Episode Transcript
The Finance Ghost: Welcome to episode 266 of Magic Markets. Thank you for being here with us. In our last few shows, we’ve welcomed some really interesting local fund managers to Magic Markets to come and talk to us.
And by the way, you should totally go and check out those shows if you haven't done so already. One with Aylett & Co. and one with SaltLight Capital. Please do check those out.
But in and amongst all of that, we've certainly been talking about a lot of current affairs lately. There's just no getting away from it, because obviously that is what is driving markets at the moment - what's going on in Iran, and what this means for all of the various macro factors, asset prices and everything else.
Go and check out last week's show if you want a really nice whirlwind overview of that and some updates from the JSE earnings season as well.
And this week, Moe, we are going to get a little bit more specific. We both went off and did a little bit of research into some sectors that have been affected by this thing. And it's going to be a pretty interesting discussion because we're going to learn from each other, which is always the goal of this thing, right?
Mohammed Nalla: Indeed, Ghost. Right now, the war is dominating the global narrative, and so it's very hard to get away from that. But we also wanted to do something different because we don't just want to regurgitate what you're seeing out there in the headlines.
In fact, it's just too fluid to discuss that.
As it stands today, we're doing this earlier on in the week. This podcast will be released later on, so things will develop over that time period. But we've literally gone from a weekend where Donald Trump said to Iran, “You know what, you've got 48 hours. And if you don't open up the Straits of Hormuz, we're going to come after your energy infrastructure and your desalination plants”.
And then this morning, before markets opened, the typical “taco Trump trade”, right? You know, they say “Trump tacos”, effectively saying, “Oh, you know, we've had great discussions with Iran”, which by the way, Iran denies. And now we're going to be negotiating over the course of the next five days.
So the question is, has he just bought a little bit of time? And it's why we don't want to just discuss the “blow-by-blow” of what's happening with the oil price. Because this morning, oil's down in the double digits, back below $100 (pretty much), in line with where we were last week, maybe a little bit lower.
Gold's been so volatile. Gold was up, then it's down. And in fact, from its low on this day when we were recording this, it's actually moved by as much as 10% from the low to where we are right now. So lots of volatility out there.
Ghost, that is why we said let's look at what's happening behind the scenes. What are some of the longer-term tail effects that might actually come through? And what I've done with that, is I've decided to have a look at global logistics.
Now, one of the reasons is that in Magic Markets Premium, we're covering FedEx. That's a stock that just put out results. And again, longtime listeners will know my views on FedEx.
And if you're not a subscriber to Magic Markets Premium, go and check that out. You're going to get a detailed report from the bottom up on that company. In fact, a new global stock every single week, on the report. R99 a month, not too bad. But Ghost, I get distracted by that.
I looked at logistics, and that was a nice interplay in terms of some of the work that we have done on FedEx.
I'm going to pause there. I don't know if you want to say what you've covered - and then we can see how that dovetails.
But logistics is very much the emphasis of what I looked at.
The Finance Ghost: Yeah. So, given the proximity of Dubai and perhaps the fact that I have family who live there, I couldn't help myself but go and have a look at the Dubai market, which is obviously incredibly interesting and has been significantly negatively affected by what's going on out there.
But I like the logistics start. I think let's start there and get a sense of what is going on. And maybe just to add to what you were saying, about looking at the prices on the day, Brent Crude, etc. - it's anyone's guess what's going to happen each day. And it really depends on what comes out from a political announcement perspective, day-to-day happenings in the war.
That's just trading/gambling, right? There's absolutely no way of knowing if and when Brent Crude drops back down to where it was, versus spikes: who knows? But there are certain things that have changed, and I think that's where Dubai is going to be an interesting conversation.
But I'll let you do logistics first.
Mohammed Nalla: It ties in because a lot of people hadn't heard of the Straits of Hormuz before this. Right? I was quite familiar with it for a variety of reasons. And that's where Dubai comes in. Because literally on one side of the Straits of Hormuz is the United Arab Emirates - not so much Dubai, but the UAE in general.
