To market, to market to buy a fat pig. Whilst the Proteas turned up in pink at the bull ring, just up the road here, the green slipped off the screens across global markets Friday. And this ended a 9 day winning streak for the Dow Jones Industrial Average, closing below an all time high. Locally our markets fared poorly into the close here as markets began to drift lower over on Wall Street. Still, the sell off was tiny, small by comparison to what we have seen in the past, the Dow and S&P 500 closed down less than one fifth of a percent. Locally it was wild movements in the Banks, down 1.6 percent which dragged the broader market lower by nearly two fifths of a percent. Resource stocks tried their hardest, but alas, it was not to be. Banks across the vast expanse of water known as the Atlantic had a mixed day, Wells Fargo and Bank of America after passing the stress tests rocketed to multi year highs, whilst amongst the failures of that test, JP Morgan Chase, was sold off. It could have also been related to the fact that the company was facing a grilling of their ex and current employees up on capitol hill. A few cheers no doubt when Senator Carl Levin retires, the man who chairs the committee that gave Ina Drew and the like a grilling Friday. The whole "London whale" trade that went horribly bad to the tune of 6.2 billion Dollars.
Cyprus could do with a few of those Dollars. The country is under intense scrutiny this morning and global stock markets are selling off on the news that depositors are going to take a haircut. That is right, depositors, and not bond holders, we will explain why in literally a second. The news is causing stock markets globally to sell off, that is fairly dumb in my opinion, how would depositors taking a haircut in an iffy banking environment? Not too sure. But that is the reason for the big sell off, nobody is quite sure what sort of precedent this sets, you see.
You sort of know where Cyprus is, if you have never been there. I presume most folks have done a geography lesson along the way, you know that it is in the Mediterranean Sea. But when I looked again, I was amazed at how far south the island was, how it was below Turkey, and further East than any of the other European Union fellow members. Cyprus is one of the most recent entrants into the Eurozone, having "enjoyed" member status since 1 January 2008. The country has not been a republic for that long, having only obtained independence from the United Kingdom in the early 60's. Anyone older than 55 will remember violence in Cyprus in 1974, and a brief war between the Greeks and the Turks after a coup. I suspect that where the country finds itself today however is waking up on a bank holiday, a religious holiday (Clean Monday), with very little to celebrate. Because the headlines read poorly for the little island that has a population of around 800 thousand. Oh, did I mention that I counted some 20 odd annual public holidays?
In recent years the economy, and in particular the real estate market, has boomed. What is not to like about Cyprus? The weather looks amazing, the sea temperature is always agreeable, the first world infrastructure is tops and of course as I say quite often, you can't replicate natural beauty. A former tenant went there on a holiday a couple of years back and commented on the wild building and investments by the Russians. And this is the key you see, because like many islands around the world, there is an extraordinarily large focus on financial services. And more importantly, because of the historical connection and shared heritage, there is a strong economic reliance on Greece as both imports and exports are dominated by that one country. The corporate tax rate is a mere 10 percent, the lowest in the Eurozone. For now, I saw an article suggesting that the corporate tax rate will be hiked to 25 percent.
Almost equally, they are the second smallest economy in the Eurozone, second only to Malta. That is right, an economy so small, that it is around 0.14 percent of the entire Eurozone. Or roughly a mere half a day of economic activity in the whole Eurozone, that is the size of the Cyprus economy relative to the rest. Which is I guess 6 hours in Germany and 3 hours in France. Ha-ha, ignore that, because that is plain rude to the French. The biggest problem however is that Cyprus positioned themselves as an offshore financial centre. Or in crude terms, a tax haven. For Russians, who have according to my reading around 20 billion Euros worth of deposits, having a Euro backed banking account was far better than having an account full of Roubles. Interestingly, as an aside, Wikipedia lists Mauritius and Ghana on the list of financial centres. In Europe the options are Liechtenstein, Luxembourg, Monaco and Malta, all lovely places to visit I guess.
