Episode Transcript
[00:00:00] Speaker A: The markets. We just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts, the Finance Ghost and Mohammed Nala.
[00:00:12] Speaker B: Together we have more than 25 years of combined experience in the markets.
[00:00:16] Speaker A: For those looking to take their market and business knowledge to the next level, we offer Magic Markets Premium. Our recent shows have included technology giants like Amazon and Microsoft, as well as a smaller tech play like Intuit. We've also covered content and streaming group Disney as well as retailer Walmart. To add to the retail insights, we recently covered Lululemon as well and this is just a taste of what's available. Visit magic-markets.com today and go Premium to get these insights. Welcome to episode 206 of Magic Markets. It's the first one of 2025. Thank you for joining us in a new year and for making us part of another year in the markets. And to those who are new, maybe you've just found us. Thank you so much for joining us. I don't think we expect you to go back to 205 episodes, so treat this as a nice fresh start. And do consider Magic Markets Premium if you haven't actually looked at it before, because there is a good example where the library going backwards is actually really helpful on some of the stocks we've covered. We've actually just finished recording one on Nike, which is looking more and more and more interesting. But we'll leave that for our Premium subscribers. Because Mo, in this show we are going to let you wax lyrical about your favorite topic, which is macroeconomics and geopolitics and what's going on in the world. And we'll talk a little bit about South Africa as well.
[00:01:32] Speaker B: Indeed. Happy New Year's, Ghost. And to our listeners, welcome back to Magic Markets. Ghost. I'm not going to let you get off that easily. You're not going to let me just wax lyrical about macro and sit all quiet during this podcast. I think the best thing about the first show of a year is that you've got the entire year ahead of you. Now I always laugh because it's like the calendar just switches over. It's the same issues that we were discussing now in the latter part of last year, they just carry forward. But again, just to highlight how the market psyche works on this right, if you looked at last week's equity performance in the U.S. it was a tale of two years because the week straddled both calendar years. So you ran into the end of 2024 and you saw massive selling pressure into that date, effectively the 31st of December. And this was on the back of a lot of profit taking, certainly in the tech sector. I mean, that sector's run so hot. So you saw those names sell off really, really hard. And then guess what, the clock resets, you start 2025 and those same names bounced on the very next trading day. So that's certainly interesting. This week we've got a disrupted trading week in the US because markets are closed on Thursday, effectively to commemorate late President Jimmy Carter in the us. So equity markets have a long history of mourning former US presidents when they pass. So markets will be closed on Thursday. But again, this gives us a great opportunity to just look at the year ahead. And what are some of those issues that we carry forward into 2025 from 2024? And there is such a long list, Ghost. I mean, just on the economic side, I'm going to jump right in because we've had the US economy that's been running hotter than other economies globally. We've had China that's come under a lot of pressure. You saw stimulus measures from China and that battle, let's call it that, because that's really what it is, that battle between China and the US. Guess what? That's going to frame 2025. We ended off 2024 on a discussion of a Trump administration coming in. Well, guess what? Officially confirmed just yesterday by Congress, we will have the inauguration. But signature initiatives of the Trump administration were this. Tariffs, right? He's talking about tariffs on China. Then he's talking about tariffs on Mexico and Canada. He's talking about risks of tariffs on brics countries. So what does this all mean? And right now, if I just digest the tariffs as one single point, there's a lot of, let's call it disagreement in the market in terms of whether the tariffs are just being used as a negotiation tactic and whether Trump will actually back down on that. Just this morning I saw some headlines saying the market's recalibrating and