And across this very narrow stretch of ocean you've got Iran just on the other side. And you can literally see one side from the other. It's as narrow as that at some points.
Ghost, if I can wrap this up in almost one sentence, think back to how Covid broke global supply chains. I would say it's not really breaking global supply chains, but rather politicising them. Because Iran has been pretty explicit in stating that the Straits are not closed: “we're letting through ships of countries that are friendly to us”.
And again, I saw this as a little bit of a tongue-in-cheek joke. They said, “South Africa, you can let your ships through”. And I was thinking, well, we don't have that much of a marine fleet, so thanks for the sign of confidence, but not much benefit there.
And if you are interested in this, go online, there’s a site - I think it's called marinetracker.com or something like that. It allows you to track the transponders of a lot of ships. Have a look at the Straits of Hormuz. What you're going to see there is an average of around 150 to 250 ships a day, going through these straits. That's a lot of global trade.
We're not just talking tiny little ships, we're talking mega carriers: crude oil, liquefied natural gas, container ships. We're now down to around three ships a day; at some point, zero over a couple of days. And so I would say that's pretty much closed, because them saying “Oh, we're letting through some ships” just doesn't move the needle on that.
Now, why is this important? If there's a breakdown in terms of the ability for these ships to move through, then your supply-demand (when it comes to global freight) starts to break down. And so that's where I decided to do a quick desktop search on what's actually happened with shipping costs.
I know this because I'm involved with certain smaller businesses down in South Africa that are exposed to shipping costs. You see a number of things happening here. One is that certain goods that were previously being moved via container - now there’s uncertainty in terms of whether that container ship will even arrive.
So some of that flow is moving into air freight. It's creating additional demand in air freight, which at the same time has the higher oil costs on the other side. So not only are you seeing an impact on shipping rates, but you're also seeing it filter through in terms of air freight costs.
Quick litmus test on this. The large crude carriers’ numbers have gone from around $50,000 to $80,000 a day to over $400,000 a day. So that's massive, right? And then if you're looking at LNG freight, that's a 10x move; it went from around $25,000 a day to $250,000 a day. So you're seeing massive moves come through here.
If you're looking at other charter rates, you're looking at three, four or five times the price. Now, it's not just that there's still some sort of demand that comes through that you've just got to move stuff around the world. Are the shipping companies actually even making that money?
Because if we look at the other side, if we look at their costs - and I've just got one data point here - if you look at what their war or risk insurance has actually done, it's gone from a very small 0.25% to 7.5% of the vessel value.
So on a single voyage, that can rack up into millions of dollars. And that is why it's not as easy as saying, “You know what? You can't go through Hormuz, you can't go through Suez. We're just going to reroute this through South Africa, for example, Cape of Good Hope, you should do really well”.
You've got to lay on the additional insurance costs, the number of days that the ship's going to actually have to be on the water, as well as the fuel costs going around the southern tip of Africa. That's going to be a very expensive exercise. So those are just some of the dynamics.
And I'm going to pause there, Ghost, because we've now touched on the straits, we've touched on Dubai.
What have you actually seen happening in that Dubai market?
The Finance Ghost: Just before we move on to that, that war insurance is so fascinating, right? To try and price that risk is just super interesting. I mean, who knows? It kind of feels like, obviously it's like anything, right?
You price for the percentage likelihood of one of the ships getting sunk that you've now gone and insured, and you're collecting premiums from every ship that's going anywhere near there. I suppose it’s no different to anything else.
But if the war just kind of blows over, or if there isn't some kind of major loss event, then the underwriters make a killing, right? They've charged you these fat premiums, and actually, nothing happened (which is what people would hope for).
It's just interesting how that works.
Mohammed Nalla: It's definitely interesting.
I want to jump in there because a company that we looked at a while ago was Lloyd's. There's Lloyd's Banking Group, and then there's Lloyd's of London, which is the big insurance company. Slight differentiation there.
If you look at the performance of some of those insurers, a lot of them actually traded down very sharply. A lot of them were saying, “We can't insure, because we don't know how to underwrite the risk. Then Trump actually said, “You know, the United States will stand there and we'll offer this insurance out to a whole bunch of ships”.
