Episode Transcript
The Finance Ghost: Welcome to episode 216 of Magic Markets. I've got to say, this is coming out towards the end of this crazy earnings season on the JSE and I feel like I've been in a washing machine for the last two months and no one will let me out. Moe, it’s been a little bit wild this side. Of course, in Magic Markets, most of what we focus on is offshore and we've traditionally spent a lot of time focusing on the US market because that's where the excitement has been recently. A little bit of a shift in momentum, certainly in the markets - some more stuff going on in Europe, some stuff going on in the UK.
Just this week, we saw headlines of how Build Your Dreams is now rolling out this fast charge network in China. All that bearishness that I used to have about Tesla's moat and will it last and everything else is at least finally coming to some fruition. Yay! It's nice to get one right, sort of. There was lots of money to be made in Tesla along the way. Unfortunately, if you’re bearish and you sit on the sidelines, you don't get to make money. If you’re bullish and you're there at the right time, it almost doesn't matter what happens long term. But of course, that's why we love the markets. There's always something going on, it's always interesting. This week it's just me and you, Moe, and we're going to have a bit of a chat around that world outside of the US and specifically focused on some of what we've seen in the UK, a little bit of Europe and all of that.
Mohammed Nalla: Indeed, Ghost. That's why we love the markets, right, is that you can hate Tesla, you can sit out – or, you can be a trader and you can try and game the market sentiment around it. There are so many things, so many dimensions to look at. I think what's important, Ghost, and the flavour, the direction we're taking in this week's show, is it's always relevant to just pause sometimes, have a look at the macro picture, have a look at what does that mean thematically? Because that also informs where you direct some of your bottoms-up research.
I recall a conversation we had in the latter part of last year. I believe it was subsequent to Donald Trump winning the US Presidency. Early days we said, sheesh, there's probably a lot of tension that's coming. And even before that, Ghost, I remember discussing on the show - we can go and find the relevant episode - but I remember it was quite some time ago because I was talking to some of my institutional clients at the time, certainly more than two quarters ago, we're now almost going on three quarters, around the middle of last year. And the flavour back then is I was saying we should start looking at Europe versus the US and this was pre-Donald Trump really even coming through. My rationale for it wasn't geopolitical. It wasn't anything around what we're seeing right now. My rationale for it was very simple. It's saying that we had this US Exceptionalism around that time, Nvidia was breaking to record highs. You had the Nasdaq breaking record highs. It was a Mag 7 story. Lots of stories around concentration risk in the US – just a handful of stocks driving the market moves there. And I said, let's look at relative valuations in Europe versus the US.
That was the narrative - you've had this US Exceptionalism. And if you just get a pullback to reality of those overbaked valuations in the US cooling down, and if you get these European valuations that just move back toward reality, that relative trade should actually make sense. Now I'm going to be the first to tell you, Ghost, this didn't work out for the longest time. It didn't work out for around the first quarter and a half. I actually looked very stupid. But subsequent to that, it's actually started to play through.
Maybe the catalyst we needed was a geopolitical catalyst. Let's fast forward to today. If you look at the last quarter, if you even just have a look at it on a year-to-date basis, European stocks have been outperforming. You've actually got US stocks that are down on a year-to-date basis. If you compare - and again, we do a like-for-like comparison here, so all in the same currency - let's do it all in US dollars. European stocks over the same time period up around 15% to 16%. If you look at the Euronext, if you have a look at the EURO STOXX and if you have a look at the FTSE which is the UK, that’s also up around 10% versus the US that's currently down between 2% and 7% depending on which of the major indices you look at. Ghost, I think that sets the tone.
We're going to then unpack what the European market looks like? What do these respective economies look like? Has the move been justified?
The Finance Ghost: Well, before we even get to that, let me ask you to guess something, Moe. We recently covered BAE Systems, which is the UK defence business. One of the competitors that we referenced was Rheinmetall, I think is the correct way to say it, in Germany.
