Global financials: returns, positioning and what’s next

Nigel Barnes:

Welcome to the first podcast of 2025. Hoping it’s a great year for you all. I’m joined today by the Denker Capital financials team. Kokkie, Ben and Barry – nice to see you.

So Kokkie, let’s start off and look back at 2024. I had a quick look at the numbers before we kicked off the podcast. The Denker Global Financial Fund A class returned just a smidgen under 19% (in US dollars) for the year, a little bit behind benchmark, but still a strong return. Kokkie, could you give us a bit of feedback as to how you felt the year went and some of the highlights?

Kokkie Kooyman:

At the beginning of the year, there was a lot of uncertainty about where the economies were going and the number of interest rate cuts that were expected in 2024. Given that, a return of 18.9% in dollar terms is very good I think – just slightly below the benchmark, and that was due to the last quarter.

But during the year, generally, there were some strong outperformers in Europe. Shares like Erste, BAWAG and Barclays went up 65% to 70%. A company like Barclays is not the greatest bank in the world, but management have been working almost 10 years to pull it right. We’ve been visiting them, and we avoided investing, and we got that one almost at the bottom and gained 70%. Same with insurers. Barry’s Progressive gained 51%. US regionals underperformed relative to the performance we had in Europe (on average 23-25%, which is still good).

Where did we lose? A lot of our losses came in the fourth quarter, after Donald Trump got elected, where emerging markets got tanked. Even the euro fell 9% in the few weeks after he got elected. The European banks took a knock. But generally, for us, because we are diversified… and we do that partly because we’re trying to find value in many areas, and they don’t all fire at the same time. But emerging markets were a detractor everywhere in the world.

We have a small percentage in emerging markets, but Brazil was down, currency included, around 30% or 40%. That’s a big percentage down. And even India, a great country which is really doing well, was effectively flat.

So yes, 2024 was actually better than we would have hoped, but we could have done even better had Donald Trump not been elected President.

Nigel Barnes:

Thanks Kokkie, for the quick rundown of last year. As you say, strong returns in 2024. And that’s great as we look forward into the new year. What do you see, just in terms of looking around the world? The US banks have been reporting recently. Ben, I know that’s your area. How’s that been looking?

Ben Kooyman:

It’s been really strong, especially compared to our expectations, where from Q3, we were a bit sceptical of the growth continuing in terms of the interest rates, and how quickly it would.

But then I guess also on the back of Trump being elected, the higher-for-longer narrative has really continued to play out. So, from the market expecting almost four to five cuts in 2025, we’re now looking at one to two, where, especially with the large investment banks, that’s really given them the ability to grow net interest income in 2025.

And so, the guidance coming through with the full year results for 2025 has been quite far ahead of where consensus has been. And that’s been above where we were as well. We were still a bit more on the fence in terms of where the US rates would go, going forward.

And then the rest, it’s been almost a trend really continuing throughout 2024, where loan growth is still relatively low. And that, depending on which policies Trump does manage to push through, will be a potential big driver in 2025. But at the same time, net charge-offs have been very low, fee income has been strong, and the banks have had very good expense control. So they’re all expecting strong operating leverage into 2025. So yes, we’re quite happy with the results, and the market’s taken it very well too.

Nigel Barnes: 

There seems to be quite a lot of noise about merger-acquisition activity, which obviously is a good income stream for the investment banking fraternity. Would you agree? Is that the feeling you’re getting?

Ben Kooyman:

Look, we’ve come from COVID, where there was a record high in terms of investment banking activity, and then it scaled down a bit. And then every year, it’s been picking up. The thing is, with us, we’re slightly underweight the investment banks, because it’s quite a volatile income stream.

But look, that is a risk we talk about every day, because there’s definitely potential for it to have a huge pickup over the next couple of years, and it’s something we discuss. But I think the market does already expect it to a large degree. So we’re almost more worried about it underperforming expectations rather than overperforming. But it’ll definitely be a nice driver for the large investment banks.

