Episode Transcript
[00:00:00] Speaker A: Fundamentals, technicals, bull cases, bear cases. This is the reason why you are listening to magic markets, and it's what mo and I just love doing and it's all good and well really. But of course none of it matters if the world does not have the right energy infrastructure. With so many complexities related to the potential solutions and trade offs out there. Understanding the energy transition is a key part of any portfolio strategy because none of these companies exist anymore. A vacuum. Now, we are certainly not experts on this stuff, but luckily investechs, the current podcast series, brings together people who are at the forefront of the energy transition. There are ten great episodes hosted by Iman Ruperti and you can use episode ten as an excellent wrap up of the topics covered. Of course, if you like what you hear, then dive into the other nine episodes as well. Search for the current on your favourite podcast player or follow the link in in the show notes welcome to episode 198 of Magic Markets. I'm afraid that the most ghostly figure on the show this week is actually my good friend and partner Mohammed Nallah, who is sick. Not sounding so great, but he's going to do his best today. And as luck would have it, he bravely put his hand up and said, hey ghost, why don't we do something on sector rotations in the US? Which basically means that Mo is going to talk for like 75% of this podcast. And of course it's in a week where his voice is not great, but you know, it is what it is. We'll do our best. And rotations in the market are very interesting and if you listen carefully in the intro, you'll heard that there's an opportunity to learn about rotations in energy as well. And that is on Investex, the current podcast. So go and check it out. We put a link in the show notes Investec thinks that the magic markets audience will enjoy the quality of their content. I tend to agree. I think the Investec podcast is a very high quality on Investec focused radio, so go and have a listen if you're interested in South Africa's energy transition and mo, I'm very interested in us sector rotations and let's hope that your voice makes it because I'm quite bearish on your voice this week. I'm not going to lie.
[00:01:58] Speaker B: Indeed, ghosts again, our listeners might just have to put up with me sounding a little bit more gruff than usual, but that doesn't detract from the content.
[00:02:05] Speaker A: Well, let's hope not. Let's hope it doesn't detract from the content. We haven't done the show yet, mate. We don't know. We'll have to let the listeners decide. But you actually don't sound too bad.
[00:02:13] Speaker B: So, ghost, I mean, the reason I'm excited about this is that quite often people just look at the headline index, they look at the s and P 500 and they say, what's happening with the index? Is it actually shooting the lights out like it has been doing or not? I think we had our 45th record close on the s and P 500, but you've got a scratch beneath the surface. You've got to go and look at what are some of the underlying themes and trends that are starting to emerge. And quite often it's not as obvious as one would assume. And why is this important at this particular juncture is that the world's going through an inflection point. We've got the US Federal Reserve that's just cut its interest rates at the last meeting by 50 basis points. So arguably we're now in a synchronized global rate cutting cycle. What does that mean? What does it mean for the US economy? Which sectors are likely to outperform or underperform? And remember, we've got to superimpose on top of all of this, the US election. That's just a couple of weeks away. So, loss to digest, let's jump right in. And I'm going to use that intro you gave us to the Investec focus podcast talking about the energy transition to maybe start off with one very simple point. The one sector that has disappointed, if you look at it on a year to date basis, on a Q three basis, and even just on a twelve month basis, regardless of how you slice and dice it, has been energy. But remember, when we talk energy here, we're talking traditional fossil fuels, and in fact, over q three, that was the one sector that was actually negative versus the rest of the sectors on the S and P 500. So let's jump into that. Ghost, why am I looking at this? Is that it's very important to map the performance of the economy where we are in an economic cycle, against the sectoral performance in the market, simply because there seem to be these tried and tested themes that come through. And a good example of this would be in an era where inflation is falling, you could possibly see some pressure or underperformance come through in terms of consumer discretionary and just general consumer stocks. So has that actually played out? If we are going into a slow landing or a possible recession in the United States, does that actually play out in terms of the performance we're seeing in the market. So jumping into that Q three was actually remarkably fascinating. And the reason I say this is that. Take a guess, ghost. What were the two or three best performing sectors in the S and P 500 over Q three versus what we've seen thus far for the last, let's call it twelve months, then thereabouts.
