Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Another Monday and another all time high is where we ended the day, as Mr. Risk-back-on visited the broader market again. We will deal with those short term issues around the equities market a little later in this message, I stumbled across a really cool piece from one of the various RSS feeds that I subscribe to. Oh, and humans landed a sizeable craft on the surface of Mars yesterday, hoping, as a CNBC anchor said to find men. As you know of course, Men are from Mars and Women are from Venus. We reached for all time highs of our own last evening, closing at 35,469 points, up by nearly two thirds of a percent. The rally was rather broad based, industrial enjoyed a great day, the only major sector to fall short were the banks. But that sector is up 23 and a half percent year to date. Whilst in Europe and the US banks are flopping, and regulators are found wanting and politicians are licking their lips. Wondering who to blame next, other than themselves of course.
Richemont enjoyed a huge day as the trading update was welcomed with both hands. 6.35 percent better on the day, just less than 50 Rands a share at the close. Although during the day the stock traded comfortably above that level. I did also see a research note that suggested that Richemont was still a screaming buy. The WSJ (Subscription only, sorry) had an article titled Richemont Chases Luxury Status, with the conclusion that they are cheap. Now there is a turn up for the books, Richemont looking cheap. I remember the reluctance of people to buy them because they looked expensive, all the time. Perhaps those folks can buy them close to the all time highs. I am of course being facetious. You have to feel a bit for this guy, but he got it wrong: Bronte Capital Just Closed A Luxury Short At A Loss. Wrong. And perhaps that piece is everything that I need to lead me nicely into my next piece.
I have been banging on this drum about the fact that our business TV channels are too short term in nature. It makes me mad. Don't get me wrong, I would rather keep all the short term stuff and my favourite channels than not have the channels at all. The channels are a very useful tool for us, not because we are trading the market at all, in fact the exact opposite, but rather because one wants to be up to date and always informed. Because as we often say around here, it is all about paying attention and making sure that you are doing that by being more informed than your market peers, you have the edge over the longer term.
The short term trading and the focus on what to do each and every day gets me down sometimes. How is it possible that on a piece of European news you would change your mind on the immediate future? Because, as quickly as you might get that right, you can be wrong on just a sentence in a speech from the ECB governor, or comments that Angela Merkel made. How is it possible to keep track of all of that and then make short term decisions based on nothing specific, but rather momentum? It is hard. Too hard for me, I don't think that I have those skills to do that sort of trading.
But that is the world we live in, the day to day trading allure is huge, there are competitions, we hold the best of best in high regard (think Paulson and Co.) and somehow try and reach for the secret sauce. Or we think that "they" have the secret sauce. Because someone must possess that secret sauce, look at their crazy returns. To do this consistently and on a long dated basis is hard however. But where is this going? Well, to this story, posted by Jeff Miller in his blog "A dash of insight" titled Has CNBC lost its mojo? Interesting. I forwarded that to my friends over at CNBC Africa for comment from them. The conclusion that Jeff reaches is that CNBC (the US version of course is what he is watching) has lost their core audience, because of their short term focus. I love being on the box and getting into a debate over this. I think here, locally, the channel will continue to do really well, people are hungry for African business news. Interesting though, the whole debate around trading and investing, I sense that it will never end.
I do not really care too much for the Standard Chartered management today, I do somehow feel for their shareholders, and ordinary staffers who would not have known about all of the "secret" deals involving Iran over the years. The shareholders would have known that Standard Chartered have positioned themselves as a champion of emerging markets, and as such would have escaped the financial crisis in a way that made their peers envious. But their stock is down over 19 percent this morning. Why? Because of this sort of breaking news: Standard Chartered Faces N.Y. Suspension Over Iran Deals. The Bloomberg story suggests that if a fine was imposed, it could amount to as much as 5.5 billion Dollars. The market cap, as at the beginning of trade today was 29 billion Pounds, around 45 billion Dollars. So this is a huge deal. And I have no idea how badly it is going to end for Standard Chartered. But this almost feels like their "BP Deepwater Horizon" moment. Difficult to plug something that has already leaked AND walk away Scott free. The term Scott free according to Wiki, the source of free (and freely moderated) information refers to a slave by the name of Dred Scott who walked away from eternal slavery. Scott free you see.