He said a lot of things over the course of the last three weeks. Whether those are practical or not, is again, questionable.
But to your point, it's flipping a coin. It's black or red, because if you've underwritten this risk, there's no real way for you to actually manage that. You can obviously syndicate that. There are reinsurers that come in behind that.
But if the war doesn't happen at that point in time, they could actually just sit on that premium, and there could be a big windfall. This reminds me a lot of what you're seeing on betting markets - Kalshi, Polymarket - because that's almost like underwriting this kind of risk, but for the retail investor, right?
The Finance Ghost: That's exactly what it is. Such a crazy time we live in.
Let’s move on to Dubai. I took a look earlier today before we were recording. This is not a market that I'm particularly familiar with. The research that I did today was pretty much from zero (just to give that a little caveat here). But the Dubai General Market Index is only down around 11% year-to-date; it's dropped more than 20% or so from its peak. Again, by the time this goes out, that situation will be different from what it is when I looked.
But the point is, it is down, unsurprisingly. But then you have to actually dig into the different sectors, and here's where you can just apply some common sense.
So what would have done poorly in the last month? Property. What is Dubai so famous for? Property.
If I went and looked at Emaar Properties, that's down 30% over one month. That is the biggest property developer in Dubai, from what I understand. Their portfolio and their track record includes buildings like the Burj Khalifa, the Dubai Mall, and the Dubai Marina. I've seen all these buildings. I've been to all these buildings. Absolutely incredible.
Honestly, quite the track record. But doesn't help when drones are coming and potentially attacking these buildings. It is, unfortunately, as blunt as that.
Another good example is Deyaar Development. That's down 22% over one month. So, some pretty nasty sell-offs there, as you would expect to see.
The next question is: clearly things are hard there; fine, what does that mean in terms of the survivability of these firms?
Now that leads you to the next question which would be: balance sheet. But this is a Sharia Law environment, so debt is not quite as straightforward. You might be tempted to think, well, they don't really use debt, for example. There's a fund on the JSE called Oasis Crescent. I think it's Oasis Crescent Property Fund and they famously don't have any debt in it at all. It's basically unleveraged exposure to property, because it is Sharia compliant.
But in this world they create Sharia-compliant debt structures. These are essentially Islamic bonds. Moe, you'll probably understand this stuff much better than I will. What I will tell you is that I found an article from the end of last year quoting a Bloomberg statistic. Bond and sukuk (that is essentially Islamic bonds) annual issuances grew more than 12-fold to $6 billion annually by the end of 2025 versus 2021. A massive uptick in debt issuance.
And why is that? It's because we've seen a land grab strategy in Dubai. We've seen arguably a property bubble. I think now you don't need to say the word arguably anymore. If anything's going to pop a bubble - if it's not this, then nothing is going to pop it.
That same article noted 70% growth in property prices since 2019. And remember, this is in hard currency.
The Dubai investment story has been quite remarkable, actually. Obviously, lots of debt out there means big maturities coming down the line. So again, that article reckons maturities of around $8 billion due by 2030. I can believe it. If I look at the rate of issuances, those bonds are only due several years after they're actually issued.
So this led me to the next logical question, which is, who's exposed here? Who has been buying up these bonds? The answer is primarily banks based in the region. So, yes, there are some international banks that have obviously participated, but it looks like it’s banks in the region that are primarily exposed here.
So what does that mean now in terms of risk? Even if this entire thing blows over really quickly, let's say it all just goes away tomorrow, immediately, everything's fine, everyone's friends, it's done - investor sentiment towards Dubai has surely taken a knock, right?
If you're now thinking about where to go and buy premium property, are you going to go and buy it in Dubai? And are you willing to pay what you would have paid two months ago? Because suddenly, for a lot of people, the reality has been a case of, “Hang on, I can get trapped there”.
And that's not really something that was on anyone's pros and cons list a couple of months ago. It was, “Oh, the weather's great, and I'm tired of London”, and all that kind of thing. So investor sentiment has surely changed.