Kokkie Kooyman:

Nigel, maybe just before we end off on US banks, the things that stood out for me (and Ben can comment too)… the big fears last year were CRE (commercial real estate) and, if you recall, that people were so worried about the huge bad debt that was coming in commercial real estate and the capital levels of the bond positions. AOCI was the big word.

And as we warned investors, we said, this panic is a buying opportunity, because all our research showed that the commercial real estate problem in the US was very limited to the smaller towns and the smaller banks, not the big banks. And just going through the results, Ben, there’s almost no mention of it. In fact, the mention is everywhere that the provisions for commercial real estate are a lot less than expected.

Ben Kooyman:

Yes, that’s very true. Within Q1, if you look at the banks’ results (we mentioned the net charge-offs being very low), a lot of the reserves they took in Q1 and Q2 had picked up, and then Q3 was flat. And then Q4 has actually been a downward trend again in terms of reserves for commercial real estate.

You can also see it anecdotally, and it’s been in the news the last couple of weeks, JPMorgan saying their staff must come back to office five days a week. We’ve now seen with Donald Trump being elected, the government officials must come back five days a week to the office, which was a big driver for the risk in the commercial real estate. So, it does seem to be past its worst.

Nigel Barnes:

Okay. In terms of the results, it’s results season now for the US banking sector. Any particular surprises or standouts there?

Ben Kooyman:

One we’ve taken a bigger position in recently, one which was standing but had fallen back a bit, was Citigroup. It’s a bit on the lower quality side. They had a decent set of results. I think the share price is up about 7% on results, which we were happy with after our recent buying. It was interesting… it was a decent set of results, but they actually brought down their target expectations, although it was an expectation which no one believed in to begin with. So now, it’s almost a more realistic level of 10% to 11%, which gives you enough upside.

So even though it hasn’t been the greatest bank and still has a couple of problems, I think we were cautiously optimistic on the results. And I don’t think there has been a bank so far that we own, or that I’ve looked at, where we thought it was weak. So, they’ve all been average to above average in terms of our expectations.

Nigel Barnes:

And anything that excited you, that you don’t own, through this results season that you’re starting to have a look at?

Ben Kooyman:

Yes. So, there are two companies which we’ve mentioned over the last two years that we’ve wanted to buy and have been waiting for the time. That is Charles Schwab and Bank of New York. Both came with good sets of results and we’ve discussed taking positions. So maybe we’ll have another round of discussions, but there’s definitely a potential we would look to take positions in those companies.

Nigel Barnes:

Okay. You’ve got to do a bit of a sales job on Kokkie.

Ben Kooyman:

Well, he says he’s looking at it and we’ll discuss it further. So, I’ve started the process!

Nigel Barnes:

Thank you, Ben. Thoughts on Europe, Kokkie?

Kokkie Kooyman:

Ben can fill in the detail, but essentially what we’ve seen so far… just this morning, Swedbank, a larger bank in Sweden, which is in our top 10, so a big position, came out with very good results in terms of expectations.

Actual results are flat year on year, but the market was so worried in Europe about lower interest rates – the effect of lower interest rate on bank results – and the market forgets that management teams take action. They prepare. They see the interest rates coming down, and they start moving the balance sheet. So, shares are up 6% this morning, simply on them really meeting expectations.

Nigel Barnes:

Great.

Kokkie Kooyman:

Yes, Ben will give you a look at what we further expect, but that was a good result.

Ben Kooyman:

I agree on Swedbank. I think the one difference with Europe relative to the US is that the banks are much cheaper, screening on an absolute value. But I think the market, because European interest rates came from negative 0.5, they were almost considered un-investable for a long time. And then the interest rates in Europe going to 4% suddenly gave them a huge tailwind as their profitability kicked up.

Now the market’s been quite worried that interest rates go back to zero. That’s something we don’t have as our base case. And it’s almost that argument that the banks trade around where interest rate expectations will be. Because if they stay around two, they’re still very profitable. If they go back to zero, then a lot of that profitability would disappear again. Not as bad as the market expects because, as Kokkie says, the management make changes to their balance sheet to account for it to a degree. But I think that’s almost the largest thing driving the European banks now – their interest rate expectations. But in terms of their core operations, they’re probably better run than they’ve been before. They’re also sitting on huge excess capital. The dividend yields are between 5% and 8%.

