Episode Transcript
[00:00:00] Speaker A: The markets. We just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts, the Finance Ghost and Mohammed Nala.
[00:00:13] Speaker B: Together we have more than 25 years of combined experience in the markets.
[00:00:18] Speaker A: Looking to take your market knowledge to the next level? Well, you are certainly in the right place. And you should also check out Magic Markets Premium, our weekly research report and podcast covering global stocks. It is still just 99 rand a month or 990 rand for the year and features literally a couple of hundred reports and podcasts on international companies. This is an incredible resource for any stock picker. Welcome to episode 284 of Magic Markets. I had to wait for a siren to stop in the background now, which I think is a very good summary of my demo because pretty much everything I touch at the moment breaks, which I'm not enjoying. But anyway, it does teach you some lessons about platform reliance and needing to be in more than one place. And perhaps that's a good time to mention that we are planning to start putting our podcasts on YouTube, which I think is quite exciting because there are a lot of people who want to listen on YouTube, so check that out. We'll obviously make sure that we send out the links, et cetera, when we are ready on YouTube. Please be sure to subscribe there because the big dream one day is that perhaps Magic Markets Premium can then enjoy some of the very cool stuff that YouTube offers as part of those creator monetization programs. But we have to get the listen hours up first. So TLDR the MO is go and listen to our podcast on YouTube once it's ready.
[00:01:29] Speaker B: It's just really exciting simply because this world moves so fast and how people effectively get in their content digest. That content is evolving and we would like to evolve with that here at Magic Markets, we're looking forward to putting this stuff on YouTube. For those of you that want to see us on YouTube, the spoiler here though is that you're probably still not going to see Ghost's face. Probably still going to have to hide behind a purple sheet or something like that. But we'll do our best to make it as entertaining as possible.
[00:01:53] Speaker A: Yeah, maybe one day behind Premium. We'll see. We'll see that in years to come. For now though, we are going to chat a little bit about consumers MO because last week we had the Saab keep rates where they are, which I was very pleasantly surprised by and very happy about. I think a lot of people were. So I'm keen to get your thoughts on that. Definitely. And then we also saw some important updates from consumer stocks locally, Cashbold and Mr. Price primarily that I think are worth just mentioning on the show. So I'll let you take us through it first in terms of your view now from outside South Africa. So you're very much just working with the data here on what the Saab has done, how the consumer is looking and all the rest.
[00:02:30] Speaker B: Everyone who listens to the show over the long term will know that I'm slightly more hawkish. I certainly support the Saab's hawkish stance. I think it's responsible and really that institutional credibility filters through into inflation expectations. It anchors a whole bunch of stuff. So long and short of it is that I was actually surprised to see the Saab keep rates on hold at 7%. But I'm going to caution people who are getting too excited here because this was not a dovish hold still the same hawkish Saab that we have come to know and love or loathe, I guess. And what was interesting is that in the latest meeting it was a still a split vote. It was a 4 to 2 split vote to actually keep rates on hold with two members still wanting a 25 basis point hike. So that's the reason why it's still got that hawkish told to it. And if we compare that to the May meeting where they actually hiked rates by 25 basis points, that was also a split vote of 4 to 2. But at that meeting, two members were preferring no change. And so the majority still won out on both of those meetings. Meetings. That's just how it works. Now the important thing to note is that I don't think we're out of the woods yet. If you looked through the Saab's announcement, you listened to what the governor was saying effectively in May, they were really concerned around the inflation shock. You had oil coming through quite strongly because of what's happening in the Middle East. Fuel inflation was surging and so the inflation forecast actually lifted to 4.4%. Their growth forecast was cut to 1.2%. But again, we know that a lot of the growth issues in South Africa are not as a result of tight monetary policy. It's rather some structural issues below that. And so when we came through into this last meeting, the July meeting, the picture actually became a little bit more balanced because the Saab's own internal forecast for inflation for this year improved marginally to around 4%. Remember, that's still well ahead of their 3% target. That's the new target is 3% with a 1% tolerance on either side of that. And so at 4% you're pretty much at the upper end of