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Brexit, trade wars provide cover for out-of-focus Investec

By David Whitehouse
Posted on Tuesday, 1 October 2019 12:35

Investec is backing too many horses say analysts, who would rather see them refocus their efforts. Reuters/Andrew Boyers

Investec is giving the obvious excuses of Brexit and the US-China trade war for its under-performance. The truth is that the company’s diversification strategy has failed to work.

The group, which is listed in London and Johannesburg, warned on September 20 that earnings per share were likely to drop by between 15% and 18% for the six months to the end of September. Those results will be published on November 21.

  • “When you cite something that people know about, it makes it easier for the company,” argues Steven Jon Kaplan, CEO of True Contrarian Investments in New Jersey.

Kaplan and his clients are indirect holders of Investec stock through holdings in the EZA exchange-traded fund, which invests in South African companies.

  • Investec needs a clearer focus, Kaplan argues. “Investors like to know what they are investing in,” but that, he says, is no longer the case at Investec.
  • Acquisitions in recent years show no clear pattern or coordination, he argues.
  • The firm says that it operates in three principal markets: the UK and Europe, South Africa and Asia/Australia as well as “certain other countries” – in other words, pretty much anywhere.


Investec says it’s in the process of “simplifying and focusing the business in pursuit of disciplined growth over the long term”.

  • It has closed Click & Invest, part of its UK wealth management business, its private equity business in Hong Kong, sold Irish Wealth & Investment and restructured its Irish branch.

The group blames Brexit and trade wars for an expected significant drop in earnings at UK specialist banking.

As in March, it also blames the depreciation of the rand against the pound as a factor depressing earnings in sterling. But if Britain had not been going around in circles over Brexit, the pound would be much higher versus the rand – and Investec’s results even lower in sterling terms.

Global cyclical factors are the real reason behind the Investec profit warning, Kaplan says.

  • It’s natural that there should be a slowdown after a long period of global economic expansion, he argues.
  • “Companies say what people will want to hear. Cyclicality is harder for people to grasp.”
  • Investec, Kaplan argues, should position itself for a global resumption of inflation.
  • Negative interest rates, he says, are set to trigger a round of commodity inflation. Investec would do better to invest more in commodities, and real estate, he argues.

The company is in the process of demerging its asset-management business, which will be listed separately in London. The spin-off is due to be completed in the first quarter of 2020.

But, Kaplan argues, banking, rather than asset management, should have been spun off.

  • Investec says that asset management adjusted operating profit will increase, but earnings on the same measure will decline for banking and wealth.
  • “It’s easier to sell something popular,” Kaplan says. “But the better thing would be to sell the underperforming business.”
  • Low or negative interest rates, he says, mean that the banking industry globally faces a tough outlook.

Bottom Line: The piecemeal closures to date are not enough to create a clear identity and mission for Investec.

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