Episode Transcript
The Finance Ghost: Welcome to episode 218 of Magic Markets. It's been a pretty busy time. We've now said goodbye to quarter one. We are actually recording this on April Fool's Day. Moe, are we committing that there will not be any April Fool's jokes? I think the market generally gives us enough chaos that we don't need to make any April Fool's jokes. Did you see any particularly good ones running around on social media that you quite enjoyed, or were you immune to that?
Mohammed Nalla: Immune. I ignore all of this nonsense, right? There's so much fake news and then even the real news looks like it's an April Fool's joke. So there's no real upside, you know, looking out there. In fact, April 1 is the one day when I try and actively avoid as much of the social media news flow as we get. I'm committing, no fools on our show this week. Ghost, I don't know if you're ready to commit to that?
The Finance Ghost: Geez, I don't know if we can commit to no fools, but we can commit to no April Fool’s. No fools is an opinion that our listeners will have to form for themselves!
But I will tell you that the April Fool's joke I enjoyed was Sea Harvest, who promised to sell bottled sea water. So that was quite fun. And there were a couple of other niche, hobby-related ones and whatever which are too niche to really share here. But always some good stuff on April Fool’s. It's fun to see how social media just lights up and brands do some clever stuff. They really do come up with some smart stuff that goes viral, some excellent free brand recognition if you come up with a good April Fool's joke. But we're not as smart as that. So we'll have to just talk about US consumers instead, right?
Mohammed Nalla: Indeed. And the US gives us enough headlines to actually just wonder, is this an April Fool's joke, or not? Just looking at some of the moves, what's been driving markets, they’ve really been hard hit by this Trump tariff war. We've spoken a bit about that, we've spoken about US jobs and how US jobs data actually comes through. But all of these factors are very important when you're weaving through that macro narrative. You've got to bring that down also in terms of what it means for the underlying economy. Remember that actually has a direct bearing in terms of the company's own expectations around earnings guidance. It then filters through with a bit of a lag in terms of earnings themselves coming through. And then that is reflected - the sentiment, the expectation as well as the actual delivery - in the share prices. And that's why we're talking about that this week.
In fact, this week the focus is, as you mentioned, the US consumer. Now why this is an interesting place to start, Ghost, is that the US consumer single handedly was the one driving force behind a lot of the US exceptionalism that we saw on equity markets into the tail end of last year.
That's actually eased off quite a bit now. And what's driving that? I think you had mentioned this as an idea when we were discussing off-air. If you're looking at consumer sentiment in the US, there are a number of sentiment gauges, but probably one of the most watched sentiment gauges is the University of Michigan's Consumer Sentiment Index. That actually decreased down to 57 index points in March. For context, that was around 64.7 in February. So quite a significant deterioration.
What's driving some of that? We've got to look at it. What's driving some of that is that we've got the tariff concerns, we've discussed that people are unsure around what this actually means for US consumers. Just the tail end of last week, Trump announced 25% tariffs to come through on US autos. Someone quantified that and said it's going to translate into around $15,000 extra per motor vehicle sold in the US, so that's quite a big hit. People are saying, what's going to happen to my overall disposable income? The costs of goods are going to go up. That actually filters directly into inflation expectations. If you look at that as another sentiment indicator and that also underlies the Consumer Confidence Index, consumer inflation expectations have actually ticked up to above 4%. That's the highest in 32 years!
It suggests a high degree of uncertainty and apprehension around how sustained some of the upside price risks are in the US economy. And then lastly, to one I actually referenced on the webinar I did with Mesh a little while ago, talking about gold, that's the Economic Policy Uncertainty Index. If you look at that, we're now at levels higher than we had actually seen in the global financial crisis.
That doesn't bode well for markets. It doesn't bode well for the overall economy. That headline Consumer Confidence Index now at its lowest point since January 2021. So again, quite depressed if you're looking at US consumers historically, there's quite a bit of polarisation underlying that, that confidence index. People's political views seem to inform it - so you'd get people who, for example, lean Democrat, they'd be very negative during a Trump administration. Likewise, Republicans would be very negative during a Democrat administration.