[00:04:37] Speaker A: Well, I knew you were going to ask me that question, and I honestly don't know. I mean, property's been pretty good in South Africa, but I don't know if that's a Q three thing. I actually don't know how property has performed on the S and P, so I'm curious if that's one of them. Probably isn't. Maybe it is.
[00:04:50] Speaker B: I'm glad. And that's why I throw the question to you, is that I know you're going to come out with some nugget of wisdom. So, yes, property has actually done remarkably well in Q three. And it was the second best performing sub sector of the S and P 500, real estate stocks up around 16 and a half percent for Q three. Now, again, remember, this was property playing catch up. It had lagged the S and P 500 over the course of the last year. Then thereabouts, on a year to date basis, it's actually still the second worst performing asset class. So that Q three has really been property stocks starting to come back. They've been trying to make a recovery. And this stands to reason it makes sense. Remember, property stocks tend to trade as bond proxies. If you go into an interest rate decline cycle, a falling interest rate cycle, that tends to favor those bond proxies. And that is the reason why you actually saw real estate or property stocks really performing quite well in Q three. Remember, this was an era where the market saw the Fed move and they said, hey, we're going to start getting these massive cuts coming through. So maybe some of that optimism will obviously leak out with what we're seeing in the markets as we talk today. I know. You know, just this morning I saw us treasury yields were actually trending higher. That's going to hurt property stocks, but property. A good guess from you there, ghost, in terms of one of the top three performing sectors, going to give you the other two, because the top one was actually.
[00:06:08] Speaker A: Let me guess, one. Let me guess, one first. Let me guess one first. Technology. Is tech in there?
[00:06:14] Speaker B: Not on Q three. In fact, both technology. So remember, technology, you've got to spread into, you know, info tech and then the telecommunications or the communication sector that's where the likes of Google Meta, they come through there. So if you look at those, both of those actually underperforming the S and P 500 in Q three. And in fact let me ask you one more question since this is quite interactive, right, take a guess, what was the Q three performance on the S and P 500?
[00:06:42] Speaker A: Oh no, I genuinely have no idea. I'm so glad we have you on the show, mate. Cause I'll never look at the macro stuff like that. I'll just let my portfolio do its magic. Tell us, tell us what the Q three performance was on the S and P 500.
[00:06:51] Speaker B: Mid single digits, 5.5%.
[00:06:53] Speaker A: Not too bad for three months.
[00:06:55] Speaker B: Not fantastic either because it was weighed down by the technology stocks that were only up around one and a half percent. Let me give you the winners because technology definitely wasn't one of them. And this talks to the sector rotation story and why I'm so excited about this is I was speaking to some of the institutional clients I speak to on the macro stuff around a quarter ago. In fact that was earlier, it was probably two quarters. So I was about a quarter early and I said you've got to start positioning defensively. And when I say defensives, what comes to mind? Utilities. Utilities, the best performing sector on the S P 500, up 18 and a half percent in Q three. Now again you could argue like real estate, was it just playing catch up? But if you look at utilities on a year to date basis, it gets a podium spot. It's number three behind the two tech sectors I just mentioned. So utilities as a theme starting to come through. Yes, a lot of that return came through in Q three and on a twelve month basis, utilities again a podium spot in the number three spot just behind info tech and financials. So let's talk about financials because I think that's also an interesting sector. Remember, banks tend to do quite well in a higher interest rate environment. You've got the endowment effect. What's been surprising is despite this early indication of rate cuts, financials have continued to perform. Now there's a very good reason for this in the US is remember higher interest rates actually didn't come through with a lot of distress for us consumers simply because a lot of them locked in 30 year mortgages at record low rates. When we had this period of higher interest rates all it meant was that activity in the housing market slowed down to zero, but people were then just staying in their houses. They didn't really feel the impact in terms of that wealth effect. So that stands to reason as to why finance stocks have actually done quite well. In fact, we've just entered into the Q three reporting season. JP Morgan, an interesting set of results. The stock had rallied 10% when