Kokkie Kooyman:

The Bank of Ireland, a dividend yield of 10%. The market’s thinking there’s a lot wrong there. And there isn’t.

Ben Kooyman:

And the buybacks, some of them are up to 20% of the market cap that they’ve got approved for. So, there’s a lot of tailwinds. Even in a worst-case scenario, we still feel there’s enough levers they can use to protect their share price.

Nigel Barnes:

Okay. I’m going to get to positioning right towards the end. But we’ve always got to remind investors that this isn’t just a banks fund. There are other sectors within the financial community that you guys look at. And one of those is insurers. So Barry, thanks for joining us. I know you look at the insurers. And the big question around at the moment is the impact of the fires in the US. Just give us a bit of feedback there, Barry, as to how that looks.

Barry de Kock:

Undoubtedly, a massive economic impact from the recent wildfires. And it is still an ongoing catastrophe. So, any estimates are very much still very wide ranges. The numbers being thrown around by economists and meteorologists are for ‘economic losses’ (that’s important) to be around 250 billion which, if you adjust for inflation, is larger than Katrina was back in the early 2000s. So, a mega impact.

But important to note, for insurance investors and for investors in the fund, is that the impact on the insurance sector and the insured industry loss is going to be significantly lower. That is estimated at the moment to be around $25 billion to $40 billion. It’s a fairly wide range, but definitely a very manageable event.

And the reason for that is, for years now, California wildfire risk has been very well understood and well known by our companies and the insurance sector. And risks have been elevated there. It’s not a surprise that every single year since about 2019, we’ve had large fires.

The big issue in the market is that the insurers have been unable to price adequately to take on these risks and to cover the insureds. And that is because the pricing has been regulated heavily by the State of California. So, what you’ve seen happen there, and like you’d expect any good insurance company to do, they’ve simply walked away from writing that business.

An example there is Chubb, which is a core holding in the fund, and has been for years. In 2021, the CEO, Evan Greenberg, announced that they are stopping writing California homeowners’ business, which is the core business which would cover fire loss. And I remember the key tagline he had on the call, was that somebody else is going to have the pleasure of writing this business. So, they’ve walked away. So, we certainly think that there will be an impact on the insurance sector, and they will pay claims, but definitely an earnings event and not a capital event, and very manageable.

The other part that’s important is that for about five or six years now, at an industry level, across all risks, losses have been over 100 billion for the insurance sector. With this at 20 billion to 40 billion, it’s going to definitely underpin the hard market that we’ve seen for the last few years in the industry, which is good for insurance companies’ margins and for top line growth going forward. So that coupled with high interest rates, I think the outlook remains pretty solid for the sector.

Nigel Barnes:

Okay, brilliant. Thanks, Barry.

Kokkie, let’s look forward to the rest of this year. I’d like you to touch on positioning, just take us around the world a bit, and what do you see as the key themes? You’ve mentioned Trump. I think he’s going to be a key theme for all of us pretty much every day for the foreseeable future. But how do you see it in terms of positioning and where you are right now?

Kokkie Kooyman:

If you look at the environment, then Trump has really had an effect. And it will continue to have an effect of a stronger dollar because of the fears of tariffs and what it will do to the US economy and obviously the economies America trades with.

One of the economies worst hit is Mexico as well, because of him just hating it and because of everything that he finds fault with it. Funny enough, if you look at the Mexican banks… we still have a small position in a really good little bank, Banco Regional, and it’s actually up I think 12% this past week. So, it almost looks as if the market has now decided this is all in the price.

Look, the Mexican banks are starting to come with results. I think the result is due tomorrow. So, the market’s obviously expecting a good result, which Barry’s been warning me about. But we didn’t add, because the macro risk is just a bit too much at this stage.

