In this episode, Kokkie Kooyman, manager of the Denker Global Financial Fund, provides insight into the impact of the Russia-Ukraine invasion on the global banking sector. He also speaks briefly about Berkshire Hathaway’s positioning, in the run up to the company’s annual shareholder meeting which Kokkie is attending in April. Listen to the episode or read the transcript below.
Thanks for joining me, Kokkie. I’m very glad that I caught you this morning because I’m sure our listeners are very keen to hear what you’ve got to say about what’s happening in the world at the moment. Could you talk us through the steps you took in the lead up to Russia’s invasion of Ukraine, in relation to the fund’s Russian holdings, and what you’ve done since?
Look, we had two main Russian holdings:
- Tinkoff Credit Services, which is one of the best fintech players in the world and one of the best disruptors. It’s followed everywhere in the world, in terms of what they’ve done in terms of their technology and growth.
- Sberbank, which is also an incredibly well managed bank but it has got a large government shareholding.
In the run up to the invasion we had a lot of discussions and, to be honest, we got it wrong. We didn’t really believe Putin would invade Ukraine. We thought a lot of the Crimea invasion, which was over in one or two days, and thought maybe he would just take Donetsk and one or two provinces which were rebel held. We did sell down Tinkoff and Sberbank in the run up, but it was more on valuation and a bit of fear about increasing tension but we didn’t envisage what was going to happen.
When the invasion started, we immediately sold the Sberbank shares we held. This was due to the real risks of sanctions and because it is a government-owned bank. Although it was already down 50% at that stage, it was still the best decision we made because it was sold down further to 90% or 95% down. It’s almost un-investable now. A lot of brokers are refusing to deal in Russian shares and I think the Russian position has just changed so dramatically in the world. It’s going to be isolated, so I think for a while it will not be possible to just own Russian shares. So, selling Sberbank was a good decision.
Tinkoff is listed in London with its main listing in Cyprus – we’ve held on to that. It is a half a percent position in the fund now. Look, we are debating this every day but at the moment you just don’t have clarity in terms of what Putin is going to do next. Does he use a nuclear option to just subdue Ukraine? There’s a small probability, but the nature of the man is such that he could. So you’re still really gambling.
What I must add is that the fund had fairly large, about 10%, exposure to the surrounding countries. Austria’s Erste Bank, which has got no Russian exposure and no Ukraine exposure, has sold down 20-25% since the invasion and it just doesn’t make sense. So we’ve gradually started buying Erste Bank. The same goes for companies like OTP in Hungary and Kruk in Poland – everything has been sold down (initially because markets were worried about how far Putin is going to go and also about what the impact of sanctions will be). Sanctions will certainly have an impact of Europe. They’ll mean higher oil and gas prices and higher inflation.
I want to come back to that, but you specifically focused there on the Eastern European region and the area surrounding Russia and the Ukraine. What has the impact on the banking sector been in other regions of the world?
Until yesterday when Jerome Powell, Fed Chairman, gave clear indications that they’ll continue hiking interest rates because of the fear of inflationary pressures, US banks were mixed. But yesterday they saw a sharp turn and we think that will continue because higher interest rates are very good for the banking sector. We have seen regional banks up 10% YTD. It’s actually quite strong, so they haven’t really faltered. The investment banks like JP Morgan, Goldman Sachs, Morgan Stanley and Citibank have actually been weak. They are all effectively global banks, have business in Eastern Europe and are more market driven. JP Morgan is now down 10% YTD whereas the regional banks are up. So, in essence: The US is generally stronger and investment banks weak but the real pain has been in the UK.
Amazingly UK was sold off quite a lot, like OneSavings (one of the ones we hold and were adding to yesterday). European banks took most of the brunt. Emerging market banks have actually been strong, mainly because of the market recognising that we are going to see higher commodity prices for quite a while. Especially countries like Indonesia (where the fund is invested), Mexico, Brazil and South Africa. The South Africa market has been strong simply because investors realise the impact of higher commodity prices on the currency and on the internal dynamics of things like tax collection and budget deficits. So emerging market banks have actually been doing well.
All investors, like ourselves, have been shocked and saddened by the humanitarian aspects of everything that’s been going on in the world and we send all our thoughts out to the people of Ukraine. But, purely from an investment perspective, are there buying opportunities in the banking sector?
Yeah. My favorite example at the moment is 1942 in the US. Six months after Pearl Harbor the market bottomed and from there on climbed. The war actually only ended with the surrender of Japan four years later – and there was so much suffering and there were so many deaths in that time. However, markets sadly get used to war and look past the suffering (as terrible as that sounds). War actually does create growth. It does create demand. And so, the market has sold off, especially in areas that have nothing to do with the war. For example, Erste Bank or ING – which is down 25% and simply on fear about inflation in Europe (which is actually good for the banks). So I think it’s definitely buying time.
So, it’s a time when you’ll be adding to some of these positions?
Certainly. I mean, there are two risks. One is that Putin does use a nuclear option, and that the US and Europe get dragged into the war. I just can’t see him being that silly but you can’t ignore it as an option. The second risk is oil prices escalating strongly (now on $114 depending on whether you use brent or not). So the inflationary pressures and the pressures on emerging markets especially are negative. India is negatively affected by higher oil prices, but areas like Japan and Europe are oil price insensitive – it’s not as important in their daily lives anymore but it can have an effect. If you look back to the 1970s when you had the oil crisis and it led to stagflation – bank shares and markets actually did well on that.
Thanks, Kokkie. Let’s change direction, because the title of this podcast is ‘Banks and Berkshire Hathaway’. You’re coming up on your 22nd trip to Omaha. You’ve almost been to more Berkshire Hathaway annual shareholder meetings than Warren Buffett himself! Could you give us the backdrop on Berkshire Hathaway? How are they positioned, how are you feeling going into the meeting and what are you expecting?
It’s so nice to think of that. It’s one event that we normally really enjoy.
Firstly, Berkshire Hathaway is very well positioned at the moment. Over the years Buffett has really changed the composition of the business and has almost 50% now driven by wind energy, energy, transport and railroads. So as the economy grows, you can imagine how geared the railroad business is – train and energy as well. Consumers are in very good shape and will benefit. And then he’s still got a large part in reinsurance which, like the reinsurers in our fund, are doing very well because insurers are passing on the costs of all the catastrophes onto higher premiums. He also has exposures to the market where he has done very well with his Apples, etc.
So Berkshire Hathaway reported good results recently and is actually still fairly defensive. So we’re looking forward to it. It’s always good to go and sit there for six hours and listen to Warren Buffett and Charlie Munger and their comments on world events. I’m especially looking forward to hearing what they have to say on the crypto and blockchain space.
Sure, I know that’s a space you’ve been you’ve been looking at closely. Well, please come back and report back to us. After the meeting we’ll do another podcast so you can share some of the insights and things you learnt at the meeting.
If anybody traveling to Omaha would like to catch up with Kokkie while there, please let us know. You can get in contact with me. Kokkie promises to buy you a beer. He also promises to bring some peanut brittle back for me.
Just bear in mind, Munger is 98 (I think he’s turning 98) and Buffett is turning 91 or 92. So there aren’t going to be too many annual shareholder meetings left with both gentlemen on stage.
Thanks for taking some time to chat today Kokkie, I know it’s a very busy period at the moment with what’s happening. Thanks for being on the podcast and travel safely to Omaha.
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