Now, what happens in a debt issuance is that the debt is issued based on a loan-to-value ratio, right? And debt covenants, and an understanding of what these properties are actually worth. If the values come off, where does that leave your loan-to-value ratios, where does that leave your covenants? Are there breaches of these covenants? I don't know yet. Going to have to see where the dust settles.
So then I went and found one of the banks (it seems it's the biggest bank) - Emirates NBD. It’s down 26% over the past month. So it’s roughly in line with the property names. No real surprise there. The banks are hurting.
One other sector that I simply had to go and have a look at, of course, was hotel ownership, because that's the other thing I thought of. It’s one thing to sell property there, but certainly, what you don't have in Dubai is incoming tourists, because they can't get there, even if they really wanted to.
I suppose maybe it's bullish that they also can't leave, so they need somewhere to stay. I hadn't considered that, actually. It's a bit sad - that might be part of the bull case. Nothing like having a “captive audience” - literally!
My research into the largest hotel owners in Dubai revealed that they are generally not listed. The biggest is the Jumeirah Group, which is state-owned.
And that, of course, leads me to my final point. Shareholders in Emirates Airlines? Government. Dubai airport? Government.
Perhaps a bit of a cautionary tale here around privatisation, because if you privatise everything, there is just no resilience in a situation like this.
What happens when your airport's been attacked, and it's privately owned, and they may or may not have had insurance for that - and then your whole country shuts down as a result?
In a case like this, you want government to be the owner of things like your airport and your major airline and some of these other things, because government can then absorb that.
It still hurts the fiscus, obviously, but it's very different to a private balance sheet falling over.
So yeah, pretty interesting. Not as bad as you might think. You know, 20% to 30%, it's a normal sell down. It's not like an absolute catastrophe. And off a high base.
Mohammed Nalla: Listen to Ghost telling you a 30% is a normal sell-down [laughs].
The Finance Ghost: It is a normal sell down. I mean any crisis is kind of that level, right? This is pretty bad, very localised. I was expecting worse.
Mohammed Nalla: I think a normal sell-down is 15%, 20%. I mean that's a proper sell-down. I think when you're in the 30s, that's big. Look, I don't think it's existential levels. Existential levels is when you're down 50%, 60% and then beyond, right?
So I think you've raised a couple of very, very interesting points.
To the point around the exposure to the sukuks and the banking system there. We know at the end of the day the sovereigns generally tend to step in from a financial stability perspective. So I wouldn't be horrendously worried about that if you were a small scale depositor, for example.
For me, I think the focus on the property market is definitely key because Dubai existed because of, as you've indicated, people who were tired of the UK and everywhere else in the world and ran away from their tax burdens. They went to Dubai and the weather was lovely. And so that veneer has started to tarnish a little bit.
To your point of a trapped audience, I've been watching this again. I've got some family and friends out there, and some people have actually managed to leave the UAE. They literally drove across to Saudi, managed to get a flight from Saudi, and flew back home.
Whether it was Canada or the UK, they managed to actually get out of there and they've left the apartments behind with stuff. And they said, “We'll figure it out, we'll decide whether we want to go back or not”.
So it's still early days in some respects. Yes, we're entering week four of this war. If it does resolve, I think some of that will go back - you’ll see the sharp V-shaped recovery - and Dubai will get back to normal.
However, if this persists, then I think you're going to see a lot of property they're going to have to advertise, and say, “Straits of Hormuz frontage” [laughs]. I say that very tongue-in-cheek.
But just on that point, historically, moving a container from the UK to Dubai (and now I guess we have to look at it the other way around) would cost you around $2,000. And that cost has gone up in line with the other shipping costs we've mentioned, where now you're looking at around $6,000 / $8,000 and above. As you've indicated, there's not a lot of shipping going on.
So if I circle all the way back to the logistics point I was trying to make, your larger global liners like Maersk, Hapag-Lloyd: those have actually suspended certain routes entirely, pending a resolution.
You've seen the same thing on some airlines. I think it was KLM that said, “We're suspending routes to the Middle East at least until May, and then we'll reassess”. So I think that's where you're starting to see some of those cracks emerge.