that guidance. And so that's probably why there was some balance there for the MPC members to say we're at 4%, we're at the upper target, let's see what happens. We can actually just wait out another meeting and if we feel that it's warranted at the next meeting that the inflation pressures are still there, they're still in the economy, then we can actually move at that point in time. The problem with inflation is that the latest inflation print CPI came in at 5%, which is actually uncomfortable versus that 3% Saab target. Yes, the Saab is seeing it at 4% over the course of this year. But remember that takes into account some of the lower prints we had earlier this year. And the main pressure point, no surprises there, it's the fuel story, but it goes beyond that because if you strip out food and fuel core inflation in South Africa has also increased and this is as a result of second round effects which we have spoken about on the show. But then there's also the pesky issue of administered prices. We know Eskom's put up prices, we know your rates and taxes have gone up and that all starts to filter through into inflation. So that's certainly a concern. The other thing that is quite concerning is that services inflation is also quite sticky and that covers things like insurance, transport, housing, all of that. And that's a lot harder to reverse than a petrol price coming down when oil prices come down. So that's the reason why the Saab does remain quite concerned, quite hawkish. And so I would say the next move is genuinely data dependent. If we see the oil price collapse back down into 60, that's not happening at the time of this recording. Heck, we're close to around 100. It just came down because again now it's piece on, piece off. You know, it's really quite fluid out there. But if we see the oil price gap back down to the 60s, you may see the stab just stay on hold. Just want to see what actually happens with inflation and with the rate hike that they've already pushed through. However, if oil remains close to 100 and above, I think you could probably see another hike come. So we at this cusp where it is going to be data dependent, the Saab doesn't know anything more than we know and they're certainly watching global events. Now I want to bring that back home very quickly in terms of what that means for investors. Obviously on the bond curve, the short end that's sensitive to the Saab, the long end depends on credibility and inflation expectations. That's the Saab hawkishness that comes through very important. On the equity side though, it is still a tough backdrop for South Africa simply because the consumer's not out of the woods. We know that consumers are under a bit of pressure and I'm going to actually wrap with a quick look at retail sales and actually what also released last week just to show you that it's not really firing on all cylinders. Retail sales in South Africa up 2.3% on a year, on year basis. Remember this is a macro print so I know you're going to go into the detail of specific retailers, but on a monthly basis only grew by 0.1% after 0.8% in the prior month. In April that number was also revised lower. On that basis the consumer is not dead, but they're not booming. And so I would say yes, you might see certain sectors actually outperforming. I know on the latest print clothing and footwear did really well. Other retailers, that's a very broad category doing quite well. But other sectors may be struggling a little bit. Ghost, the Saab is trying to be responsible here. Let's see. I don't think we're out of the woods just yet.
[00:07:27] Speaker A: No, I don't think we're out of the woods at all. And thanks for the additional insight there Mo. And long time listeners will certainly know that you have at times been more in support of the Saab I think than many of the consumers on the ground. But the good thing about that is you get to look at the actual data. Whereas obviously it's people's lived experience on the ground. No one wants high interest rates and so obviously we get irritated when we see that stuff coming through. A couple of recent retail updates that I think are very relevant to this conversation. So the first one would be Cashbold revenue in the latest quarter. They've released an update now is up 6% but almost all from new stores, unfortunately 5% growth from new stores versus just 1% from stores in existence before July 2024. By the way, many retailers will define new stores as those that are not more than two years old because they wait for it to mature. So you've got a scenario here where the mature stores contributed very little growth. Full financial year also up around 6% again looks better than it actually is because of the impact of new stores. And here's where the issue really comes in, is that inflation was only 1.5%. Now, that is quite low. And you would expect that if inflation is low, then volumes will be nice and strong. Unfortunately, existing stores was only up 1%. So if inflation was 1.5%, that tells you that volumes in the existing stores were negative. And that is a pretty serious problem during a period of modest inflation.