What's interesting right now, Ghost, is despite the partisan alignment, Democrat or Republican, you’re seeing consumers across both political parties starting to get a lot more bearish. And so it's something we should probably pay a lot of attention to.
The Finance Ghost: The story is not much better here, I've got to tell you. I mean, there's lots of headlines. If you go and search South African consumer confidence, you'll see those wonderful words: “record lows”. Yay. So this is the FNB/BER, I think that's the Bureau of Economic Research, Consumer Confidence Index. Not good is the summary, citing things like tax fears, among other things. So, you know, this is what happen, the budget speech comes out and everyone says, oh no, things are still not good. There's a big worry. Yes, load shedding might largely be a thing of the past, apart from an occasional cameo appearance, but now we have other stuff to worry about. And now there's all this uncertainty. I saw headlines literally today about how the DA is not going to support this budget. And we still don't really know exactly how that's actually going to play out. So it's just a really difficult time for consumers.
The stocks on the JSE that are very consumer focused - we don't have a retail index or a consumer index that people really look at, it's one of the things that I wish was different on the JSE. We have to go look at the Industrials index, basically, which is just the polony of absolutely everything, that no one knew where else it could go. And if we did have one, it would be horribly, horribly down. I think it was last week on the show, we actually joked about how Choppies is basically being the retailer you actually wanted to own this year! We're not going to rehash that conversation. We're just pointing out that the consumer side has been rough in South Africa and on the US market.
There are big US names that are releasing some pretty tough stuff, right? And it's across the board. If you look at what analysts are asking in those earnings transcripts, they are focusing very much on consumer health. Very, very much so. And so Moe, we see this consumer pressure coming through, because that's what analysts are asking about in the transcripts. You can actually tell a lot from the mood. We can get to that because I went and did a little bit of an exercise of looking at some of these transcripts and seeing which words come up most often, which is quite fun for gauging the mood, I suppose.
Mohammed Nalla: Yeah, I mean, I look at it and I call it like social media sentiment. You see what's coming up. It's the same thing when you troll through those analyst transcripts. In fact, if you go and have a look at I think Factset, they do some interesting things where they'll pick a word like “recession” or “inflation” and say, how often are these words actually popping up in earnings calls across various sectors in the US economy? In the US market?
I think the point you raised is very important though, Ghost, is that the South African market doesn't have the kind of breadth of coverage that you get in the US. You don't really carve out a lot of your underlying sectors. And that's why looking at international markets, specifically the US, is very interesting for me, even from a macro perspective, but then also from a bottoms-up perspective as well. That's why we do what we do in Magic Markets Premium, looking at global stocks. You just get a lot more granular in terms of some of the exposures you can get. I'm going to jump into that because it is very different when you drill down because yes, headline consumer sentiment is very poor. You've actually seen that come through in a lot of the discretionary spending categories.
So, for example, Deckers Outdoor, they've seen significant price declines, shrinking profit margin, weak guidance. Nike, that's one I know is close to your heart. Really a disappointing look coming through from Nike as well. But if you go and have a look at sectors that have been more resilient, then you're getting the consumer non-discretionary stuff that starts to come through. Stuff like CVS Health, which was sold off very aggressively, yes. Low base effects coming through there. They've actually started to bottom out a little bit. You've seen some activity come through based on which sector you're looking at. The other differentiator you want to look at is exposure to whether you're looking at high-income consumers or middle-income consumers.
Something you pointed out to me is how resilient a stock like Ferrari can actually be here because they are not just mass affluent, they are very much a luxury play. Their response to the Trump tariff wars was that, well, we'll just increase our prices by 15 or 25, whatever the tariff increase is, our price will go up by that amount. That's because they know that their consumers certainly in the US are price insensitive. Most people in the US that are buying Ferraris already own a Ferrari, so you see some resilience coming through based on how far up that LSM or income curve you are.
Now the other thing I want to mention here, and we can go into some fun numbers because I like doing this right, is if you go and break that down and say which stocks have actually performed over the course of. And we can pick a time period, you can go year-to-date, you can go 12 months, you can even go five years, right?