And one last point that I want to land on, as we move towards the conclusion of the show. Again coming full circle (we’ve spoken about Dubai, logistics and so forth) - who actually benefits from this?
And in the early days, a lot of people said, “Well, go and have a look at the Chinese shipping companies, because they actually would stand to benefit”. Their ships are moving through the Straits of Hormuz, or arguably could move through the Straits of Hormuz.
I had a look at this, and interestingly enough, there's a Chinese shipping company called COSCO, not Costco with a T, but COSCO. They are one of the largest shipping companies. It's listed in Shanghai. And again, if you have a look at their performance as the war broke out - and we're talking the very start of March - their stock actually rallied in excess of 20%.
And that's because people said, “Ah! You know what? No one's gonna be able to ship. These guys are gonna be able to ship”.
Well, guess where we are right now, Ghost? We're pretty much flat on where we were at the start of March. Because it rallied, it came back very sharply, and then it bounced around.
And as the market takes a slightly more mature approach here, and they say, “Yes, shipping rates have gone up on the spot market” - but longer term, as we've indicated, your insurance costs have gone up, your fuel costs have gone up, so there are no real benefits there.
And then you could look at Indian shipping companies as well. I had another look there, and there's a company called Great Eastern. These are companies that don't get a lot of airtime because again, they're listed in India or they're listed in China. But these are companies that have done okay.
If this actually lasts a lot longer, that's when you need to start looking and saying, “Are there any ships moving through the Straits of Hormuz? Who are they? Can they actually monetise this? Does this actually have a very long tail?”
And right now we have no clue, because maybe we've got five days of Trump negotiating with Iran, maybe we don't?
One last point. We spoke about Dubai, and you mentioned how the state steps in at the end of the day, or can step in at the end of the day. A lot of the hotel or hospitality groups might be owned by the state.
The problem with that entire narrative, though, is: what happens if the state's revenue lines get compromised? And I won't use Dubai as the example here, I'll use Qatar, because Qatar has actually had massive damage to some of the LNG plants.
And thus far they've quantified that at an annual loss of $20 billion. $20 billion a year! And they estimate it's going to take them five to six years to rebuild what's been damaged already. So if you wrap that up, that's $100 billion, thereabouts, in terms of lost revenue - that severely constrains the revenue line of some of these states.
And so I would say, overall thesis, if you think, “Yes, there's going to be a bounce back or the state's going to step in to save some of those investors in Dubai”, just be very wary in terms of what actually happens to the state's revenue line, should this actually get a lot uglier.
Ghost, it's interesting. We don't have any definitive idea of how it's going to resolve, because, quite frankly, no one has that when you have someone literally making up foreign policy on the fly - not tweeting it, but “truth socialing” it… Is that a term? I can't say Tweet…
The Finance Ghost: “Truthing it”...
Mohammed Nalla: There we go!
The Finance Ghost: …I suppose. I don't know. I'm not on Truth Social, I can tell you for sure. Hard to say. But yes, that is the world we live in and I think we can probably leave it there.
I’m happy that I don't have a very fancy apartment in Dubai, although if I had the money to buy such a thing in the first place, then my life would probably be okay. But that's the thing with high-net-worths, right? They're fickle, and capital can flow wherever it wants to go.
So that's the problem for this Dubai property bubble. It's going to be an interesting thing to see what the long term effect is.
To our listeners, thank you for joining us. Sometimes it's fun to look at specific sectors elsewhere in the world, and try and figure out what's going on, and just apply some logic and see if it's what you think it is.
Let us know what you think, obviously. And Moe, always great to do this with you, and I look forward to doing this again next week.
Mohammed Nalla: Indeed, Ghost. I'm going to point our listeners who aren't subscribers to Magic Markets Premium for some detailed stock-specific research from the bottom up. This week we're covering FedEx, but every week we cover a new global stock.
It's only R99 a month. We've kept that pricing on hold for the longest time. Again, because we want to deliver some value to everyone out there who's a retail investor but wants institutional-quality research. Go and check it out. It's magic-markets.com.
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. 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.