they put out results. And why do I say it's interesting, is that they actually had revenue come down, but it beat market expectations. And that is the we'll get into earnings shortly goes. But it's why you've got to pay attention to what is the market actually pricing. And before we even get into a view on earnings and what's happening in that space, I just want to round out the sector rotation story. Because what I generally tend to do is I map this every single quarter, and I've got kind of a relative rotation graph that looks at which sectors are actually losing momentum, which sectors are lagging, which are then gaining momentum, or maintaining momentum. So if you can picture a four quadrant approach, and that is the reason why I early, around two quarters ago, you started to see some interesting things come through in the utility space. And that is the reason why that was a call that I had made around two quarters ago, thankfully came through quite strongly in Q three. Now, it's not all good news, because again, if I say you've got to be defensive, well, what else comes up with defensive? You look at things like healthcare, and healthcare is what I want to get into. Because again, over the last twelve months, other than energy, which I mentioned in the intro, healthcare has been the second worst performing sector on the S and P 500. Over Q three, it managed to lift its head just a little bit marginally. And I mean, by ten basis points, outperforming the S and P 500. So why has healthcare done so poorly in this overall defensive sector rotation that we're seeing? And the reason for it is that healthcare is one of those sectors that has a very direct bearing from the outcome of the us elections. We've got two candidates, we've got Harris, you've got Trump. And depending on which way the election goes, and it's really a coin flip at this point in time, that's going to favor different players within the healthcare sector. And I'll tell you what I mean when I say this is the Harris administration will likely favor players that operate and service the lower income groups, whereas the Trump administration generally focuses more on the retirees. And you might actually see that come through in pharmaceutical firms and so forth. So the mix of healthcare is very important and tied to the election outcome. I'm still optimistic on a sector basis that over the next quarter or two, you should start to see that come through as a defensive theme as well. But pay attention, it hasn't been fantastic thus far.
[00:11:00] Speaker A: You inspired me to actually log in on my stockbroking account and quickly have a look at next era energy, which is a utility that we covered in our premium research at a point in time. And based on the research we did, I went and bought the thing. And yeah, happy to report that it's looking very nicely up over 50% basically. And that's in dollars. That's the beauty of the us market is you can go and invest in things like utilities. You actually just can't do that in South Africa. You can't go and invest in Eskom even if you wanted to, which you probably don't. And the renewable stuff is really hard to access. There's not a lot in the listed space that gives you access to that kind of thing. A lot of it's happening as private deals funded by really big institutions in South Africa and these public private partnerships and everything else. It's helping with that energy transition. But it's not necessarily something you can easily invest in as sort of just the retail investor. Us market is different to that. You can go and buy these utilities, you can go and take a view on which state is that utility in and how fast is that population growing and how much more electricity are they using as people's needs actually go up. And what does that mean for utilization of that infrastructure, how much renewable stuff is coming on stream there and at what sort of margin. I think next era was one of my favorite companies actually that we covered on magic markets premium because I would never have even thought to look at a utility until you said to me, actually it's a big deal up here. Let's have a look. And that's why I always appreciate the fact that we get to do this together because that us lens is different to a south african lens. And even the sector rotations I suppose are going to look a bit different and they'll be affected by different things. The US market very affected by elections at the moment. The south african market. The China story has been pretty important recently with stimulus there. Yes, it impacts a lot of those consumer discretionary stocks you mentioned as well. I see my Lululemon shares are not quite as revolting as they were. That's probably because of China. But I think in South Africa it has an even bigger impact. So the point of these rotations and these quarterly moves and year to date moves, etcetera, sector performance will vary depending where you look in the world, indeed, ghost.