Which stocks have actually come through very strongly? And even when you look at that, I won't get into that yet. We'll save some of that for the later discussion. If you go and have a look at that, you can see a pretty clear distinction in terms of where companies play in the income spectrum and then also where they play in terms of what consumers have to buy versus some of the more discretionary stuff goes.
The Finance Ghost: Absolutely. So a really good example, I'll jump into one if that's alright, is Nike. Nike recently released some numbers. They think they are very premium, the market says maybe not so much, we're happy to buy your stuff, but at quite a discount. I went to look at the Nike earnings transcript. Pretty interesting. The word “China” appears 17 times, which is a lot. But you'd expect that because Nike's Chinese business is substantial and the Chinese business was down 15% year-on-year for the quarter at Nike, which was really rough. So obviously analysts put a lot of attention on that. The word “tariff” appears only twice.
Now, that's all the proof you could ever need really that earnings are backward-looking. So when these earnings come out and companies come and talk about them, they're talking about what already happened. Whereas the market is very forward-looking I think the questions that analysts ask at these earnings releases are a bit of a hybrid of the two, really. So at Nike, it's all about China. That's the focus.
Then if we move on from Nike, we can look at a company like Lululemon and there Moe, the word “China” appeared 11 times. So not as much as Nike, but interestingly enough, very different story at Lululemon because mainland China sales up 39%. It's actually the US that is slowing Lululemon down, sales up just 1%. And so there, the word “tariff” appears six times, not twice.
So you've got a scenario where a company like Nike, which has disappointed the market, is struggling in China, Lululemon doing well in China, but their risks lie in tariffs, reciprocal tariffs, whatever the story may be. Same story at Nike - they also face these tariff risks. They just have so many other own goals that they need to sort out in the meantime that the tariffs are not the biggest problem. This also teaches you something about how these stocks operate and how dangerous turnaround stories are in this broader macroeconomic environment.
Because Lululemon has done “nothing wrong” and so the focus there is on the macro. Nike has done a lot of things wrong, that have led to this turnaround, so the focus is on the issues in a place like China as opposed to something like the tariffs.
If you'll allow me one more, I did Darden Restaurants as well. They own restaurants in the US and Olive Garden is their main asset, which I think is an Italian themed restaurant. The word “China” comes up precisely nil times because they're not in China. They don't even sell Chinese food. So no big surprise there. The word “tariff” comes up six times even though they source 80% of their inputs locally. That was the answer that management gave was to say, look, actually 80% of our sourcing is local anyway. And the stuff we import, 20% of our total procurement, we can look for alternatives locally if we need to.
But what about the knock-on effect on this US consumer that we've been talking about? Because that is really the focus for tariffs. The word “consumer” came up in the Darden Restaurants transcript 25 times. You would expect this because it's a consumer-facing business. But if you go and look at the context in which it was raised, it's not positive. It's analysts hammering them with questions about how is it possible that they are not seeing pressure on US consumers in casual dining? How are they bucking the trend? How can this possibly continue?
So, long story short, some businesses it's a China issue, some it's a tariff issue. But for all of them, it either is or is going to become, I think, a US consumer issue. And the tariffs are going to impact that.
Mohammed Nalla: Indeed. Ghost, you've looked at some interesting names there. So just on a year-to-date basis, Lululemon, that's down 23%. Nike down 14%. So maybe that's why Lululemon are very concerned about tariffs, I think relative to Nike.
But let's look at what's up on a year-to-date basis, because that's even more interesting, going back to that differentiation around consumer staples versus consumer discretionary purchases. At the top of this list, and I've got a long list here, BJ's has come through. Followers of Magic Markets Premium will know that we've included this in the competitor section when we look at stocks like Walmart or when we look at Costco. BJ's is up almost 30% on a year-to-date basis.
If we look at something else, like Dollar General, falling in I would say the lower LSM part of the market, yes, off a very low base, Dollar General had performed very, very poorly over the last 12 months, but that's done okay on a year-to-date basis, up 15%! You can see that defensive theme coming through. Even Kroger, which is more of a supermarket or grocery retailer, so less discretionary, more consumer staples, they're up around 10%.
