JSE Direct with Simon Brown

Summary: In this episode of JSE Direct, Simon Brown delves into the latest developments in South African markets, focusing on the impact of China's major economic stimulus and the strengthening of the Rand. Key highlights include:

Rand Strength: The Rand has seen notable appreciation, reaching levels of R17.12 to the US dollar. Simon discusses the drivers behind this, particularly US dollar weakness and foreign purchases of South African bonds. He explores possible future movements, with a target of R16.80 and potential for further strengthening.

USDZAR | Weekly | 26 Sep 24

Global Stimulus: China's massive stimulus measures, including relaxed lending rules for banks and lower interest rates, are aimed at boosting consumer demand. This is the largest Chinese stimulus since 2008, with significant potential to impact global commodities and bolster the South African economy.

Commodities & Bull Market: The commodities market is seeing positive movement, with Chinese demand driving up prices for industrial metals like copper, iron ore, and coal. Simon notes how the previous commodity bull run in 2021 significantly strengthened the Rand and discusses the potential for a similar scenario if China's economy continues to gain momentum.

Market Performance: South Africa is outperforming other emerging markets, particularly Brazil and Mexico, over the past six months. Simon explains the drivers of this outperformance and highlights the continuing bull run in the JSE Top 40 and All-Share indices.

SA Equities: Our fortunes have changed significantly since the GNU was formed in June. SA has dramatically outperformed (in US$) not only Emerging markets in general, but Brazil & Mexico. SA has tilted more centrist, with a focus on the economy. Brazil & Mexico both shifted left. pic.twitter.com/Zz6OOM4dCJ

— Karin Richards (@Richards_Karin) September 23, 2024

 

Rate Cuts: South Africa and several other global economies, including the US and Europe, have entered a rate-cutting cycle. Simon emphasises the importance of this for markets, especially property stocks, which are benefiting from lower bond yields and improved investor sentiment.

JSE Index Changes: Anglo Platinum has been removed from the JSE Top 40 index, replaced by Pepkor. Simon discusses why Pepkor’s entry is significant, given its position as a retailer and its attractive valuation compared to competitors.

Key Discussion Points:

• Rand’s strengthening trajectory and foreign capital inflows.
• China's economic stimulus and its potential effects on global commodities.
• Outlook for South Africa’s bond and equity markets.
• Changes in the JSE Top 40 index with Pepkor replacing Anglo Platinum.
• Global rate-cutting trends and their impact on local property stocks.

Simon Brown

* I hold ungeared positions.

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Episode Overview:

In this episode, Simon Brown dives into the current economic landscape with a focus on interest rates, inflation, and the state of the South African Rand (ZAR). He also explores asset-light businesses and why they make great investments, followed by a breakdown of the latest market activity and local company results.

Rate Cuts & Inflation Outlook:

• South African CPI (August): 4.4%.
• A possible drop to 3.5% in October discussed with Johan Els, Chief Economist at Old Mutual.
• The need for rate cuts to stimulate the economy, with experts debating between 0.25% and 0.5% cuts.
• Fed decision and its potential market impact.

SA Prime and CPI September 2024

ZAR Strength & Market Trends:

• Rand showing strength, potentially reaching sub-17 levels.
• Global market highs: S&P 500, NASDAQ, and JSE Top 40.
• Consumer confidence in the US and South Africa rising but still negative.

Platinum Group Metals (PGMs) & Palladium:

• A strong bounce in PGM stocks, driven by oversold positions and palladium production cuts.
• Palladium’s recent performance and its potential future breakouts.

Palladium weekly chart | 18 September 2024

Asset-Light Businesses & Their Investment Potential:

• Definition and benefits of asset-light businesses (e.g., Santova, Nvidia).
• Simon breaks down why businesses with fewer physical assets can provide higher returns on equity and efficiency.
• Comparison to asset-heavy businesses like banks and retailers.
• A deep dive into asset-light models like Shein, Temu, and logistics firms.

Company Updates & Local Results:

• Outsurance: Strong financial results and special dividends; analysis of the short-term insurance industry’s ability to reprice premiums annually.
• Altvest IPO: Simon discusses the upcoming Altvest IPO on the JSE and why he's not taking part in it, despite its interesting SME funding model.
• Finbond: A look at the excitement surrounding Finbond’s potential delisting and the company’s moves in the US market.

Noteworthy Quotes:

"Rate cuts are coming, and I think we'll see a short-term sell-off as markets react." "Asset-light businesses like Santova and Shein are great investment opportunities because they don't carry the heavy burden of owning physical assets." "Outsurance continues to impress with strong numbers and dividends, proving the strength of short-term insurers."