[00:13:03] Speaker B: I mean, it's such an important point that you raise. I'm glad you got the next era energy after we had done it in magic markets premium. And again, it's testament to the fact that I'm not just talking out of my hat. I mean, that was really the product of the fact that I was looking at utilities as a sector. I liked it. And I said, why don't we do a utility as one of our bottoms up stock research pieces in magic markets premium? So that theme has come through quite strongly. The other thing on Nextera, just why we're talking about it, it's so important, is I was a little bit nervous with the hurricanes that have come through that really hit Florida quite hard. I was concerned because next era has a very large regional exposure to Florida. So you've got to pay attention to some of those nuances, just in terms of what are the geographical exposures, what is the mix in terms of conventional energy versus clean? Next era really coming through as a good clean energy play. And again, the US election starts to feature here because players that have a larger weighting towards clean energy would arguably do well under a Harris administration, whereas the Trump administration would probably favor more of the fossil fuel industry. So pay attention to some of those nuances. I know it's oversimplifying it because at the end of the day, clean energy is a theme. It is a mega trend that we're not going to get away from. So what you really want in that space is sometimes you can look at the sectoral rotations as a tactical play, but there are mega trends which dictate a structural play. And I certainly think energy or clean energy is one of those structural plays. Now, you mentioned China because China's so important. So let's talk about China, because if you have a look at the recent results that were out of LVMH, for example, luxury groups, it's not in the S and P 500, it's a european listed company. LVMH is really citing tough trading conditions in China. And that is a concern because at the end of the day, China was a big driver of some of those luxury returns. Again, it's a consumer discretionary stock. So that plays into that sectoral rotation theme that we're talking about. Yes. Over Q three, consumer staples and discretionary both outperformed the overall index. Like I say, the info tech, the tech stocks really weighed down the overall index, so they came through, but they weren't the stand out performers. So just pay attention to what's happening in that space. I want to raise one last point on the sector rotation, and it might be early as well because I think the utilities trade has really come through quite strongly. It's looking as though positioning has switched quite a bit towards defensive. It's actually two points, and the first point I'm going to make is that as you see a broadening of market leadership. Remember the big gripe a quarter two quarters ago was that the stock rally was really just led by a handful of tech stocks at extended valuation multiples. And that gets you concerned. As the rally broadens out towards a wider subset of stocks, it doesn't take away the risk of a correction in markets. I think that risk is still there. You've got to pay attention to it, because usually as you run up to the elections, it's bullish. Post elections, you see some of that froth come out of the markets just in general. That ties in with seasonality trends you're seeing on the S and P 500 as well as on the VIX. So I would be okay for November, but start to get cautious. December, January, February, wait for that froth to come out and then reassess. The point I wanted to raise, though, on a sector basis that might be early, is pay attention to resources. Pay attention to the material sector. It's not resources on the S and P 500, it's called materials. Pay attention to that, because if you see this rebound come through in terms of China, first point, the chinese mix of growth is changing. It's not the old resource led growth model. So yes, I'll take that as it's a potential tailwind, but not necessarily the same tailwind that you had seen during the commodity super cycle. But there are some tentative signs that materials or resources in general are trying to move out of that laggard sector of that quadrant approach that I look at, and it's starting to look as though some of that momentum might want to actually emerge. Q three, not a bad quarter. It was around 9% for materials, not quite a podium spot. It was number five in terms of the ranking order. But pay attention if you're looking for the next trend, I think commodities, look at the CRB index, look at copper. As a south african investor, this has a material bearing because South Africa is still viewed as a commodity heavy economy. Correctly or incorrectly, that that's a separate point. The fact of the matter is, if you actually see a rally in commodity prices, that stands to reason that that might be bullish. For the rand, it might be bullish for some sectors down in South Africa, you don't get great sectoral breakdown in South Africa, which is why this discussion is largely around the S and P, around us markets. But that is the next sector that I'm looking at with quite a degree of interest. And then energy, we've spoken about it. Energy has been this laggard. If you had told me two years ago that the Middle east was going to be on fire and that you'd actually be having Brent crude prices down in the seventies, I would have probably had an 80 or a 90 handle on that. So it has been a laggard. I think there's some big risks there. And I would say maybe as a tail risk, not a core position, but as a tail risk, I'd start looking at energy again. It is firmly in the laggard quadrant, so it's not the sector rotation story there, rather than some geopolitical element that might come through. That's what I'm paying attention to.
