Episode Transcript
The Finance Ghost: Welcome to episode 265 of Magic Markets. What a time in the world. There is a lot going on out there, internationally and at home. We have a very busy earnings season right here on the JSE, and that's some of what I'll be talking about today.
And to give us a view of what is going on internationally, this geopolitical climate, what's happening in commodities and markets in general, is Moe.
Moe, I'm so glad that you focus on that stuff, because honestly I do prefer just going and reading a set of company results. It feels like it's easier.
Your world is much harder. I don't like to guess where all this stuff is going. It's very difficult.
Welcome, and I'm looking forward to seeing what nuggets of information you are bringing us this week.
Mohammed Nalla: Yeah, Ghost, indeed. When you're looking at macro, it's easy until it's not, right? You’re out there wondering what's going on for the longest time, and then all of a sudden boom, you get a war - and markets are all over the show.
The fact of the matter is, there are actually a lot of things that haven't quite moved the way one would have expected. And that's what I want to try and unpack in the macro side of the show. I'll jump into that.
I think that's a precursor to anything that you're going to say on the earnings front, because potentially that's a lot cleaner.
When you're looking at the macro, there's a lot of noise, there's a lot of volatility in the market. I'm not an expert in terms of geopolitics. I don't know how this war is actually going to resolve. There are other people out there that study this, and again if I’m being quite frank, I don't even think they know.
Right now what we're going to try and do, is just have a look at what the markets have actually done, now that we're entering the third week of this war with Iran. And I say entering because we are recording this earlier on in the week. By the time this is actually published, it will be slightly later on in the week. But at the time of this recording we're entering the third week.
And first and foremost, if I just wrap up everything I'm going to say, is, interesting thing in this conflict is that your classic war trades haven't worked out. Gold hasn't rallied the way you'd expect it to rally. That's the safe haven of choice. And in fact, if you have a look at things like bonds, US treasuries: those haven't rallied either.
And instead, the market is looking at this and it's treating this entire situation as an inflation shock, which is why you're seeing oil is higher, you're seeing yields higher, you're seeing the dollar - those have really been some of the dominant moves out there.
And so that's some of what I'd like to unpack. Do you think that's a reasonable cadence for us to cover?
The Finance Ghost: I think so. And certainly the rand, which has moved pretty sharply as well, right? And as you say, the dollar. We're unfortunately down here in South Africa on the other side of that trade. And things were looking so pretty for the rand and the fuel pumps. Just when we thought, just when we thought…
Mohammed Nalla: Not just the rand. I mean, it was looking pretty for the rand, it was looking pretty for the JSE as well. And in fact one of the earliest reactions, one of the largest reactions you’ve seen, has been on the JSE, where you saw a correction of around 10% around a week ago - pretty much coming through across the board.
And if you look at it at this point in time, the only sector that's up on a year-to-date basis is the resources sector. If you look at everything else, you're down on a year-to-date basis. And this was after a pretty strong start to the year on the JSE.
So yes, we'll touch on the rand because we're touching on the dollar. And then we can use that JSE point to go into some of the stories you're talking about.
Let me jump first and foremost into the obvious one, which is the energy markets. I think that's where you've seen the most immediate reaction. Brent crude spiked really sharply. I was an oil bull for the longest time, and like you say, you lumber through these views on a macro side until there is a catalyst.
And oil then reacted sharply from around the 60s, there and thereabouts. In fact, last week, over the weekend, (Trump tends to do things over the weekend), we saw, as soon as trading opened up in Asia, this panic trade come through.
We saw oil trading as high as around $115 a barrel on Brent. Now, remember, from 60-odd dollars, that's roughly double in the span of two weeks. So that's massive. And the irony of that is, that kind of upside pressure wasn't sustained. We actually saw massive intraday volatility, and saw that come all the way back down to around the $100 mark, which is where we're starting the week, this week.
Now, the reason why this is absolutely bonkers - that's not a technical term! - is because the oil market is by and large the world's single largest commodities market that is out there. So in order for that market to move by double digits on an intraday basis, it’s just telling you how fluid things are, how much money is moving through that particular segment of the market.
When we started out this week, I thought we'd actually see a push towards $120, early on in the week, simply because over the weekend a lot of the noise was around how the US has attacked Iran's Kharg Island.