Chapters 00:00 Economic Landscape and Rate Decisions 03:09 Understanding Asset-Light Businesses 05:54 Market Psychology and Upcoming Events 09:11 Local Results and Investment Insights 11:52 Exploring New Investment Opportunities 15:10 Finbond and Market Speculations 17:59 Larry Ellison and Oracle's Rise

Simon Brown

* I hold ungeared positions.

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Summary

In this episode of JSE Direct, Simon Brown discusses various topics including the troubles faced by Anglo Platinum, the performance of leisure stocks, Anglo Gold Ashanti's* acquisition of an Egyptian gold miner, and the impact of two pot withdrawals. He also touches on the future of PGMs, the growth of electric vehicles, and the psychology of markets. 

Takeaways

• Anglo Platinum is facing challenges as Anglo American wants to get rid of their stake, causing a sell-off in the market.

• Anglo Platinum weekly chart
• The PGMs market is uncertain, with palladium and platinum prices experiencing fluctuations.
• The World Platinum Council projects a second year of meaningful platinum deficits, with jewelry demand expected to rise.
• The growth of electric vehicles is impacting the demand for PGMs, but the market is still uncertain.
• Investors should wait for positive price action before considering investments in PGMs.
• Anglo Gold Ashanti's acquisition of an Egyptian gold miner raises questions about the use of equity and the future of gold prices.
• Two pot withdrawals have resulted in over 4 billion rand being withdrawn from the market.
• Leisure stocks, such as City Lodge and Sun International, have mixed performance, with City Lodge experiencing lower occupancy rates.
• The growth of sports betting raises concerns about its impact on poorer individuals and the fairness of the industry.

Sound Bites

"Anglo Platinum has a problem which is perhaps a little more unique than just the PGMs."

"There is that initial overhang. A whole lot of people will get Anglo-Platinum shares and say, 'I don't want these' and sell it."

"The World Platinum Council is saying we're gonna have deficit again, that's the important point."

Simon Brown

* I hold ungeared positions.

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Chapters

00:00 Challenges for Anglo Platinum and the PGMs Market 02:22 The Future of PGMs and the Impact of Electric Vehicles 07:54 The World Platinum Council's Projections 09:16 The Diminishing Role of Internal Combustion Engines 11:09 The Impact of Low Prices on Production 14:55 Anglo Gold Ashanti's Acquisition and the Use of Equity 17:56 Pot Withdrawals and their Effect on the Market 19:18 Performance of Leisure Stocks: City Lodge and Sun International 19:42 Concerns about Sports Betting and its Impact 20:10 Upcoming Events: Investment Goals and the Psychology of Markets

Episode Summary:

In this episode of JSE Direct, Simon Brown delves into the impact of anticipated interest rate cuts and how they may affect various sectors and stocks. He shares his thoughts on potential beneficiaries like consumer stocks, REITs, and companies with high levels of debt. The episode also covers key updates on Nvidia's earnings, Nike's stock valuation, and a new ETF listing by ETFSA.

Interest Rate Cuts and Market Impact:

• Jerome Powell's Jackson Hole Speech: The anticipation of rate cuts as early as September, with an expected reduction of around 75 basis points by the end of the year.
• Benefiting Sectors: Companies with significant debt, consumer stocks (Mr Price, Foschini, Shoprite), and REITs are likely to benefit from lower interest rates.
• Sector-Specific Insights:
  • REITs: Discusses the potential for real estate investment trusts like Storage, Spear, and the concerns around office spaces with high vacancy rates.
  • Consumer Stocks: Simon reiterates his positive outlook on consumer-focused companies and the strong performance of used and new car sales, highlighting stocks like CMH and Motus.

Stock Analysis:

• Nvidia: With results due, Simon highlights the market's expectations and the potential for significant movement based on the earnings report.

• Nvidia | Close 27 aug 24 | Weekly chart
• Nike: Simon discusses Nike’s current valuation, seeing it as a strong buy at its multi-decade support levels, despite its challenges.

Nike | Close 27 aug 24 | Weekly chart

ETF Updates:

• ETFSA's New Actively Managed ETF: Introduction of the Balanced Foundation ETF, which is actively managed due to the lack of a specific index and includes a mix of local and foreign equities, bonds, and property.
• Satrix Nasdaq ETF: The transition from a feeder fund to a standard fund, reducing total expense ratios and offering cost benefits to investors.

Housekeeping:

• No Show Next Week: Simon will be on vacation and the podcast will resume on 12 September.
• Money Summit: Scheduled for 10 September in Johannesburg with free tickets available using the code "MONEYWEBGEST" at MoneySummit.co.za.