they believe that the stance on tariffs are not going to be that harsh. But in the same vein, you mentioned this to me just before we started recording Ghost. We've actually had the US designate Tencent as a military linked organization from China. So this telling me that it might not be tariffs, but the risk of trade wars between China and the US haven't dissipated. Now I want to move from that directly into what are some of the impacts? Because first and foremost, tariffs are not the be all and end all of solving the US's economic distress and some of the economic problems. Right, I say distress. They've actually been outperforming some of the world economies. But tariffs are known to be inflationary. I guess the two periods in history where tariffs were used, one of them wasn't inflationary. But that's also in a world that wasn't as interconnected and where supply chains weren't as reliant on foreign sourced goods. Guess what? The last instance where we actually saw tariffs being inflationary was very similar to what we see today. And that's a world that is increasingly reliant on global supply chains. So my concern on tariffs is that they actually choke off the US Federal Reserve's ability to provide lower rates because if they are inflationary, it means rates are not going to come off as sharply as markets have predicted. Guess what? Markets have recalibrated on that already. Go and look at the US 10 year. You've seen how that has actually trended significantly higher. And this is because the market is now only pricing in one or two 25 basis point cuts from the Fed in 2025. This has really significant impact in terms of how we value equities and how that filters through into equity valuations that arguably are looking a bit stretched. If you look at specifically the tech sector in the US maybe the rest of the US markets not as frothy, but I think that gives us a decent backdrop. I'm going to pause there Ghost, because I want to hear your view on just some of these, these tariffs, maybe that China story on Tencent, that's something that's relevant and then we can dig into some of the other issues.
[00:05:56] Speaker A: Yeah, I mean, I'll tell you what Mo, for all the noise of the last five years and goodness knows there's been a lot, right? So five years ago was January 2020.
I mean, my memory of exactly the timeline of COVID is a bit hazy. I remember it got, you know, know the lockdowns were March in South Africa, so the virus was around for a couple of months before that. I honestly can't exactly recall. But five years ago was actually, it feels like yesterday, but it was a full five years ago. And in that time we've had the pandemic. You know, we've all had stuff going on in our personal lives, we've had crazy stuff going on in the markets. We've had a whole story and there were a million reasons along the way to think, oh, I shouldn't be in equities or you know, maybe I shouldn't be in offshore equities because they look expensive. Expensive over five years. I just had a look now. So the Satrix 40 ETF. That's the quintessential top 40 ETF locally, you know. And those who follow Ghostmail will know that I work a lot with Satch, so it's nice to quote their products on this. Satch40 ETF up now? Actually, no, but you always do this to me. You guess over five years total. Not total return, but return. Capital return on the Satrix 40 ETF. Don't Google. I can see you typing.
[00:07:06] Speaker B: I'm not typing. I'm not.
[00:07:07] Speaker A: Statrix40 ETF. He does find. He doesn't know the code. Patrick says in my old memory bank.
[00:07:11] Speaker B: It'S the JSE top 40 effectively. Right. I'm gonna guess like 50 then. Thereabouts easily.
[00:07:16] Speaker A: Now you definitely googled it. 48. That was either the best guess of your life or you were doing some scaly. It was a good guess anyway.
S P500 over five years.
[00:07:27] Speaker B: More than that.
80.
[00:07:29] Speaker A: Yes, more than that. How much more than that? 153. So this is now in Rand because now I'm quoting the Satrix S P500 feeders. So this is something you can buy on the Jac.
[00:07:39] Speaker B: That's why I got it wrong, Ghost. It's the exchange rate.
[00:07:42] Speaker A: There we go. There we go. I don't know. I'd have to go check that moment. I'll give you credit there. NASDAQ 100 feeder. So S&P was 153%. Top 40 was 48%. Where do you think the NASDAQ is?
[00:07:54] Speaker B: Oh boy. Oh boy. No, the NASDAQ's going to be like 200%, let's guess.