[00:18:02] Speaker A: Ghost yeah, and I think a nice place to maybe start to bring the show to a close is just to say, you know, this quarterly work that you're doing is super important and it's for a lot of actually institutional clients of yours and everything else. For me personally, I don't sort of sit and say, hey, you know, which sector did well this quarter and what should I do and should I churn and everything else from time to time I'll rotate in my tax free savings account because I can do it without incurring the tax. And that's obviously an ETF play. But generally speaking, I actually try not to watch too closely because it really does encourage churn. And I guess that's where I actually wanted to leave. This is, it's really important to know what's going on out there, to understand how the macroeconomics are playing out and the geopolitics, etcetera. But a lot of the old advice of buy good companies and leave them alone also still applies. I mean, I could very easily have panicked about Lululemon and, you know, with reason, because I bought after what was already a very large sell down, and then the thing just kept going wrong. It literally was on its way to becoming more lemon and less lulu, and I could easily have panicked and just locked in a big loss. You know, I'm still in the red, but not by much anymore, because the china stimulus story is starting to improve the outlook there. And it's because I believe at its core, Lululemon is a good company. And after the share price had dropped so much. It was something that I was interested in finally buying, having avoided it at such frothy levels. So this show is not designed to encourage you to go and churn your portfolio every three months. Not at all. It's about what's happened in the last three months, what is happening in those rotations. When you're looking for opportunities to deploy more capital, where are some of the places that you might want to look?
[00:19:36] Speaker B: Yeah, indeed. Ghost, I think that's so important is again, I use this in the institutional space for a lot of clients that make tactical tilts to their portfolio. They might want to be long a certain sector for a couple of quarters and then move that around. It does work quite well in the institutional space, in the more retail space, and again, this is not ever advice, but in the more retail space, how I use this personally is really when deploying new capital, as you correctly say, it doesn't negate the need to go and do some proper bottoms up research. If you're buying individual stocks, if you are someone that actually goes and trades on ETF's and you're deploying new capital, you might want to park it in a particular sector as a theme, rides out and then move it into your core portfolio. Maybe just, you know, buying the beta, buying the S and P 500 over time, but that's how I'm using it. The point I want to land on is we've just entered into the earnings season Q three earnings season, very busy week as we are recording this. And just a quick look, a two liner look effectively at, you know, what's the revenue trend at the moment. If you're looking at that, generally, you're looking at around a 4.7% blended revenue growth rate for the S P 500. And if you're looking at results out thus far, revenue beats around 64% versus earnings beats that are around 79%. So pay attention to that trend as well, because it does mean that, you know, if revenues are coming through, but the beats are not as aggressive as you're getting on the earning side of things. It might play into that soft landing macro thesis, and that is how I square the circle here, is that you've got to blend the top down approach, the bottoms up approach, look at what's happening on earnings. Look at that on a sector basis. That's an entirely different show, right? But look at that on a sector basis and see, is this talking to, is the macro theme talking to what we're seeing on the ground? If not, you've got to go and ask the questions why? And quite often, that is what yields the insights that will really serve you well going into the next quarter. But unfortunately, that's where we've got to leave it this week. We hope you've enjoyed the show despite my croaky voice. Hit us up on social media and let us know. It's at Magicmarketspod, at Finance Ghost, and at Mohamed Nala, all on X or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this. Until next week, same time, same place. Thanks and cheers.
[00:21:43] Speaker A: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