Mohammed Nalla: Yeah, Rheinmetall.
The Finance Ghost: There we go. What do you think the Rheinmetall share price growth has been over five years. So, Covid lows as your base?
Mohammed Nalla: I have no idea because I hadn't even heard of the company five years ago - it was probably a non-existent company…
The Finance Ghost: …just a crazy number. Give me a crazy number. What would upset you?
Mohammed Nalla: Are we talking Nvidia-like territory here? I don't know…
The Finance Ghost: …I don’t know, I'd have to, call up Nvidia. Come on.
Mohammed Nalla: Right, let me guess. Five years, let's say 500%, five times? Gone up five times?
The Finance Ghost: 2,565%. So, if you draw the chart, it has literally gone to the moon - yeah, I mean that was my reaction when I saw this as well - can you imagine going back and just a bit of hindsight, you just go take all your money out your bond and go and invest it in a German military stock? That's how you would make your fortune. It's quite extraordinary.
But again, I think it shows what happened on the JSE last year, although obviously we haven't seen numbers like that. But it's this kind of downtrodden, no one wants it, no one's interested, and then suddenly there's just this hype trade. We had it on the JSE with the GNU and we had this change in political climate here supposedly and load shedding was gone and it was all very lovely and the market got very excited and bid up JSE stocks into the teens from a P/E perspective and some of them into the twenties. Because that's one interesting thing about the JSE - the great stocks trade in the twenties, the stuff where everyone's disinterested is in the single digits and then you get a lot of stocks in the teens. You see these names that are not necessarily great companies getting bid up into the low 20s, even. And that's when you know on the JSE that things have gotten a little bit spicy.
This year there's been a big correction. People have kind of taken a deep breath and realised that actually the GNU stuff is not really filtering into company results. I've got to say, when I read the SENS announcements where there are companies that are referencing the effect of the GNU, and that's typically because they're in the construction space, for example, or something like that, it's not really favourable. They're not really saying, wow, there's so much to be excited about. It's not that at all. Now we have all the issues with the budget speech, blah, blah, blah. We're not here to talk about South Africa.
The reason I reference it is we saw a little bit of this kind of hype trade locally, saw the GNU come in, we saw people get excited, and we've seen a lot of disappointment this year. Could that be what happens with Europe, with the UK, for example? These are some crazy, crazy, crazy multiples. Rheinmetall is on a P/E - I assume this is right on Google - of 83x! 83x for a defence stock. I mean, what is going on here?
Mohammed Nalla: Yeah, Ghost. Again, longtime listeners will know that the first thing I like to do is avoid anything that's hyped up, that's a meme stock. Maybe Rheinmetall has moved into that space. It's really been in the news a lot now. I think the thing that caught the headlines over the last week is that Rheinmetall has basically said to the German government, we can repurpose the Volkswagen plants that they're looking at shutting down to produce tanks. And again, we've not seen stuff as crazy as this since World War II. So again, be cautious because, yeah, maybe the stock's going to ratchet up, but if we end up in a World War 3 type of scenario, guess what? That's not good for risk assets wherever you look.
So I would caution against some of those. We saw the same thing in US defense manufacturers a while ago, right? I don't know if you recall, it was still during the Biden administration. But a lot of the talk there had pushed up the meme stock, let's call it the topical stock flavour, on Lockheed Martin, on Northrop Grumman. And then we actually saw that melt away and then you saw it come through. So I want to actually pivot from that a little bit towards a much broader look at Europe and what it means, because I think some of it might be hype, some of it might be - you know what, this is America's “Amexit” from the rest of the world, right? We had Brexit in the UK, it's Amexit, America really pushing back against everyone. I'm going to coin that. I haven't heard that term out there. I'm going to call it the Amexit, right? Maybe this is the Amexit trade. Maybe that's the theme that people are playing.
