on incoming president Trump, whose policies are perceived by some as potentially inflationary. It remains uncertain whether we’ll see further cuts; perhaps one may occur next week, but after that, it might remain on hold.

Thus, as a backdrop, I anticipate that the financial sector will continue to outperform positively, especially in Europe.

In South Africa, we’ve already performed well; many sectors remain reasonably priced. Absa’s price-to-book ratio stands at one, and Momentum is at 1.2, yielding returns on capital between 16%-18%, with Absa offering a 7% yield. I believe that if interest rates decrease, the sector should have another strong year.

JIMMY MOYAHA: Regarding the financial sector’s performance in South Africa, do you think our greylisting as a country would have altered this performance? Would investor sentiment have differed under other circumstances?

KOKKIE KOOYMAN: Jimmy, that’s a valid inquiry. Initially, it’s important to acknowledge that there was a prevalent negative sentiment at the year’s beginning. Notably, the rand has appreciated by 3% against the dollar and over 7% against the euro since January 1st.

In my view, the impact of greylisting existed, but it was somewhat limited. It increased financing costs and inhibited growth to an extent.

However, the two primary drivers were forming the GNU and declining interest rates. If greylisting is reversed next year, that could further boost local sentiment, but these earlier events played crucial roles.

Interestingly, while I mentioned Capitec increasing by 66% and Absa by 32%, don’t forget that the JSE only saw an 18% rise this year. So, when we compare those figures, the performance of financial stocks stands out.

JIMMY MOYAHA: Indeed. Financial sector stocks are outperforming many peers, especially when contrasted with resource counters experiencing significant declines.

Kokkie, looking towards 2025, we hope for more consistent decision-making from global leaders. Are you optimistic about the financial sector?

KOKKIE KOOYMAN: Undoubtedly! A point often overlooked by investors leading up to this year is the extensive work regulators have undertaken since 2008. They’ve endeavored to make the financial sector almost bomb-proof, which has negatively impacted returns by requiring firms to maintain excess capital and reserves while cleaning up their lending books.

As a result, the financial sector is in a robust position, and we shouldn’t anticipate traditional levels of bad debt.

As interest rates diminish, demand for credit typically increases. Although there might be slight reductions in interest margins, transaction volumes should rise. I foresee solid earnings growth ahead, whether Capitec, OUTsurance, or FirstRand continue their re-rating for further profits. They should still achieve around 15% growth.

It’s also worth noting that Investec has been one of the underperforming stocks this year, trading at a 20% discount to book value. It’s a strong company but is grappling with challenges from the UK market, along with broader economic issues affecting growth and vehicle leasing.

Similarly, Old Mutual has only gained 8% this year. While fundamentally sound, it faces some management challenges.

Overall, there’s a vast potential for undervalued investments in the financial sector, and I’d argue that around 70% of them remain mispriced and have room for re-rating.

JIMMY MOYAHA: Here’s to a promising year for 2024 in the financial sector and an even better outlook for 2025.

Let’s wrap up this discussion, Kokkie. Thank you for your insights and contributions as always.

Kokkie Kooyman, director at Denker Capital, shared his reflections on the financial sector performance for 2024.

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