As expected Local CPI for June came in at 5.4%, lowest in twenty months and well within the 3%-6% target range from the South African Reserve Bank. Yes base effect as June last year was the first +7% inflation print of this cycle. 

When do we start talking rate cuts? Truthfully not yet, a pause would be nice eve as the gov always targets 4.5% not the range.

Simon Shares

• MPC is Thursday, I expect no raise and can we start talking about rate cuts yet?
• USDZAR currency forecasts from Goldman Sachs:
  • End 2024: 16.00
  • End 2025: 15.00
  • End 2026: 14.00
• Decent UK inflation as it dropped to 7.9% for June vs. expected 8.2%. But still highest in Europe. Italy 6.9%, Germany 6.4%, Netherlands 5.7%, Euro area 5.5%, France 4.5% & Spain 1.9%.
• Pick n Pay (JSE code: PIK) very poor update. "SA sales declined 0.3% (0.0% like-for-like)" while "internal selling price inflation" was 9.5%, so they went backwards at a fairly alarming rate
• ArcelorMittal South Africa (JSE code: ACL). Monday CFO quit after just two weeks and then Tuesday a horror update.
• Transnet selects a private port operator to run the container terminal in Durban.
• Koyfin 15% discount for first 2 years
• The Indian Nifty 50 at all time highs and we have an ETF for that.

Simon Shares

• US inflation for June was 3.0%, expected was 3.1% and previous 4.0%.
  • Next FOMC meeting is 25/26 July.
• I think they still do a 0.25% rate hike, but then maybe pause for good, well until cuts start next year.

Nasdaq100 special rebalance to cut the 'Magnificent Seven' to "address over concentration in the index by redistributing the weights."

Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla are the magnificent seven. They account for 55% of the index.

• Effective close 21 July
• Done twice previously; December 1998 and May 2011.
• The combined weight of the five stocks with the largest market caps will be set to 38.5%, currently it is 46.7%.
• Nasdaq100 is a modified market capitalisation index. So market capitalisation is not the only consideration, albeit is the biggest contributor.
• Overall this has already seen some selling in the big five, and buying in those that are expected to be weighted higher. Final weightings will be announced after close in Friday 14 July.

The Four Horsemen of Big Tech

A phrase coined in the late 1990s for Microsoft, Intel, Cisco Systems and Dell Computer as they stormed higher in the dot com craze.

All had horrid collapses and took o a decade plus to recover their dot com levels and Cisco and Intel have been modest investments at best with Dell delisting.

Are we seeing the same with the magnificent seven?

Yes, no, maybe.

It is different this time, they all have real tech and make real profits. But have they gone wild on the AI bonanza? Absolutely. Now sure, AI will only get better and all seven have a real chance of be the real leaders in the space (in different ways). But valuations are stretched and this current earnings season is important as are the next few as well.

Simon Brown

Two-pot system is confirmed, here all the details

• Starts 1 March 2024
• All future reg28 and pension contributions will be split into two pots
  • One third savings
  • Two thirds investments
• You can withdraw the savings component before retirement
• Tax still payable
• Existing funds will convert automatically into the new two-pot system
  • Of existing funds R25,000 will be transferred into the savings pot
  • Concerns about everybody taking out their R25,000 and crashing the market are over done.

Simon Shares

• Top ETFs so far in 2023, so +50% returns in just six months.
• New-vehicle sales in SA +14% for June. But last year June Toyota Durban was still closed after flooding. But still a decent number.

• Pep (owned by Pepkor) has started offering credit to customers, they own Capfin so have experience in lending.
• China will control exports of some metals used in the semiconductor industry. Gallium and germanium are considered “minor metals.” They're not rare but costly to produce and China supplies ±80%
• SARB says fight to tame inflation monster is paying off. First time he has even hinted that maybe inflation is coming down.

Simon Brown

 

SA Inc watch list.

Building a list of stocks that are cheap, very cheap, and could give good return n the next year or three. Criteria;

• Must be profitable, so positive PE ratio
• Must be cheap, so PE below 8x
• Small as in market cap under R8billion
• No REITs

Using Koyfin I get 46 stocks including REITs and detail them in the podcast. I'll create a watchlist on Google docs and share that link in time.

What about just the mid cap ETF from FNB? FNBMID. Sixty stocks but problem is the top holdings are; Sibanye-Stillwater*, Discovery*, Nedbank, Bidvest and Remgro. That's already ±25% of the ETF and none really for my requirements as above.