Guess what? We opened up in Asian trade. I was watching this last night. We actually ended up down. As we're talking right now, oil's just below $100, so we don't know where that's going to rationalise.
But this now takes us onto the next point, because I spoke about how the markets are pricing this as an inflation shock. So if you have a look at bond markets, that's where you've seen one of the more interesting moves, because if you're looking at US Treasuries, the bond yields have increased there.
Remember, there's the inverse relationship - as bond yields increase, it means bond prices have decreased.
Now, why would that be the case? And remember, we've got a FED meeting later this week as well.
Up until the start of this war, the market was saying, “yes, the FED could probably cut rates a little bit. Inflation's kind of tailing off. Yes, it's a little bit higher” - but the inflation risks were largely being brushed off. And I think this particular war has cast that inflation risk firmly back onto the agenda.
It's why you've seen US Treasury yields higher, and that filters through into bond yields in South Africa. We haven't even got into the equity story and that's where we've seen some interesting stuff as well.
I'm going to pause there because I think you've got a question. I can see you kind of gesturing.
The Finance Ghost: Do you think the inflation risk is so high that we might see rates starting to shift direction? Is that even remotely possible? It's such a hopefully short-term disruption, cost-push inflation. It's not a demand-pull inflation issue at all. I don't know that it helps to really go and just hurt consumers even more.
But dare I ask, do you think that we could see rates start to go back up or is it just way too early to even have a view?
Mohammed Nalla: Not a cop out, but it’s way too early to have a view, right? If you look at inflation metrics across the world - if you look at the US, you look at Europe, you look down in South Africa - you’ll see that one of the nicest tailwinds to inflation, and I mean tailwinds in terms of lower inflation - was lower energy prices.
That's been a theme for several quarters now, and unfortunately we’re going to see that energy spike come through.
And here's the market dynamic that should worry a lot of people: you're going to feel this down in South Africa. I know there's a lot of chatter down there around how much the petrol price is going to go up by.
And remember again, in terms of your pump price, only a portion of that's actually the rand oil price. A lot of that is taxes and so forth. So you've got to be careful with that calculation.
But the problem comes once markets adjust their pricing - if you think of taxis for example, down in South Africa - they'll adjust on a big jump, and then they don't adjust downward. And the same thing happens across the entire value chain. The same thing happens with regards to retailers.
You get some stickiness in prices. They move the prices up when they've got that flexibility and if things actually do calm down a little bit, they don't pass those price savings on further down the line. Assuming this all resolves, they don't pass that on. So I think that's a risk that you have.
Potentially, I think companies will be sensitive to pushing that up, and effectively maybe losing some market share if they're insensitive markets (I'm talking globally here). And so I think if this persists for a very long time period, the risks escalate - that this gets baked into your inflation story. But for now, it's probably too early to tell.
The Finance Ghost: Just one point that you might find interesting, because I know you don't necessarily follow the South African retailers that closely. So for the first time in, forever maybe, we’re starting to see the word deflation on the grocery side specifically.
And that's because you've obviously got this homogenous product set - where people are cross-shopping all the time. It's rice from one versus the other, or bread or milk or beans. It's not quite like clothing, where the products are not perfectly interchangeable, they're just substitutes.
And you're actually seeing deflation at Shoprite, which is how they are managing to just crush their competitors so beautifully. It's because of the amount of volumes that they're pushing through.
The other thing that I doubt you would have seen, it's just such a detailed thing - Shoprite recently started reporting gross margin by segment, basically. And the really frightening thing is, they have one of, if not the best gross margin of any of the food businesses, alongside a value retail strategy, with deflation!
I mean, incredible, right? It just shows - it can come through from only the absolute best players, and then they use it as a competitive advantage.
And what people love to do, of course, is they like to say, “Oh, well energy's up 5%, so now the inflation basket, the CPI basket, “acceptable” inflation is up, I don't know, 5% as well”.
So even if their inflation increases like 2% or 3%, they'll put prices up 5% and then they just lock in that extra margin for a while. It's a big part of what keeps inefficient retailers alive. That's why retail has been such a difficult space in South Africa in the past year, because when inflation goes out, it's the tide that goes out - and it's who's swimming and what are they wearing.
And there are lots of weak retailers, who are not surviving in a weak inflation environment, just as an aside. So one wonders to what extent this might change that, and ironically give weak retailers some kind of break.