Simon Brown

* I hold ungeared positions.

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ETFSA is listing an Actively Managed ETF, The ETFSA Balanced Foundation Prescient AMETF (JSE code: ETFSAB). 

Simon spoke with Gareth Stobie from ETFSA about the ETF, the listing process, where it fits in a portfolio and what it will be holding.

• IPO opens: 26 August 2024
• Listing date: 02 September 2024
• JSE code: ETFSAB
• TER: 0.52%

ETFSAB

In this landmark 600th episode of JSE Direct, Simon Brown reflects on the podcast's journey from its beginnings as a radio show in 2008 to becoming a leading podcast for market insights. The episode covers a range of topics, from South Africa's local CPI and a strengthening Rand to the surprising twists in the gold market and a mixed bag of corporate earnings.

Local Inflation Data:

South Africa's CPI has come in better than expected at 4.6%, fueling speculation on whether the next rate cut by the MPC might be more aggressive than anticipated.

South Africa CPI | July 2024

Rand Strengthens:

The Rand has shown significant strength, dropping below 18 to the dollar, with Simon analyzing the contributing factors, including foreign investment in bonds and a weakening US dollar.

Bull Market Sentiment:

Simon reaffirms the current bull market, highlighting the JSE's all-time highs and advising listeners to stay invested while cautioning against the risks of sitting on the sidelines.

Top40 20 August 2024 | Weekly chart

Gold Market Rally:

Gold prices have surged above $2,500, driven by central banks' increased purchases and concerns about the US dollar's stability. Simon discusses the potential for further gains in the gold market.

Corporate Earnings Recap:

• Coronation Fund Managers: Special dividend announced but falls short of expectations.
• CMH*: Despite low liquidity, the stock continues to climb, reflecting the breadth of the bull market.
• Sasol: Disappointing results with no dividend payout, a situation Simon had previously predicted.
• Spur Corporation: Strong earnings, signaling improving economic conditions.

Simon Brown

* I hold ungeared positions.

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Sasol's Struggles:

Simon revisits Sasol's recent production and trading updates. Despite some positive news, the company's financials remain grim due to significant write-downs and a challenging pricing environment, especially in the chemical complex. With a forward PE ratio hovering around 3, Simon questions the actual value in Sasol and advises caution, emphasising the importance of waiting for a stock to show signs of recovery before investing.

Sasol weekly chart | 13 August 2024

ADvTech's* Solid Performance:

Simon provides insights into ADvTech's latest trading update. Despite a voluntary update (not mandated by a 20% variance), the company shows strong growth in earnings per share. He discusses the stock's valuation, historical performance, and why he remains optimistic about its future prospects, even as it trades at a PE ratio of around 15.

ADvTech weekly chart | 13 August 2024

Combined Motor Holdings* (CMH):

Simon shares his thoughts on CMH, a stock he has held for years. Despite a stagnant price movement over the past three years, the stock offers a solid dividend yield. He discusses the broader consumer environment, the potential impact of reduced interest rates, and why he continues to favour CMH over competitors like Motus.

CMH weekly chart | 13 August 2024

Renegen's* Milestone:

After a year and a half of delays, Renergen finally starts producing helium. While the stock has seen a recent uptick, Simon highlights the challenges that still lie ahead, including scaling up production and the company's upcoming NASDAQ listing. He also reflects on the broader sentiment in the junior mining sector.

Coronation's Active ETFs:

Coronation has launched six actively managed ETFs on the JSE, a significant development in the local ETF market. Simon explains the concept of actively managed ETFs and why this move could be a game-changer for both Coronation and the JSE, even if he personally isn't planning to invest in them. Find details here.

US Inflation Update:

The latest US CPI data shows a slight decrease to 2.9% for July, but core inflation remains elevated. Simon discusses the implications for future interest rate cuts by the Federal Reserve and the potential impact on South African monetary policy.

Tribute to Brett Duncan:

Simon pays tribute to Brett Duncan, a former stockbroker and warrants market leader at Standard Bank, who recently passed away. Brett was a key figure in Simon's early career and played a significant role in the South African warrants market. His passing is a significant loss.

Simon Brown

* I hold ungeared positions.

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Apple's Financial Performance and Buffett's Decision:

• Apple's recent financial results showed steady revenue growth across various segments including iPhone, MacBooks, and iPads.
• Warren Buffett's Berkshire Hathaway reduced its stake in Apple by half, sparking market speculation.
• The implications of Apple's valuation and Buffett's strategy in maintaining a significant yet reduced position in Apple were discussed.