I tell you what we are more interested in here in our little office (where we saw a few snowflakes falling outside this morning, I am sure that you might have got more or less snow where you are) is the fact that the noose might be tightening on the power in Iran. They are losing millions of Dollars a day in oil trade, as far as I understand it. Iranian oil revenue has halved. And this must be building pressure internally in such a way that the Iranians will have to concede on their nuclear progress to make the problem go away. And if that were to happen, that is good news for our stock holding in MTN. Oh, and for the record, I care about the people of Iran too. I am pretty sure that fewer sanctions are good for them too.
Byron's beats takes an out of the office presentation back into the office today. This is very, very interesting.
- So yesterday I went to the African Bank investor presentation. I covered the operational update yesterday but wanted to get some more insights into the macro environment and how African Bank, who are the industry leaders in South African micro-lending, saw the industry and how they were dealing with the so called bubble that so many people are talking about.
As mentioned yesterday Abil have now increased their loan book to above R50bn, that is 36% higher than last year. The likes of Capitec as well as the big four banks have also been aggressively growing their Micro-lending book. This has resulted in a growing contribution of unsecured lending to the total credit book of debtors in SA, up from less than 5% in 2007 to just under 10% today. It's still growing fast as unsecured lending now contributes nearly 40% of total new credit granted.
Because there has been a decrease in mortgages some may suggest that there has been a credit swap out from mortgages to the unsecured space but African Bank have found this to not be the case. They have concluded that the growth in this space has been driven by supply side factors. Credit is always in demand, especially unsecured because no collateral is required. This, on top of the fact that secured lending has been so hard to come by since the financial crisis. So the big growth in SA has come from the SA banks ramping up their supply.
The returns on unsecured credit are very high and banks are more confident in their abilities to manage the risks that come with such lending. African Bank's strategy to use Ellerines kiosks as sales points is a perfect example of the supply being pumped into the market. So at this stage, the banks can decide how big they want their books to be, which gives them more room to manage risk. African Bank's approval rates have reduced from 75% to 69%. That would of course also be a function of more applications from their ever increasing accessibility.
Another trend they have picked up on is the increased lending from higher income groups. This would be a function of current clients increasing their salary base. This is good news because these clients would be lower risk with potential for bigger loans. As an analyst friend pointed out at the presentation, once a client is locked in he will continue to use Abil for his lending requirements as his/her salary and standard of living increases. Nearly 80% of loans come from existing clients.
For the economy however, higher income groups tend to spend more on less productive consumer goods which is not good news. So is this growth sustainable? As competition increases loan sizes may decrease. And yes the bank admits that such a fast uptake will have to slow down and may have some repercussions. But they are well aware of this and have implemented and are implementing systems to manage their risk. The third part of the presentation showed us what these strategies were but I will not bore you with those details.
I am satisfied that African Bank have "things" under control. Their management team who have a great reputation are all in high spirits and it seems like a good place to work. They have been innovative in their roll out, have been building up a good credit rating in Europe in order to raise capital in low interest rate environments and are even considering taking deposits, starting with their staff as a test in September. We continue to add to the stock.
Currencies and commodities corner. Dr. Copper is last at 342 cents per pound. The gold price is slightly better, up at 1613 Dollars per fine ounce, with the platinum price also a little ahead, 1402 Dollars per fine ounce at my last check. The oil price is last at 92.14 Dollars per barrel, flat on the day. The Rand is 8.19 to the US dollar, 12.76 to the Pound Sterling and 10.15 to the Euro. We initially went higher and I guess set another record, but have come off and are about flat this morning. There has been a mixed bag of economic data releases here this morning, from Italy and the UK.
Sasha Naryshkine and Byron Lotter
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