Although, given that this will be straight into their supply chain, and weak consumers, I don’t know that it’ll really have that effect, actually.
Mohammed Nalla: It's an interesting dynamic because even if it gives them a break, it maybe gives them a break over a shorter time period. Everyone moves their prices; they're going to do that.
Remember, longer term, if this rationalises and if the stronger players say “Yes, we're going to pass those savings back to the consumer”- if they actually turn that in order to protect market share or gain market share (and again, Shoprite's done a phenomenal job there) - then those weaker retailers are still going to hit the wall at some point in time.
The point you raise around deflation is interesting. Because the other dynamic that's been strong in South Africa over the course of the last year (maybe even a year and a half now) has been the fact that the rand has been resilient.
The rand’s been strong, and given the high proportion of imports in South Africa, you're an import-heavy economy there - yes, there have been some good signs there. You've had trade or current account surplus for the first time since, I think, 2022.
So yes, there have been some good noises there. But as an import-heavy economy, stronger rand has certainly helped that deflation story. Let's see how that actually plays out.
Before I let you jump into specific stock stuff. We haven't touched on EMFX, or the rand, and then equity. So let's maybe touch on those two points and then we can definitely come into the stock-specific view.
I'll start off with the rand. The dollar has been the safe haven of choice. Gold hasn't actually done that. And the reason why gold hasn't been the safe haven of choice is, it was coming off a phenomenal base. I don't have to tell anyone that gold has actually been the safe haven. It just got priced in earlier, right?
So that's me maybe talking my book. I like gold as a safe haven hedge against war. And it's done that job over the longer term, but certainly not since the war has started. And the reason for that is because of how the market has priced this as an inflation shock.
Gold doesn't do well when real rates increase. And real rates have increased because inflation's steady in the US, bond yields have actually gone up as I've discussed. And so if real rates have increased (remember that's your competitor to gold in terms of safe haven flows, right, at some point in time), the relative attractiveness of gold is why that's underperformed, but it's also why the dollar has outperformed. It's because the dollar is still considered as the eventual safe haven.
Now on that basis, the rand is a high-beta, emerging market currency. So when you see the dollar strengthen - and it's strengthened by around 1.5% to 2% since the start of this war - you actually see an outsized move on the rand.
And that's really what you've seen here - the rand was one of the outsized performers when the dollar was weak. Likewise, when the dollar is strong, it reverses a lot more sharply. That's on the rand. I don't want to add too much more on that.
What I want to get into lastly is just on the equity side of things. If we look at the equity markets, they've sold off, but very modestly. The story for me is not a directional story rather than a rotation story that’s happened in the US.
If you look at what's done well, what's not done well, obviously energy stocks have been strong because of what's happened in energy markets with that big jump.
But then other players like AI, semiconductor names: some of them have been quite resilient. And that's despite all of this worry around the AI bubble and the SaaS bubble. You saw some of those SaaS names corrected and then bounced very sharply.
An interesting one for me was Sandisk, the memory-chip maker. Sandisk collapsed in one week, and the very next week got all of that back, and more. So you're seeing some of that rotation come through, some mean reversion trades coming through there.
And who's actually lost here?
If you look at consumer cyclicals, those have really struggled. Stocks like Apple haven't done fantastically.
Financials tend to get hammered because you're getting the move on the yield curve, you're getting uncertainty. So financials haven't done well.
Healthcare, that's also been interesting because there's some other stories happening in healthcare there, some news with regards to Eli Lilly, GLPs, all of that kind of stuff.
But in aggregate, I think you've actually picked up a little bit of a sectoral rotation story in the US. And why it's interesting is because, yes, we're now going to week three, but week one was actually very different from week two. If you had a look, I think defensives really didn't give you any defence in the first week - and then came back decently in the second week. Just last week you actually saw defensive (consumer staples, health care) found a bid, they were doing relatively okay. But people don't know how long this is going to last.
One last point on equities that I want to raise: we spoke about inflation, so this is relevant. People speak about oil, but they don't realise how much of the value chain in fertilisers also goes through the Straits of Hormuz. So if you go and have a look at fertiliser companies in the US, they've done really well. They're up around 20% the last time I checked (there are two names that I had a look at in that space).
The inflation story might be more than oil, there might be a food inflation story if some of the inputs into that value chain get disrupted for a longer period of time.