I think there's something bigger at play when you look at Europe. Let me explain to you, why is that? If you look at how these markets are made up, what are some of the largest cap stocks in that space? I'm gonna have a quick look here, because in Europe, first of all, you've got several markets you need to look at. You've got the FTSE, that's in the UK, Then you've got the DAX, that's in Germany. Then you've got the Euronext, which has actually come through as a very strong competitor to the FTSE as a pan-European exchange and they have markets in Belgium, France, Ireland, Netherlands, pretty much across Europe. A pan-European kind of market there.
If we look at what makes up these markets, it's a very different constitution to what you're seeing making up the US. The US has become very tech heavy. So it makes sense, when you have this growth and this tech flavour, it makes sense that the US index has actually pulled away. If you look at the S&P, the Nasdaq predominantly, maybe the Dow to a lesser degree, you've had less of that in Europe. The reason for it is that the underlying makeup of those indices is very different. If you look at some of the largest names on the Euronext, you've got at the top of the list Novo Nordisk, that's the healthcare stock. They make the insulin pens. We covered it in Magic Markets Premium. Go and check that out if you're a subscriber.
Then, you've got no surprises here, I would have guessed number two was actually number one, but it makes sense because we've had a bit of a sell-off - that's Louis Vuitton Moet Hennessy (LVMH). That comes through as the second largest stock on the Euronext. Luxury goods, that's been a strong flavour. What I'm trying to get to here is what's the underlying flavour? I'm going to run through some of the names. Novo, I've mentioned, you've got LVMH, then you've got SAP, then you've got Hermes which is luxury goods. You've got ASML that cracks a mention. Guess what? That's tech. That's probably - in fact, if you look at the top 10 on the Euronext, that's the only tech stock in the Euronext's largest holdings. You've got Roche Holdings, pharmaceuticals, you've got Nestle, that's FMCG, AstraZeneca, that's pharmaceuticals again, Novartis Pharmaceuticals and then Shell. As you can see from that, it's a healthcare-heavy type of index. And it's not just the Euronext. If you go and have a look at, for example…
The Finance Ghost: …Moe, you know what it feels like? Sorry, just listening to those names, it feels like a pre-global financial crisis index. It feels like this time capsule. It's like going back to a time when energy stocks and maybe one or two retailers and some pharma was the world. Where's the big exciting tech? It's not in Europe, that's the point.
Mohammed Nalla: It's not in Europe and that's because Europe hasn't had the innovation, right? If we look at, let's not even look at another pan-European index, let's look at the DAX, that's almost German-specific. Yes, you've got European companies there, you've got some cross-listings here. SAP, for example, comes through very strongly on the DAX. Then you've got telecoms coming through - Deutsche Telekom, Siemens coming through strongly there. You've got Airbus and Allianz. Insurance coming through and then maybe one industrial player, that's Airbus. So an interesting mix, then.
When I looked at this, I was quite surprised because where do the famous German automakers rank here? I'll give you a sense of scale. So if you're looking at the top five stocks there, they kind of come through at around 120 billion in terms of stock. Again, that's the other point, is if you look at the US, the largest stocks run into the trillions and trillions of dollars. If you look at the European markets, Novo Nordisk coming through at around 350 billion. So a fraction, a fraction of the size. If you take the total market cap of these indices, they basically one of the large cap names in the US, so scale is definitely one differentiator. But I was going on the German point, I said where do the automotive manufacturers that are so important to Germany's economy, to Germany's export story, where do they stack up? They come through - if you look at Mercedes Benz around I would guess the 50 billion euro market cap level, similar with Volkswagen, BMW, Porsche, all in a similar kind of range. This is showing you that they're not cracking the top mention of the largest stocks, but that the flavour of those indices is very different to what you're picking up in on the US. A last point goes before I hand back over to you is that the FTSE is somewhat different. When you're looking at the UK specifically, your mix is, I say, somewhat different. It’s not that different. It hasn't had the same kind of innovation that you've seen in the US, but the flavour changes a little bit in the UK because here you start to see more financial services groups, for example HSBC, they're one of the largest stocks there.