[00:07:59] Speaker A: Yeah, 200. 217%. Now that's return over five years. That's obviously not annual. But it just shows that over that period, you know, you had a million reasons to think all of these political issues overseas, et cetera, et cetera. There's definitely something to be said for just staying invested, particularly if it's a longer term vibe that you're going for in the markets. And you know, we all have that section of our portfolio that is just that long term, keep growing, keep doing your thing. And then obviously there's tactical trading around that. Now what is particularly interesting is obviously last year was this very, you know, this great year for South Africa. Now there's lots of bullishness around South Africa and there's lots of reasons to worry about the US and you've mentioned so Much stuff there around tariffs and uncertainty and geopolitics and the whole story. Last year was this great year, right, for South Africa. We had the gnu, we had this political improvement, load shedding's gone. It's all lovely in the last year. I won't ask you to guess, I'll just give you the numbers. The Satrix 40 ETF over 12 months, 12%.
Okay. You know, it's for the JSE, it's a good year sadly. But S&P 529% NASDAQ 132% so interesting how much more alignment there is here between the S and P and the NASDAQ over 12 months. Certainly much more than over five years. But they still absolutely obliterated the local market. And this was one of the best years the local market has had in memory. It's all that anyone can talk about. And I guess the point here is that even with all this geopolitical risk and everything in the US and even with the extended valuations, there's a good reason why in Magic Markets Premium we only do global stocks because people, or our view at least is especially South Africans don't actually spend enough time considering their global opportunity set. I'm not sure if it's familiarity bias. You know, people want to buy companies that they potentially know about, but we all know about Microsoft and Apple, et cetera, et cetera. And yes, the short term volatility can get quite nasty because you also get hit by the Rand, et cetera. But over the long term the results are in and it's quite clear where the win has been. So I thought, you know, with all of the geopolitical stuff we're going to think about and going into this year, mo, it's actually really good to just remember that whilst we can talk about these offshore risks and it's very important and we have to, you know, Even in the JSE's best year per se, it got smashed by the offshore alternatives.
[00:10:21] Speaker B: I think that's very important. And I mean ghost, I'm going to unpack a couple of things there, right? I mean as you indicated, the S and P gave us like a high, high 20s return last year, almost 30%. It's the first time we've had a back to back greater than 20% return on US markets since 1998. Now again, post 1998, we then had.com, we had a whole bunch of, you know, the LTCM crisis, all of this stuff happened. So I think when markets rally that hard, it certainly gives you a Backdrop where the risks are higher. Going back to your point on South Africa versus offshore, I mean just based on the numbers you gave me over the last five years, just the currency depreciation alone contributed around 30% worth of your return. So again, that is testament to the fact that yes, I know it's not a one way ticket on the currency, on anything for that matter, but the risks in South Africa generally tend to be higher. You've got higher inflation, you've got the interest rate differential. And that over time tends to play towards Rand weakness that comes through. I'm certainly not saying, hey, you know what, the Rand's going to get weaker this year. But I'm just saying that contributes to the longer term narrative of offshore versus local. Then the third point I want to raise, Ghost, is that you've indicated how, what is it like 15% on the JSE top 40 this year? That's a great return then thereabouts.
[00:11:35] Speaker A: 12. 12. Don't get too excited there. My 12, I was excited. Right.