The Finance Ghost: Moe, you mentioned Sandisk there. Fun one: up 1,186% over 12 months! I decided to have a look while you were talking. Obviously data centres, AI, all the absolute craziness - it's not because everyone is suddenly using a digital camera and needs a memory card, that's for sure!
It is a very, very volatile time and I'll maybe now just use a few minutes to just give you some insights from the South African earnings season.
I've already given you the one on retail that I wanted to give you, which was to say, a super difficult environment. Lack of inflation really separates strong from weak. Lots of weakness, lots of concern around South African consumers. Online betting keeps coming up, competition from China, structurally high interest rates, fine, bank all of that - retail's tough right now.
What's doing okay? Well, property funds are actually releasing some half-decent growth numbers when it comes to their distributable income. So generally speaking, mid-to-high single digits - and some of them are getting their distributions up by double digits. Only a handful. In some cases, because payout ratios have moved higher.
But that also speaks directly to improved sentiment, in some cases. I suppose the cynical outcome is to say, “Well, do they just have fewer reinvestment opportunities?” My overall read across all these names is that sentiment is better, which is nice to see.
Reversions on leases are looking quite promising, particularly in retail and industrial, as you would expect. Office is still tough, especially the low-grade stuff - pretty much everyone is just running away from that. They continue to do so. Premium and A-grade is the only type of office property that these listed funds actually want to own.
I would say that a focus on quality is actually a theme in the sector. So lots of disposals of non-core assets. Just going away from trying to be all things to all people, and rather saying, “Look, this is our game, this is how we make money”.
There are some funds that have had quite opportunistic plays on the residential side. It's not often that you'll see names like Growthpoint breaking ground on residential partnerships, which is quite interesting. One or two others that have done it.
Moe - as a buy-to-let enthusiast, you might enjoy this. SA Corporate Real Estate. Would you like to guess how many apartments they have? You always make me guess random stuff. How many apartments do you think they have, as part of a deal they once did to acquire what I will refer to as “a basket” of apartments? Just give me anything.
Mohammed Nalla: No clue. Hundreds. Thousands.
The Finance Ghost: 15,600 apartments, my friend.
Mohammed Nalla: Ouch.
The Finance Ghost: I feel tired.
Mohammed Nalla: Where are those?
The Finance Ghost: It’s a mix of suburb, inner-city properties - they bought a whole lot of portfolios basically. Now as much as that sounds horrendous to manage - and I'm sure it is - they bought them at such a discount to NAV that they're just releasing them into the market over time, at a rate of like 800 to 1,000 apartments a year. And they're getting a nice uptick versus what they paid.
But yes, I can't help but think about the admin along the way.
So, some opportunistic plays, overall sentiment is decent in property. I remain pretty strongly invested there in my tax-free savings account, particularly because then you get those REIT dividends tax-free, which is delightful. And I’m still happy with what I'm seeing there.
The other thing I want to mention is banks, very briefly. They’re doing much better in Africa. Investors seem to be buying into that story. Macroeconomic situations can turn very quickly though. So all we need is a situation where the dollar gets strong again, and some of those African currencies will go the wrong way all over again. Or if something goes wrong with the underlying commodities.
Whatever the story is, unfortunately frontier markets are vulnerable and sensitive to the geopolitics. And that's why they can give you - in the good years, they're really good, and in the bad years it can be extremely poor. So just keep that in mind.
MTN is a cautionary tale among the telcos banks - less extreme because they're not as much of a play on Africa specifically - but just be careful there.
And then to finish off, I wanted to highlight two companies on the JSE that are perhaps slightly off the beaten track, and actually putting out some good growth numbers. The first one is CA Sales, or CA&S.
They are basically an FMCG-enablement company, that’s the best way I can describe it. They help FMCG companies reach their markets. So a mix of logistics, merchandising in the actual retailers. They are the glue in the middle, if that makes any sense.
And it's actually traditionally a Botswanan business. That's where it's from. Now, as you know, diamonds turned out to not be forever. So Botswana is a very bad story right now and getting worse.
CA&S makes - not necessarily the majority of their money - but their biggest segment is Botswana. But they've been so busy with bolt-on acquisitions to diversify in Africa, that they’ve actually managed to grow their headline earnings per share in the latest period by between 15% and 20%. Which is pretty remarkable given the underlying exposure.