Simon Shares

• Local crypto exchange, Revix, suspends trade or withdrawals on 24% of client crypto assets as their South Korean partner has issues with a provider.
• Naspers (JSE code: NPN) & Prosus (JSE code: PRX) plan to remove the complex web of cross holdings to a simple structure whereby Naspers owns 47% of Prosus who owns the stake in Tencent (Hong Kong code: 700).
• Good Invicta (JSE code: IVT) results.
• Rand all over the place.
• Brent weak, surely suggesting the global economy is weak. But so far the promised 2023 recession has not arrived, remember the hard vs. soft landing debate of late 2022?

 

* I hold ungeared positions.

Simon Brown

 

Local CPI 6.3% for May (lowest since April 2022) from 6.8% in April and vs expected 6.5%. A very good number and we should see June below 6% as June last year was the first +7% in this cycle at 7.4%. Simple base effect should put some serious pressure on inflation over the next few months.

So is inflation largely over locally? Probably.

Can we start talking about when the MPC starts cutting rates? The next MPC rate announcement is July, the day after we get June inflation and we'll see that the governor says. But cuts are maybe fourth quarter fo this year, at soonest. Standard Bank thinks another 0.25% hike later this year and consensus is cuts only starting next year.

Simon Shares

• UK core inflation rises from 6.8% to 7.1% and CPI 8.7%. They are in trouble.
• Standard Bank (JSE code: SBK) trading update. Very much two parts, bad debts are ugly and profts are lookign great. They also expect a 0.25% rate increase in the second half of the year?
• Afrimat (JSE code: AFT) deal to buy Lafarge for ±R1billion. String vertical intergration and potential to boost profits to essentially be paying around a 3x PE. They also say that it looks lie constructions has bottomed in 2022.
• Omnia (JSE code: OMN) results. Agri struggling with margin pressure, ining booming while chemicals slips. But overall good and stock si cheap.
• Transaction Capital (JSE code: TCP) secures funding for Gomo. Securing the capital was a major market concern and now they have a bak using their balance sheet and they earn a margin. Good deal but market still selling.
• How to Diversify Your Commodity Exposure With the PICK ETF
• Dividend portfolio paying monthly

 

dd

Disappearing dividends

Just this week Spar (JSE code: SPP), MultiChoice (JSE code: MCG) and Telkom (JSE code:TKG) have all cut dividend to zero.

We had big dividend payer Coronation (JSE code: CML) drop theirs to provision for the SARS fine and historically good dividend payer Pick n Pay (JSE code: PIK) reduce theirs.

This shows the pain that companies are experiencing, not all, but certainly some, It perhaps also shows quality, for example Shoprite* (JSE code: SHP) increased their dividend.

The problem is we love dividends for cash flow and they tend to grow ahead of inflation, sometimes well ahead of inflation. They're also taxed better than traditional income from bonds or cash (albeit not as low as CGT). But the downside is that any dividend can disappear at any time.

For investors such as myself, reduced dividend is not a big problem. I like the cash flow but don't need the income for expenses. For those living on dividends the pain is real. If the income is required you need a good amount of bond and cash investments and REITs that aside from the pandemic pay consistently, albeit REITs reduced over the last 5 or 6 years.

Another option is something like dividend aristocrats (we have a local and offshore ETF for these). Here we have companies with decade long track record of paying dividends, but remember Steinhoff (JSE code: SNH) was in the local dividend aristocrat ETF, so even this is not guaranteed. But a basket or ETF works well.

Simon Shares

• US CPI for May 4.0%, lowest since March 2021.
• Latest IEA global oil market outlook: peak oil combustion by 2028?
  • Petrol demand to peak this year
  • Road transport oil demand peak 2025
  • All transport by 2026
  • Overall oil for combustion peak 2028
• ZAR 18.33

• Massive moves expected in Richemont (JSE code: CFR) on Thursday 15 June as the index rebalances. Could see ±R4billion of selling.

* I hold ungeared positions.

Simon Brown

Simon Shares

• SEC sues Binance and CEO for U.S. securities violations.
• SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency.
• First quarter GDP was 0.4% and we avoid a technical recession.
• Pepkor (JSE code: PPH) price slide.
• Tigerbrands (JSE code: TBS) horror results.
• Oceana (JSE code: OCE) results knock it out the park.

Sun City visit. Excellent resort, but very quiet which many commentators suggest is because it's a random weekend in June?

I sent this past weekend at Sun City, vacation club. Some thoughts.

The resort is world class, well maintained with a ton to do for kids and adults.

1/n pic.twitter.com/29yaV2GP8b

— Simon Brown (@SimonPB) June 5, 2023

 

Buying SA Inc.

Not yet but building a watch list with the plan being to buy 10-15 stocks over the months ahead.

Why?