[00:11:38] Speaker B: Let's maybe say it's 50 with dividends. Yeah, it's 15 with dividends. Right. But if you look at a sector level, right. I think listed property was the best performing sector in South African markets over the last year. And that makes sense. You know, you've had this normalization in interest rates. You know, it came off a very low base. So yes, I'll take that as well. But it was both listed property as well as financial. Now remember financials, banks effectively benefiting from the endowment effect of rates having been a little bit sticky, a little bit higher for a longer period of time. The point I want to land on here, Ghost, is that you've got to also be sensitive. Yes, you can buy an index, you can buy the top 40, you can buy the S and P. You mentioned how the alignment between the NASDAQ and the S and P stood out for you over the last year. That makes sense. Simply because of the weighting of some of those tech stocks in the S and P. The S and P is becoming a quasi NASDAQ proxy. Right. I mean that's really what's happening there. And that's why those have aligned so strongly over the last year. But when that decouples, you know. Yes, those weightings will eventually fall. And when those weightings, let's assume they fall, when those weightings fall, that divergence will recur. The point I wanted to land on is that be sensitive to the sectors that you invest in. In South Africa, it's a lot harder globally. It's not that difficult. You get sector specific ETFs. And a lot of the work that I do on the macro front tends to focus on what is the sectoral allocation that we should be getting right over the course of this next year. And something that's interesting that, I mean, I've been. I was bullish on Staples and Utilities that worked until we had the. Those have kind of come off a little bit now. But looking forward into the year ahead. Something I said last year, this time to a lot of people, I may have even said it on the show, is that be wary of the latest fad in the markets. I remember last year, this time it was the GLP1 stocks, right? Ozempic. That was the craze. Go and look at all of those stocks. Lilly, Novo Nordisk, go look at what's happened to them. Because I said be wary of the fad. The fads actually come off. And my concern is I don't know whether some of the, the optimism that's been priced into stocks like in video, around this AI trend, whether that's a fad or whether that's structural. And part of me wants to say, yes, it's structural. AI is here to stay. But I think there's a lot of froth baked into those share prices. What I'll tell you where I think there is potentially opportunities we always say sell the shovels in the gold rush is whether AI is a fad or not. Increasing use of AI, just as a. As a technology platform is going to mean increasing energy consumption. And I think that's something that not a lot of people are speaking about. I've been bullish on the energy sector. It sold off reasonably. I've been bullish on the energy sector certainly over the last quarter. Then thereabouts, I have taken a little bit of pain, but it started to turn now and again. This can range all the way from alternatives we've discussed. Companies like Nextera, for example, Magic Markets Premium. They were heavy on the renewables. You can look at nuclear, you know, nuclear's run really, really hard. So I'd be cautious. There's. But what about traditional fossil fuels? I think those have been overlooked. Some of those oil companies, those energy companies, those have looked interesting to me. They're giving you decent dividend yields. And if we actually just see some stabilization in terms of supply, we've already seen OPEC managing some of their production capacity there. And you see an uptick in demand. And where will that uptick in demand come from? Well, again, you've got China throwing some stimulus to support their economy. You've got the US that's going to probably look at, you know, being being a lot more aggressive on the tariffs. Maybe that chokes off some growth. I'm not so convinced. Maybe we actually see some productivity gains to offset that. But in aggregate, I think the energy sector is one that I'm certainly going to be looking at with a lot of interest. The last point I want to land on, then I'm going to hand back to you, Ghost. Is China's future is intrinsically linked to South Africa and so is the story around resources and commodities. Now we know China's transitioning from, you know, that effectively very resource heavy growth model into a more services growth model. But the question mark for me is there's a lot of infrastructure overhang, both in the developed world and then also still coming out of China. And so the question mark for me is I haven't quite landed on what is the outlook for commodities. And I'm talking base metals here. We've seen precious. I mean gold was a fantastic year last year. I've loved gold for a long time, so I'm happy to see that. But what is the story? Ghost, I'd love to hear your view. What is your view on the outlook for commodities? Because that has such a significant bearing on, on South African exports and certainly on companies of some significance listed down in South Africa.