What makes the situation quite unique is that the Cypriot banks do not have bondholders. They did not need that source of funding because the deposits were flowing, to quote Lloyd Christmas from that awful movie Dumb and Dumber: "A place where the beer flows like wine." And in turn, and this is where the problem lies, Cypriot banks extended dodgy loans. That is the core of the problem. Not enough has been written on that as the key angle as to why the Cypriot banking system got into this mess in the first place. The problem loans are directly linked to Greek individuals and companies, that country is in the midst of a multiyear recession. Ironically, the depositors were funding weak individuals and companies in Greece.
The terms of the bailout that Cyprus now has to accept are perhaps a bitter pill to swallow. A once off levy of 6.75 percent of deposits up to 100,000 Euros and 9.9 percent on deposits above that is what is being proposed. New proposals have suggested a 15 percent tax on deposits above 500 thousand Euros. I can understand why there are howls from the mass media. Suggestions that this is plain theft on depositors hard earned money. But the moral compass in me questions the source of the money. Why would you make a deposit in Cyprus of all places? Because of the secrecy and anonymity of the banking system? Does that suggest that perhaps there is something to hide?
The one side of me feels completely outraged and why would small folks take a knock, but as far as I understand it, the government of Cyprus is already dealing with that, and will make suggestions for lower depositors. But in a way I think that this is the Germans taking a sideswipe at the Russians, why would they want to foot another bill for reckless activity and not so savoury deposits? Lastly, in ending this little piece on Cyprus, can you see why we are not altogether aligned with the idea of taking meaningful investments in banks? Parliament in Cyprus votes on this matter today at three o'clock our time. The Economist piece says it all: Unfair, short-sighted and self-defeating. Perhaps we don't understand the politics of Europe enough.
- Byron's beats the streets On Friday we received updates from two construction companies namely Basil Read and Aveng. Aveng released results and Basil Read released a trading update. I am not going to go into too much detail with regards to the company specifics because they are not recommended stocks but let's see what they have to say about the sector.
The first thing I noticed about Aveng is that 20% of the business now comes from Australia. WBHO and Murray & Roberts have both targeted the Australian market as a geographic diversification opportunity. That economy has been doing tremendously well after benefiting from the commodity Bull Run created by China. Everyone thought they were finished when China was supposedly hitting a hard landing. That was not the case for either country.
But again it is the same story for Aveng, they make R392 million profit from R25 billion revenue. Those are shoddy margins. And when we go through the Basil Read update you will see the kind of problems a construction company can face. The order book is down on the back of slower infrastructure demand in Australia but they are still happy with the order book level. The demand is definitely there with big mining projects in Mozambique and large contracts from Eskom. It is a well run business but the environment is so tough, I would stay away completely.
As for Basil Read, well they are just facing endless headwinds. A road they are building in Botswana is facing claim entitlements. This causes delays and delays cost money. Another road building delay on the N12 has occurred due to lack of supply following the transport strikes. This has caused the project to lose R85 million. Rain has also been terrible for the road building deadlines.
At the same time, when a contract is finally finished, getting paid is the next challenge. They are still waiting for R80 million from the Free State provincial government and are expecting it in May. I really do hope they get paid. All of these issues have resulted in the company posting a drop in earnings of between 215% -225%.
Most of the time I write about companies or sectors which I think are good investments. But sometimes you have to look at the sectors you should avoid so as to prevent a bad decision being made. It can take one bad investment to erode away all the previous gains of your portfolio. We have steered away from the building companies for these reasons mentioned above and feel justified with that decision.
Crow's nest. I saw hitting the wires that the Cyprus parliament is NOT going to be voting today and instead will wait until tomorrow afternoon. I suspect that there are bank chiefs in Cyprus that will be enemy number one, but not the government, who in a "master stroke" have levied a tax on people's deposits. Foreigners mostly. People with stuff to hide I guess.
You must have seen this picture: How the world has changed: St. Peter's Square in 2005 and 2013. You will recall how I get a little steamed up when people compare market periods from this year, say 1983 to currently. As recently as 2005 nobody had a smartphone. And that wasn't long ago. "Things" change quickly.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
011 022 5440
No comments:
Post a Comment