In the UK you've got Unilever, again more of an FMCG play, and then more resources companies coming through. You've got Rio Tinto, you've got BP. Interesting one, I know you don't like it, but I've actually liked it recently and had some decent returns. British American Tobacco, people still smoke, that's come through and that's still one of the largest stocks in the FTSE.
This explains why you've got that interplay where the FTSE starts to look a lot more similar to something like the JSE down in South Africa. The mix and the flavour, you've got some resources in there, you've got some of the old-world defensives like British American Tobacco, and then you've also got Diageo, which is an alcohol company, coming through. You can see some of the interplay between the exposures of stocks that you're getting on the FTSE versus South Africa. Those linkages still quite strong, I think, giving you a sense that maybe it's a Europe or it's everyone else versus America theme, but maybe underlying that there are also some sectoral themes that come through Ghost.
The Finance Ghost: The similarities between the FTSE and the JSE are remarkable. It's quite fun. It's called the FTSE/JSE Top 40 index, just as an aside, but that's not because the markets are so similar. But if you speak to professionals in London, you get such a similar story - all the complaints about lack of activity in capital markets, you go and read about delisting trends and you go and see that people are not using the London market anymore for exciting listings.
They're kind of doing that in Europe now, in a post-Brexit world. And even that is not really full of exciting listings. It talks to that geopolitical shift where in some respects I almost think Europe is a more natural partner to South Africa than the Americans. You can almost see it in their business landscape when you look on their market and see the level of activity and the names and the sectors and everything else. The US has been driven by this incredible technology boom over the last decade or so and it just hasn't happened in South Africa at all. We have Telkom talking about next gen revenue because they sell you a cell phone. It hasn't really happened in Europe where they've also just been completely wiped out from the Chinese perspective on the automotive front, they've really been a little bit asleep at the wheel. They think that exciting software means a software-as-a-service accounting package! It's really old-school stuff.
That's unfortunately the reality. There's no innovation there. Why would you bother? And it almost becomes a snowball effect. In order to have innovation you need venture capitalists. You're not going to have venture capitalists unless they have assets they can invest in. And so those two groups go and find each other. Then investors looking to back VC-type players are gonna find them all in the same place, so you just get this effect where everyone congregates in one ecosystem to go and build exciting tech companies that have driven the markets now for years. The only exception, I guess, is probably China, because they have no choice but to go and build their own thing to try and distinguish themselves from the US and all the trust issues around data and using technology from the West and everything else. Then you sometimes see these models emerge from China and just break the headlines with news of what they've done in AI and what they've done in cars and everything else. It almost does feel like Europe is a more natural fit for South Africa. Maybe it's a time-zone thing, I don't know. That part of the world just does similar things.
Mohammed Nalla: I think there's some cultural interplay as well. I mean South Africa has always been pretty well plugged into the uk. I noticed that living here in North America, Canada is very different to the United States and that's going to sound strange to a South African - you look at it and you think Canada, the US, peas in a pod? I think those differences are becoming stark for me.
It's interesting you mentioned China, right? If you go, you mentioned like five years, If you take a 10-year chart and you look at all of those markets that we've discussed, I'm not going to ask you to guess, I'm just going to tell you, right? If you look at those markets, the underperformers that come through are the UK and also China. If you look at the MSCI China index, not fantastic, then maybe the Euronext comes through with a kind of semi-decent performance there. The US has literally just shot the lights out and that's been a tech story. The interesting thing is if you go and draw that very long, I'm calling it a 10-year chart, it is a very long-term chart. There were times when China was running alongside with the US, outperforming some of the US markets and it ran hot, then it disappointed, then it ran hot again up until around 2021. At that point in time the narrative on China changed and China just sold-off very sharply. I think you've got to be very sensitive to some of these global geopolitical macro trends.