When you compare that to even the stronger players like a Walmart, I really like Walmart, that’s down around 3.5% for this year. Costco is up around 3.5%. Those big box players, we covered some staples and some discretionary, pretty much treading water. But then when you look at the really discretionary stuff, Lululemon and Nike, and in fact, even if you go further down – Deckers I indicated down 45% on a year-to-date basis - you can obviously extend that a little bit longer. You can say over the last 12 months there, you'll see a player like Walmart comes through very strongly, almost 44% up there. That's because again, they've been gaining some ground against some of the other players.
I'm not going to give away a lot of what we do in Magic Markets Premium. The point I want to land on here, Ghost, is that differentiation between consumer discretionary and consumer staples is very strong. Even if you break it out beyond sectors that just look at the consumer, you've got to look at utilities. Utilities have actually done okay over the last quarter. That's been a story over the last two quarters. I was calling it from around the middle of last year, probably a little bit early. Then, it was doing really well into the election cycle in the US, Trump then won. You saw some of that come through. The markets actually rallied directly after the election. But subsequent to that, even utilities have been a decent play.
So pay attention, because these macro stories do make a difference in terms of sector allocation. I know a lot of people don't go as granular. Even if you're taking ETF exposure in the US, you can get direct ETF exposure to specific sectors. If you are active in an asset allocation space, that might make sense. If you are a stock picker, just be sensitive that even if you're buying a big company like a Walmart, you're getting a very different mix underlying that. The international investment universe is really, really wide. It does present some very compelling opportunities to get involved.
Things are cyclical, if you look at those same numbers I mentioned to you. But over a five-year time period, you get a very different picture coming through. That's because we went through that cycle of consumer exceptionalism, lots of optimism, free money following Covid, and now that steam is starting to come out of the market. You've got to be a lot more selective in terms of the types of exposures you're getting, Ghost.
The Finance Ghost: Yeah. So let me ask you outright, Moe, are you buying any of these consumer pressure stories at the moment, or are you waiting it out? Because I've got to say, I am sitting on the sidelines at the moment. I'm not adding exposure here.
Mohammed Nalla: Yeah. I'm sitting it out, because that economic uncertainty index that I mentioned upfront, that's very high. So it looks as though something may well break. And the fact of the matter is, unless the Trump administration backtracks on some of this tariff war stuff that's going on, there is going to be pain to be felt. Why do you want to go and get exposure to high beta consumer stocks in that kind of environment?
My preference, where I have really been directly allocating capital over the last two quarters and continue to do so, has been in some of the defensive names - like I say, utilities, and there I'm investing for income. A lot of those pay reasonable, steady dividends. Even if you get some choppiness around the share price, you've got a nice solid dividend underpin that seems to come through. Another play there is - we've discussed the regional bifurcation that's occurring. I've taken some European exposure that's worked out relatively well. I've been taking a lot more Canadian exposure versus the US, so it's a geographical realignment as well as a sectoral realignment for me.
The Finance Ghost: Yeah, and it's going to be interesting to track over the year, obviously, and that's what we'll certainly do on this podcast each week. To our listeners, if you want to get the more detailed stuff, then please do check out Magic Markets Premium. We recorded a show on Alibaba a short while ago, so that's part of our theme of looking beyond the US and showing you what else is out there in the world. We did BMW last week, which was super interesting. The issue at BMW obviously is Chinese disruption and their issues in China specifically. At Alibaba, we go to the source of it, admittedly not in the automotive sector, but just looking at what the growth looks like on that side of the world. We certainly won't give any spoilers away there, but there are some pretty interesting charts and it’s quite a fun valuation story vs Tencent. Lots to sink your teeth into. I think that's probably a good place to leave it Moe, for our listeners to go and enjoy what we've done in Premium this week.
Mohammed Nalla: Indeed, Ghost, we hope you've enjoyed the show. Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Go and find us on LinkedIn. If you're not a Magic Markets Premium subscriber, it's only R99 a month. Really suggest you go and check that out if you are interested in the underlying stories and some great opportunities. Not everything's a buy, not everything's a sell. But it does give you a deep insight in what's happening under the hood.
That's where you've got to leave it - until next week, same time, same place, thanks and cheers.
The Finance Ghost: Ciao.
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