[00:15:55] Speaker A: Yeah, I mean what obviously affects South Africa? So gold is a big one. And I mean gold had a spectacular year last year. If inflationary policies continue, maybe gold will do well. Mo, I think you know a lot more about gold than I do. Gold has hurt me before, so I actually just try and stay away from the thing. If it can't generate cash flows, I kind of don't want it is my new approach to life. I mean platinum, good luck. They Everyone talks about how, you know, the electric car adoption is maybe going a bit slower than people want it to. That may well be true, but sales of ICE vehicles, new ICE vehicles in general, is under pressure. So, you know, EVs might not be going as fast as EV pundits would like, but for platinum enthusiasts, it's not like the internal combustion engine cars are exactly flying off the shelf either. So that's not ideal. And then stuff like steel, you know, that's all China like we just saw. Arselo Mattel I'm not going to go through it all because most people listening to this podcast probably have seen the headlines. They were everywhere in South Africa this week. But Arsenal Metal is shutting down its Lon's business in Frunigen and Newcastle and it's a complete disaster. From a jobs perspective, it really reflects the oversupply of Chinese steel, it reflects the slowdown in Chinese demand, it reflects the effect that has on global economies. So I generally don't actually play around too much in the commodity side, to be honest, because I just think it's outside of what I consider to be an area where I can understand kind of what's going on. You know, I'd rather look at. You raised that great point earlier around where frothiness is baked into share prices and the one that we've talked about so many times, of course, is good old Tesla. Tesla is a fantastic one year share price chart. So over one year Tesla is up 66%. Okay, which is theoretically amazing. Now Tesla just reported its first ever drop in annual numbers in terms of, I think it was vehicle production, it might have been deliveries, it doesn't matter. The point is a company trading at this valuation should not be going backwards. And if you go and look at the share price chart, all the magic happened in the aftermath of the US election. Why? Because Elon Musk is super close to Donald Trump and that's enough for punters on the stock to go. Well, this is going to end, you know, well for me, somewhere, somehow I'm just going to get behind Musk all over again. I've gotta tell you for the brave, that Tesla share price is looking mighty shortable. It has come off already. It's got a very nice, I mean you're the technicals guy. Mo, go and have a look at it. Go see if you're brave enough to short Tesla up at $400. Back in September it was trading, let's see, October it was $220. So that is a long way down that could well play out. So for those who enjoy a good little tactical short, Tesla is very, very, very, very brave to short. But there is opportunity there. You know the other one that got so much attention last year, in some ways I'm quite frustrated to have missed it actually, because I liked what they were doing around selling AI. But the run it's had in the aftermath of the election, another one trading on the sort of Trump personality trade and people close to him is of course Palantir. So that is an interesting one. You know, the geeky Lord of the Rings fans inside us all get excited about this one. Palantir is up 332% in the past year, dwarfing Tesla properly and is also starting to roll over. So some of this Trump energy may be coming through in these share prices dropping. And this is where you need to be careful of offshore markets, because they can be absolutely insane. You can see some really crazy percentage moves. We don't really have the liquidity on the JSE to see big companies moving like this, whereas in the US we do. And that's where you need to be careful. If you're going to go and just buy AN S&P 500 index or NASDAQ 100 index, then you don't need to stress as much about exactly where you are in the cycle. Do the whole dollar cost averaging story buy over time. But if you're going to put your money behind some of the frothy stuff that could well be a fad, then you need to be very, very careful because you can lose half your money buying one of the biggest companies in the world and you can look back and think, what happened? I bought the hype. Well, that's what happened is you bought the hype, right?