Market Movements in Japan:

• The dramatic drop in Japan's Nikkei 225 index, which fell nearly 27% from its recent highs, was analyzed.
• Possible reasons behind the sell-off included the unwinding of the Japanese carry trade and broader market concerns about global economic stability.
• The role of low liquidity in exacerbating the market decline was highlighted.

Nikkei 225

Nedbank's Financial Results:

• Nedbank reported solid financial results with HEP's up 11% and a near 15% return on equity.
• Improvements in impairments and concerns over the cost-to-income ratio were noted.
• The banking index's performance and its implications for Nedbank's stock were discussed.

Anglogold Ashanti's* Performance:

• Anglogold Ashanti's strong production and profitability metrics were reviewed.
• The importance of holding gold miners and gold ETFs in the current market environment was emphasized.

Launch of Ethereum ETFs:

• The approval of Ethereum ETFs by the US SEC was announced, with eight new ETFs available for trading in New York.
• The differences between Ethereum's proof-of-stake blockchain and Bitcoin's proof-of-work blockchain were explained.
• Potential implications for investors and the broader crypto market were discussed.

Simon Brown

* I hold ungeared positions.

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Jerome Powell's Statement:

• Rates left unchanged in the US.
• Possible rate cuts on the table for September.
• US MPC meeting on 19 September.
• Data needed: improving inflation and higher unemployment.

Oil and Gold Market Update:

• Brent Crude:
  • Under pressure, signaling weak global demand.
  • Lower highs trend since June 2022.
  • Support at $72.50 and resistance around $88.

• Brent Oil | 01 August 2024
•  Gold:
  • Trading near all-time highs.
  • Strong central bank buying.
  • Uncertain targets, but bullish sentiment persists.

Gold | 01 August 2024

Potential JSE Delistings:

• Criteria: Dividend yield > 0, market cap < 5 billion ZAR, NAV price > 100, P/E < 10, and profitable.
• Initial search yielded 53 stocks, refined criteria (dividend yield > 5%) narrowed it down to 25.
• Top candidates: African Media Entertainment, Argent, Combined Motor Holdings*, eMedia, Frontier Transport, Home Choice, Mustek, PrimeServe, Transpaco.

Shoprite*:

• Trading at all-time highs.
• 12% revenue increase, 6.3% like-for-like growth, 5.8% inflation.
• Successful new store formats (PetScience, Checkers Outdoor, UNIQ Clothing, Little Me).

Woolies:

• Disappointing trading statement.
• Comparable store sales up 6.9%, inflation at 7%, volume decline.
• Heps down 14-19%, market expectation miss.

RSA Retail Bonds Update:

• New Rates: Two-year at 8.75%, three-year at 9%, five-year at 10.25%.
• Rates have been declining since June.

Simon Brown

* I hold ungeared positions.

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Presidential Vision for Infrastructure Development:

The South African President's recent speech emphasised making the country a hub of construction and infrastructure development. The potential for public-private partnerships and the types of infrastructure that might be developed, including roads, energy transmission, and public buildings.

Stocks That Could Benefit:

• Construction Stocks: A detailed look at various construction-related companies and their potential to benefit from the President's infrastructure plans.
• PPC: Potential benefits from increased construction activity.
• Murray & Roberts: Despite historical losses, they have a division in infrastructure and renewable power that might benefit.
• Stefanutti Stocks: Focus on their claim against Eskom, which is crucial for their future.
• Wilson Bayly Holmes (WBHO): Expected growth, though a significant portion of their revenue comes from Australia.
• Raubex: Strong performance and solid management, with significant involvement in road construction through Sanral.
• Afrimat: Supplier of construction materials, benefiting from Sanral and Transnet orders.
• Reunert: Involvement in industrial cabling and commercial battery storage, critical for new power facilities.

Market Insights:

• Mr Price* Update: Gaining market share and performing well post-elections and during a late-arriving winter.
• Sasol Production Update: Management's effective handling of controllable factors and slight improvements in Transnet's performance.
• Kumba Iron Ore: Confirmation of slight improvements in Transnet, echoing Sasol's observations.

JSE Listed Construction Stocks | 1 year return | close 23 July 2024

International Market Movements:

• CrowdStrike* Incident: A significant security update issue affected numerous systems, impacting the stock but not signalling an end for the company.
• US Small Cap Stocks: Rotation into small caps like those in the Russell 2000 index, offering a cheaper alternative to large-cap tech stocks.

Simon Brown wraps up the episode by emphasizing the importance of infrastructure development for South Africa's economy and reiterates his top stock picks to benefit from potential future construction projects: Raubex, Afrimat, and Reunert. He also touches on the potential 3% GDP growth for 2025 and the broader market implications.

Simon Brown

* I hold ungeared positions.

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