In their book, The Enigma of Reason, Hugo Mercier and Dan Sperber writes: “Two major features of the production of reasons: it is biased – people overwhelmingly find reasons that support their previous beliefs – and it is lazy–people do not carefully scrutinize their own reasons. Combined, these two traits spell disaster for the lone reasoner. As she reasons, she finds more and more arguments for her views, most of them judged to be good enough. These reasons increase her confidence and lead her to extreme positions.” In short, it basically means that our ability to argue is limited to our own beliefs.
Mercier and Sperber were referring to beliefs such as the belief that a bull becomes infuriated by the colour red, or that ostriches bury their heads in the sand at the first sign of impending danger. But the actual truth is that bulls are dichromats, which is a fancy term for a living organism for whom the colour red doesn’t really stand out as bright in any way, while ostriches, well, we all know they don’t really bury their heads in the sand. For some reason, however, we seem to believe that they do.
A belief that I have to deal with on a regular basis, is the belief that local banks have lost their sparkle completely in recent years, mainly due to:
- The SA macro-economic environment, and
- The SA political environment.
The list goes on, of course. Make no mistake, I’m not burying my head in the sand by arguing that these factors didn’t play a role, but what really makes me see red, is the belief that negativity in the Banking sector started locally, and this is being exploited by “SA bears” as one of the main reasons why South Africans should seek salvation offshore. The main reason for this poor performance shouldn’t be searched for locally, but should rather be investigated as part of an international trend.
When we take a look at the MSCI World Banks Index, which consists of all listed banks in 23 developed countries, you will see that no different to South African banks since early 2018, they underperformed sharply against the MSCI World Index (i.e. all shares) – to such an extent that international investment companies already highlighted this underperformance as a possible overreaction and an investment opportunity for value seekers.
You will see that there was a significant increase in pressure on world banks following the start of the USA’s increase of the Federal Funds Rate (FED), which also placed pressure on the sector in general. There was also a slight improvement in mid-2019 when the FED rate was lowered, but that was short-lived.
International investors clearly feel that these rates won’t stay low for much longer, which in turn will have a negative effect on US Banks (which makes up 46% of the MSCI World Banks Index).
When we take a look at local bank shares (FTSE/JSE SA Bank Index) and place them relative to the FTSE/JSE All Share Index, it becomes clear that the picture has looked fairly similar since the beginning of 2018. The big difference is that the local repo rate is now trading lower than at the beginning of 2018, which makes the fact that we are being swept along by these international tides, somewhat unfairly.
At this point, I just want to reiterate the fact that I am well aware of the reasons why we have been suffering on both a local economic and investment level. From an investment opportunity perspective, however, the figures are starting to look very interesting. Capitec has continued to be a fantastic case these last two decades, so we will be excluding it from this illustration. Let’s look at a few key indicators on the remaining four large banks in South Africa, namely ABSA, FirstRand, Nedbank and Standard Bank:
The growth rate of banks is slightly lower than the five-year average, which is a clear indicator of the difficult environment (discussed earlier) we find ourselves in. Both the price earnings ratio and price to book ratio are trading lower than their 5-year averages, and at a dividend yield of 6.4%, I’m starting to wonder whether we shouldn’t rather invest in our local banks rather than to just save our money in them.
There is still a lot of uncertainty surrounding us and we definitely find ourselves in high-risk territory, but given the choice to buy shares that are trading at historically higher levels versus those that are trading at historically lower levels during high-risk periods, I would definitely choose the latter. Don’t let limited beliefs lead you to making the wrong decisions.
The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.