[00:19:58] Speaker B: Indeed, Ghost. I mean, it's why I tend to avoid stocks that have this very high social media score. You know, you see everyone on social media talking about Palantir. I'm going to avoid that. Tesla is the quintessential social media stock because it's tied to Elon Musk, who in and of himself is a meme nowadays. I mean, really, the question. I love the Optimus spot, right? I'm so super keen about seeing what happens in robotics over the course of the next five to 10 years. But that doesn't mean I want to go and buy Tesla stock at current levels. To your point, Ghost, even looking at the S&P 500, just two last points I want to land before you wrap up the show, right? The first is that we're now entering into, I guess, the next earnings season in the U.S. and overall, in terms of companies that have issued guidance, quarterly earnings per share guidance for the fourth quarter, there's only about 106 of these out of the S&P 500. So it's not the largest sample set, but it certainly is indicative. Of those, 71 have issued negative earnings guidance and only 35 have issued positive earnings guidance. So this again showing you that, yes, there's a risk of a lot of froth being priced into a lot of these stocks out there. And I think against the backdrop of, like I say, rates not being cut as aggressively in the us, I think you'd probably be wise to look at other Geographies where valuations aren't as frothy. And Europe has been the big disappointment for me and there's lots of challenges in Europe, I'm not going to even go into that. But the uk, that's looking a little bit more interesting. So look at that. When you look at Asia, we know that Chinese valuations are really super low, but guess what, Japanese stocks have also been quite interesting off late. So I'm just saying the world is a big place and even if you want to play it at a headline index level, look beyond the S&P 500 and the NASDAQ, go and have a look at the euro stocks, go and have a look at the ftse, go and have a look at the Nikkei, because these all present some viable alternatives at a headline level. Some of those valuations in those geographies not looking very stretched. The last point I wanted to land on is very interesting and again, it's probably the subject of another show, but it's something that a lot of people may have missed is that late last year, in fact, in November, China went ahead and issued its first US dollar sovereign bond in three years. And they listed it in, wait for it, Saudi Arabia, because we know their deep pockets in the Gulf, Saudi Arabia, as the venue, and they attracted $40 billion worth of orders for only $2 billion worth of bonds. So that is massively oversubscribed. The last interesting point to that is that these were issued at yields only slightly higher than US Treasuries. Now, the reason I raised this is because we've got this battle, as I started out, this entire segment between China and the us, China is becoming a lot more assertive in capital markets, they're becoming a lot more assertive militarily, they're becoming a lot more assertive on the entire geopolitical spectrum. And. And if China has the ability to go and tap international capital markets at the cost of funding that effectively the US government is borrowing at, they can then use that money to spur economic growth and their stimulus program. So I'm saying don't write of China, pay attention to how relevant China is becoming in the global construct and ignore looking at this with a Western lens. We get a lot of this in North America, we look at this with a very Western lens. In South Africa, maybe it's a little bit more balanced. China is not the boogeyman, they're just another player. And as an investor, you've got to look at this critically and see that China has a lot of ammo in the tank. Even if the US pushes back quite hard against them, they've got some tricks up their sleeve. And that bond issuance, that's one that was certainly very interesting for me.
[00:23:29] Speaker A: Ghost yeah, it's super interesting. Look, you'll never convince me of a structural lon Europe, I can tell you that much. Mo There'll be lots that I might do in the market this year, but loan Euro stocks is definitely not going to be on the list. I'm so bearish on that automotive industry, it's frightening. Last point from me and I'll tell you what I did buy today was I bought the little gift from the market. Well, I think it's a gift of the dip in naspas and process, so we'll see what happens there. That's off the back of this whole, you know, 10 Cent is a military company situation that the US seems to have decided is a reality. That just seems ridiculous to me and I really love what fabric of Luiz is doing that process. At some point we can cover that in a future show. I think. For now that does it as a nice intro for 2025. We hope we've got you excited about the markets this year. Go and check out Magic Markets Premium if you haven't done so already. And to our existing subscribers in Premium, thanks for making time for this show as well. We certainly look forward to bringing you another year of really solid stock research and our ideas and hopefully most of them work out well for us. No one can get it right every time, of course, especially not us. But Mo, what a fun start to the year and we look forward to another year of doing this and enjoying the markets right?
[00:24:38] Speaker B: Indeed, Ghost. That's what it's all about. Lots of opportunity, lots of risk, and again, that's what makes markets. We hope you've enjoyed this. Follow us on social media, it's magicmarketspod, Indeghost and Mohamednala all on Xorg and find us on LinkedIn. Pop us a note on there, send us your ideas for topics. What do you think we should be covering here on this free magic market show? Or if you're a premium subscriber, give us your suggestions for stocks that you're interested in and we might just be able to do a deep dive on that and share our views as well. Until next week, same time, same place. Thanks and cheers.
[00:25:08] Speaker A: Ciao. This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