I'm looking forward to seeing those detailed numbers coming out. So we'll just put a pin in that one.
The second one I want to mention is one I do own, and it’s been very good for me. Weaver Fintech is at the forefront of “buy now, pay later” (BNPL) in South Africa. Headline earnings per share up a beautiful 40%. The stock was completely off the radar a year ago. I could see what they were building with BNPL, it looked super interesting.
They actually changed their name from Homechoice to Weaver Fintech. Suddenly everyone started to take notice. There’s some liquidity in the stock and the stock has done exceptionally well, and so has the business.
They're building a really, really good fintech platform around a proper understanding of who their customer is. Primarily African females. They build around that and they do it very, very well. So, you can still find growth engines on the JSE if you know where to look.
And on top of that, banks, a good story in Africa; property funds, a pretty good story across the board; retailers: life is hard. I would say those are some of the themes that have come through quite clearly in this earnings season.
Mohammed Nalla: That's absolutely fascinating.
One last question - on some of those fintech plays, it's been such an interesting space because the need for disruption is obviously quite strong. In a market like South Africa, where you've got strong oligopolies, those banks are remarkable.
You have a look at the ROE, you see they’re pretty resilient. Results are kind of steady. Is the value-unlock catalyst for some of those fintech plays, the fact that they might actually get taken out by the larger incumbents? Or do you see them actually just growing organically and becoming the incumbents of tomorrow?
So do you see that as a long-term, long-tail, or do you see it as a quick catalyst, “get taken out by the bigger players” and then move on?
The Finance Ghost: In traditional payments, I think a lot of it is build to be acquired, if I'm honest, because I think that's a really tough space. When you're doing stuff like “buy now, pay later” and you're building shopping platforms around particular customers, that is more interesting. It's a hybrid of a retail play, which is the traditional HomeChoice business and then the fintech, the lending, etc.
It would probably be an interesting acquisition target down the line, but I think a bank would struggle to own them because there's still a retail footprint there. Banks are almost one step up in the value chain, right? So Weaver needs to borrow money in order to lend it out on their platform - or where do you think they get that? Through a combination of shareholders, paper in the market, banks, etc.
So it's these different layers in the value chain, ultimately. But Weaver, I don't think it's a natural acquisition target for a bank. If anything, they would probably be acquired down the line, maybe by a retailer. But the Comp Comm is pretty strict down here, so I wouldn't hold my breath for that.
Mohammed Nalla: Thanks for those insights. We'll definitely watch that with a lot of interest.
Again, I think the need for that disintermediation is quite strong. How tight are your underwriting criteria? Some people finding some very nice, distinct niches down there.
Heck, one last comment is, with all the talk that we're seeing around online gambling, yes, we have the big gambling houses that are listed on the JSE.
But some of these online gambling companies are disruptors as well. And insofar as I understand, there's no direct-listed way to get exposure to that.
Yes, you can think it's a social ill and lots of terrible things there. But if there was an investor interested in that, what avenues would you have, beyond your traditional gambling stocks that have been listed for a very long time?
The Finance Ghost: The traditional gaming houses have got online betting businesses, but they are still quite a small part of the overall story. A lot of them are still casinos, bingo halls, limited payout machines, that kind of stuff ultimately.
So we don't have a lot of that. I'm not close to the details. I do know that one of the companies that has been very active in South Africa with online betting, is internationally listed. Not close to the details on that one though.
I think at some point the clampdown is coming on gambling, one way or another.
Mohammed Nalla: The reason I ask is because, at this point in time, given the backdrop, how we started the show: it's war, it's vice. For those of you building a “vice” portfolio, there's online gambling, there's war, there's weapons manufacturers.
We're certainly not advocating that you go and get exposure to that, but I guess that's what makes markets. There are people that will happily invest in some of these stocks.
I think it's been an interesting show, Ghost. I think that's where we've got to leave it, in the interest of time.
For our listeners. We hope you've enjoyed this. Lots to unpack in terms of the macro, as well as a drill-down in terms of some of the South African market dynamics.
Let us know what you thought of the show.
Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there. Until next week – same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
This is just a reminder that nothing you hear on Magic Markets should be taken as advice. Please at all times speak to your personal financial advisor when making decisions about your portfolio.