Some of that is thematic. If I were playing a thematic, you could play the Amexit, it's pretty much everyone except the United States and that would include China. It's not just Europe exclusively. Then also it's the valuation story because you can very much take the same valuation story that I just gave you on Europe and you could look at that in China. A lot of names, Chinese stocks trading at very, very low multiples relative to where they had been and also relative to the American competitors. That for me gives me a geographical rotation story. And then Ghost, maybe one last point to land on, is how does the UK - how do the UK and Europe fix the innovation story? Because China's not been an innovation laggard. China's been at the forefront of innovation. China's been the bad guy story and so their valuations get punished. You can't get your capital in and out easily enough. That's what's hurt Chinese valuations.
European valuations have been hurt by just the low productivity that you've had, the lack of innovation and maybe the Amexit is what Europe actually needed, Ghost. Maybe it's time that they actually started looking or taking a long hard look at their own innovation and industrial strategies because there's a lot of pent-up infrastructural development that needs to happen in the UK. It's the same thing in the US, but the UK just hasn't realised that yet. Maybe they're starting to realise it, I would argue.
People keep asking me what are some of those catalysts for growth? And I would say why not look at areas where the US is actually pulling back from because there you have a natural advantage, right? If the US is pulling back on clean tech, clean energies, Europe's been all over that space. It's not a theme or a trend that's going to go away. The planet does need to actually be saved. Things like that are areas where Europe and the UK can actually gain an edge.
The problem is they're not even there. You mentioned BYD, that's a Chinese firm with a five minute charging time. I've mentioned this time and time again. I've been to China, I've been to BYD, I've seen the amazing things they're doing. For me the answer is that the West, Europe, even Canada, excluding the US and Mexico, remember they need to rethink their relationship with China. It's always been antagonistic. This is not a popular view even up here in Canada. I think they need to rethink that and they need to say how do we partner with a player like China? We can't depend on America. How do we get Chinese investment to come into Europe, to come into Canada, to come into the UK? Let's build a BYD factory here in the UK because guess what, we're not going to be competitive anyways. Let's actually leverage off some of that expertise and allow that economic growth to come through, Ghost. There's a lot to unpack there that doesn't even touch on defence. We've covered defence in Magic Markets Premium with BAE Systems recently. I think there are a lot of things on the go here with the current global backdrop that could make this theme something interesting. Just don't overpay for that, Ghost.
The Finance Ghost: Yeah, absolutely. I was thinking now, what are some of the notable things that have come out of Europe in this modern age? I think the one that comes to mind is Spotify. ASML is another one we've covered on Magic Markets Premium, that's also European. But I mean that's two examples, and then you've got to start to go and look at just really boring stuff like SAP, which is just not exciting in the slightest.
Mohammed Nalla: Novo Nordisk was great up until the Ozempic bust, right? That's something that I've also been interested in. You've seen such a sharp correction in that stock. It was one that we said, sheesh, it's always so expensive. I've actually acquired some stock and I know it's maybe not the best healthcare stock to actually have out there. Some people think Lilly's a lot better. That's US. But I'm saying Novo Nordisk, that's a European name that's actually been pretty decent.
The Finance Ghost: Yeah, there's some stuff and I think this is obviously going to be something to keep an eye on. But I think just be careful of market hype. Just be careful of the market saying, oh, there's a big rotation now into something else you've got to look at. What is the something else? Is there a good reason why these companies are actually going to do better? Because I think that the exposure into the automotive industry is a scary thing in Europe. Especially in a country like Germany, just think about how big that is as a contributor to their economy.
I actually just had a look now, while we have been recording, I drew BYD against Tesla over five years. Which one do you think is ahead, Moe?
Mohammed Nalla: Even with the sell-off, it's got to be BYD.
The Finance Ghost: It's BYD. I think what is more shocking, and maybe I'll put this in the transcript, is that the correlation between the two seems to have broken down. They were quite positively correlated over the five years. Now in 2025, Tesla has nose-dived and BYD has shot up. Suddenly you've seen a change in correlation.