So concerning indication of consumer health there. And obviously the trick with Cashbold is that this is a discretionary retail business that requires people to feel good about investing in their homes and those sort of assets. So not a great indication there of consumer health whatsoever. Cashbold would have been very happy that the Saab did not hike rates. And then at the other end of the spectrum, we have Mr. Price. Now, Mr. Price is the quintessential cash apparel retailer. They don't focus very much on digital sales. They don't focus very much on credit either. So it's pretty concerning when you see numbers like the ones I'm about to share with you. For the 13 weeks to 27 June 2026, group sales at Mr. Price were up 45.3%. But that's no indication of the real story because that includes nkd. Take out nkd, that's the company that they recently acquired in Europe, and you get 3.2% growth. Now that still sounds decent. Fine. And the broader market was only up 0.8%. So technically that means they gained market share. But here's the trick. How did they gain the market share? Sadly, comparable store sales were flat. Trading space up 3.8% on a weighted basis. So guess what? New stores, once again, the source of growth, not the comparable store base. We're talking Mr. Price here. Now, this is value Clothing. We're not talking cash build, where people need to feel good about building on a new room or renovating a kitchen. We're talking Mr. Price, where you go and buy affordable clothing. And if we actually drill down by category and we look at Homeware, then you'll see another indication of a tough consumer story. Growth just 0.7% in homeware, comparable sales down 3.3%. So as soon as you touch a more discretionary category, the numbers just fall over. Now, the exception here is Yuppie Chef, which achieved double digit sales growth. As usual. This is very much what we're accustomed to seeing at Yuppie Chef. That high LSM layer in South Africa continues to spend money very nicely, thank you very much. But if you look at the rest, it doesn't look great. And that's why the sector is in the doldrums. The Fashini Group down 57% in the past year. Market cap now just 17.3 billion. Truworth's down 26% over 12 months but was coming off a much lower valuation base. Truit's now 20.6 billion rand market cap that is bigger than the Fashini Group, which is quite a shock. And both of them are smaller than the fintech company that Pepcore has now cobbled together by combining flash with shop to shop. They reckon that then is worth just over 21 billion rand. Obviously that hasn't been tried and tested in the listed space yet, whereas TFG and Truwords have. But moral of the story here, tough, tough, tough times for the South African consumer story. It's not looking good Mo. It's not a sector that you want to be invested in right now with only a few exceptions.
[00:11:23] Speaker B: Yeah, Ghost. I mean it's very interesting and it's nice to see I guess in a way the bottoms up data correlating with the top down data because that's really the story that we're looking at. It's a weak and fragile consumer growth, not really firing on all sorts cylinders. And that's what makes our initial discussion around the Saab so relevant. I want to just circle back as we close off the show to one key point. I mentioned how the Saab's credibility is so important. Higher rates. That rate differential really does do a lot of work in terms of demand for South African government bonds. It does a lot of work in terms of the Rand. And on the announcement last week that the Saab was actually keeping rates on hold, we actually saw the Rand weaken quite substantially. Now it's not a one for one related to the Saab decision. You did have a stronger dollar on the day, but I generally like to attribute around 60, 40 split. 60% going in terms of the dollar move, 40% of that in terms of the local idiosyncratic move. It's not an exact science but that's showing you that the higher rates actually filter through to a stronger Rand in time and that then helps mitigate some of the inflation impact. That really hurts the lower end of that LSM curve that we spoke about. That's a sector that seems to be under a lot of distress. Higher rates, that's really going to hurt people with mortgages. Arguably the upper LSM group who certainly seem to be spending quite a bit at Yappy Chef based on what you just told me. So I think it's important to understand some of those nuances in terms of the South African market. Unfortunately, I think that's all we have time for this week. So let us know what you thought of the show. Remember to go and check us out on YouTube. We will include a link in the transcript. We hope to see you there. Let us know what you thought of the show. Hit us up on social media. It's also MagicMarkets Pod One Word on X or at Finance Ghost and Mohammed Nala. Or go and find us on LinkedIn. Pop us a note on there. Until next week, same time, same place. Thanks and Cheers. Ciao.
[00:13:05] Speaker A: This podcast is for informational purposes only and is not financial or investment advice.
Please speak to your personal financial advisor.