• Inflation comes down
• Rates decrease
• Load shedding ends (Renewable Energy Grid Survey points to 66 GW development pipeline in South Africa).
• Government finds a way out of the ICC Putin arrest warrant mess.
• Rand improves (already 100c better than the R20/US$ of last week)
• I hold ungeared positions.

Simon Brown

Simon Shares

• MPC raised rates by 0.5% makes prime 11.75%, highest since 2009. The aim I suspect was to protect the rand, and that totally did not work as the currency hit its worst ever levels. Where will the rand go next? Does it ever strengthen again?
• RSA Retail Bond rates reset this morning and I expect the 5-year fixed to potentially increase by a full 15% and the CPI linked also reset and I also expect an increase there.. Will have update on the website.
• Tsogo Sun Gaming (JSE code: TSG) announced in their results last week they had acquired a ±10% stake in City Lodge (JSE code: CLH). Why? Also those were good results, much cheaper than other in the space.
• Zeda (JSE code: ZDD) results were poor. I was looking for FY 400c of HEPS, that's now seems a long shot. Debt is large, no dividend and short-term vehicle rentals is only a little above a quarter of pre-pandemic levels. I was holding and have sold.
• TigerBrands (JSE code: TBS) results were a shocker but not unsurprising? Volumes flat while revenue was +16%, hello inflation. Got some debt, but totally manageable. Load shedding hurting, consumer broken and inflation all over. But the stock trades at ±1.5x book value (see chart here), last tine this happened was 1998 when prime hit 26%.
• Spar (JSE code: SPP) trading update, ouch. Is Shoprite* (JSE code: SHP) eating everybody's lunch?
• Don't forget to action your Purple Group* (JSE code: PPE) rights issue. You have until Tuesday to either sell the rights or take them up.
• Meta (Nasdaq code: META) fined Euro1.2billion by the EU, but stock rises on the day. These fines, even large ones, are just a cost of doing business for the mega large cap tech stocks?
• Nvidia (Nasdaq code: NVDA) gets all the AI hype and love to a trillion dollars.

* I hold ungeared positions.

Simon Shares

• Bond ETFs yielding ±10%. That's chunky and they can go in a tax-free account.
• New INCOME ETF from CoreShares.

Purple Group* (JSE code: PPE) rights issue.

If you held the share yesterday at close on Tuesday 23 May you will see PPEN in your account. 10.20567 for every 100 Purple shares you held.

Each PPEN (letter of allocation or LOC as some are calling it) entitles you to buy 1 new Purple share at 81c.

• You can take up that right and buy, or
• You can sell them in the market

If you do NOTHING by 6 June they disappear with ZERO value

Sanlam will take their R45m and of the R105m public offer they will take up to ±R76m of the R105m if nobody else does. Existing large shareholders have promised to take up their rights at ±R28m. So at the end of the day they will get the R105m.

Simon Brown

* I hold ungeared positions.

Simon Shares

I have been talking about a cracking (broken?) consumer for a few months now. Two recent surveys show exactly this data.

• BankservAfrica’s five-year review of Take-home Pay and Private Pensions in South Africa for February 2018 – February 2023
  • "The average nominal salary Take-home Pay Index, increased from R12,573 to R15,438, +22.8%." But CPI was 26.6% and take home pay had kept track until last year.
• Debt Busters Debt Index | Q1 2023 survey
  • "Nominal incomes were 2% higher than 2016 levels, however when cumulative inflation growth of 40% is factored in for the same seven-year period, consumers’ purchasing power diminished by 38% over this period.".

• Rand trades at worst level ever on Friday, R19.5169/US$.
• Transaction Capital (JSE code: TCP), last week I sad the worst may be behind them. Well with the ZAR collapsing equalling more inflaiton and rates and petrok increases. Maybe not for SA Taxi or WeBuyCar.

• Purple Group* (JSE code: PPE) rights issue. Full details on 18 May. It will be R105m from Purple Shareholders and R45m from Sanlam at Easy Equities level. Total R150m
• Local PGM production down 14% in Q1.
• Calgro M3 (JSE code: CGR) results saw HEPS just above 150c while the stock trades at ±300x. Value or value trap?
• Sold my Sun International (JSE code: SUI) as price go backwards and I protecting profits. Excluding dividends ±70% return since November 2021.
• OpenAI Sam Altman goes before US Congress to propose licenses for AI.
  • Pulling the ladder up behind you to stop others.
    • I have been using ChatGPT via Bing and Google Bard. For investors they mostly useless.
• Octodec (JSE code: OCT) results. Large discount to NAV and DY ±14%.
• Investing in mega trends

* I hold ungeared positions.

Simon Brown