Mohammed Nalla: I think an important point to note as well - a lot of people think BYD, China, oh, China's bad. Guess what? Warren Buffett was one of the earliest investors in BYD and to my knowledge, I think he's held that position? He's cut back on a lot of his US positions. A very big Apple position has been cut back. I don't think he's cut back on that BYD position. I'll have to go and check that.
But this is telling you that sometimes ignore the hype, ignore what politicians are telling you to do. There's still a lot of opportunity in that Chinese market. And again, if you were to ask me, Moe, are you going Europe, are you going China, are you going to the US? I've been skewing a lot more recently, selling down on some of the US holdings. Not entirely, of course, you can't do that. But I've been allocating more toward the European names, the Chinese names.
Some of them do still scare me because of the valuations. I've got exposure there. I don't necessarily want to increase my exposure. I was probably suffering through that sideways move. But Ghost, what do you think of that? A name like BYD, that looks fairly obvious now, but again, it's already rallied so highly. What do you think on the China versus Europe trade and what are some of the names that maybe have popped up for you in the Chinese market?
The Finance Ghost: Well, I will tell you, I went and did some Googling now while you were talking, and Warren Buffett did actually trim his BYD stake, but it has been a massive winner for him. I think trimming as the valuation gets crazy is not unlike him. He's sitting really deep in cash at the moment, let's face it. Obviously, I wish I'd bought BYD. I feel quite annoyed because I've been watching what's played out with the Chinese car story. The automotive sector is also just not a very exciting place to play generally. What you've got there is a story almost like you saw with Capitec in South African banking, where it's a market share win. It's not because South African banking's gotten a lot better, the world's automotive sector hasn't gotten better, it's just a whole lot of share has shifted into China.
I do have some China ETF type exposure in my portfolio because I just think you do need some look-through. The other thing I've got is I've got Prosus, which is obviously a Tencent look-through with some other stuff. I like what Fabricio Bloisi is up to there as the new CEO. That's pretty much the extent of my Chinese exposure at the moment.
In terms of Europe, not really sitting on anything, which speaks volumes in and of itself. I've got to say there just isn't enough excitement there for me. I've wondered about, oh, you know, do I add on a banking position or try and find a suitable ETF, etc. But in South Africa, I also have the benefit of getting some pretty interesting yields. You can go and buy fixed income in South Africa and you're getting a really strong yield above inflation. Depending what you do, it's practically risk-free. Obviously not bond ETFs, but if you go and put your money in the bank, then literally.
Sometimes these European companies I worry are going to give those sort of returns, pretty disappointing yield, not much more than that if things don't really go well for them. In South Africa, look at it and say sometimes it's better to actually just go and get your yield, sit tight a little bit in cash, almost Warren Buffett style and then wait and see what happens and where you can put some more money into equities. I'm much more of a natural investor in the US companies; I want to buy growth type stuff in my equity portfolio. I'm not a big fan of stuff that can go sideways for a very long time indeed.
Mohammed Nalla: Ghost, everyone wants that growth, the question is always where the growth is going to come from and also when to switch defensive. I've switched defensive over the course of the last year. So far, it's been the right move.
The last point I want to just raise is the fact that a lot of people don't focus on individual Chinese names because it's a strange and foreign market to them. They don't know enough about those stocks, those companies. Whereas with Europe, there's that interplay we've discussed with South Africa, a lot of the brands. Slowly over time as that brand recognition from China becomes stronger, I would expect to see a lot more interest in Chinese markets because quite often buying a one shot ETF on the Chinese market gets you the good and the bad and so it dilutes the performance of some really good underlying companies.
Ghost, unfortunately that's all we have time for this week. We hope as our listeners you found this an interesting discussion on some of the macro themes at play on the European market versus the US specifically. Let us know what you think. Hit us up on social media. It's @magicmarketspod, @FinanceGhost and @MohammedNalla 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.
The Finance Ghost: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