But the big opportunity is starting to appear in emerging markets, where we did cut back a lot during the year. And so, we’re really looking at that, but we are very cautious. The valuations are attractive in emerging markets. So, during the year, we’ll see how it goes.

The other one is EU banks versus the US banks. At a certain stage, the Trump effect should have inflationary negatives, which means higher interest rates, which will prevent the US economy from growing too much and could even cause a recession later on. So, our preference at this stage is for more European banks, simply because the valuations are on your side.

So, we’re staying underweight US banks. And it’s still a big position, by the way. It’s 30%. But they are fairly expensive. Not overly so, as Ben explained. The deal flow is going to go their way. We believe interest rates are going to stay high, and Trump is going to get some growth going. So, then loan growth will be good. Activity will be good. But a lot of that is in the price, where in Europe and the UK – different kettle of fish – not totally in the price.

As you mentioned, it’s more than just a banks fund. Two holdings, Euronext and Deutsche Börse, which we bought to start being defensive in case of a market fall, actually did very well last year, and are still looking good.

And we’ve started adding a bit more to the debt collectors, which also in this cycle normally start doing well. I think the big risk for us would be a US recession and interest rates coming down sharply, which at the moment one doesn’t foresee.

Nigel Barnes:

So, the portfolio’s well diversified, Kokkie?

Kokkie Kooyman:

It’s well diversified. If you look at the valuations on most of it, and even US relative to the market, US banks are very cheap, and relative to their past, they’re fair, average. But the rest of the portfolio is actually defensive. As I said, Bank of Ireland with a dividend yield of 10%, even ING with a dividend yield still of 6.9%. That will cushion you if we do have a big negative market move.

Nigel Barnes:

Thanks. Just to go around the table to finish off, let’s talk about things to look out for this year. Barry, anything specific that you feel that investors should look out for in the portfolio, things that you’re maybe focusing on?

Barry de Kock:

I think the reinsurance sector is set to have a good year. I think it’s been a couple of very difficult years up until 2023. And there was a hard reset in pricing in that market. And I think that the last couple of years have shown that the balance sheets have really been bolstered, and the loss ability of these companies has improved significantly. So, I think even if we have a large year, our companies should still report pretty decent results and strong book value growth, which I think is a change over the last maybe seven years or so for that reinsurance sector specifically.

Nigel Barnes:

Great. Ben?

Ben Kooyman:

I think we’ve discussed a lot of the operational drivers. The one thing we’ve started looking at more closely is Canada. I don’t think we’ve been invested in Canadian shares in the last 15 years. With a lot of things coming with the new potential elections this year, with a very capitalist-friendly party potentially winning, and some of the companies now showing good value, we actually own three Canadian companies now.

So, Canada will definitely be a country we want to spend more time on. As I say, we haven’t owned it in about 15 years, so it’s something which I am quite interested to spend more time on. And maybe we’ll increase our positions there if we get more confidence on that.

Nigel Barnes:

Okay, great. Kokkie?

Kokkie Kooyman:

I think that’s an interesting one. One of those Canadian companies is a smaller company and a strong potential for growth into the US as well. And that’s where we really create the real alpha – those smaller companies. Barry found Arch Capital a few years ago, which has done really well for us. We’ve got something like NLB in Slovenia, Eastern Europe. It’s really our ability to find those smaller companies. And we’ve got quite a few of them that we’re looking at and that are in the fund. And the mid-cap sector, globally, is hugely underpriced.

Investors mustn’t forget, those companies keep growing shareholder value at about 20% per annum and should do so even in a tough period. So yes, I’m actually quite excited about this year. I don’t think we’ll do quite 20%. You never know. But we could do 10% to 15% in dollars.

Nigel Barnes:

Okay, great. Thanks, guys. And good luck for the coming weeks. We’ll get out on the road at some point and we’ll put together some sessions out across South Africa over the course of the next couple of months. And hopefully, we’ll see some of you there.

Kokkie, Ben, Barry, thanks for your time today. Thanks to you all for listening. We’ll catch up with you again soon.

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