To market, to market to buy a fat pig. A fat pig? There are many people around the world who do not eat pork for both religious and health reasons, but there are many more who eat pigs than who do not. The Chinese for instance account for more than half of total pork production globally, with 475 million pigs that live in China, but more astonishingly is that the production is a massive 723 million pigs a year. 1.275 billion a year. Add to that over 1.034 billion cattle on earth, of which 329 million live in India. And of course, again for religious reasons are not eaten. Pork of course is almost always eaten, unless you do not count the Vietnamese pot bellied pigs (the miniature one of course), I want one as a pet! What do you feed them? And I suspect that they trash your garden, this is then not for me, secret, I love planting indigenous plants. Waterwise and learning that local is lekker.
Local is not leaker here, with regards to the currency, but the Brazilian Real has taken a pounding over the last few days too. Not so much the Indian Rupee, but that grouping, in amongst that lot, we are the worst performer this year. I cannot imagine that our public finances are in any better or worse shape than those countries, I think that not to be underestimated is the sentiment factor. And more importantly what the impact on imported inflation has been on all emerging markets. Deflation is currently being experienced in Greece, Switzerland, Portugal, Spain, Ireland and Sweden. But in India, Indonesia, Turkey, Russia, Brazil and South Africa, inflation is more than a little problem.
Which presents this very difficult situation for central banks in emerging markets, whilst there is not a single central bank in the developed world who is looking to raise rates in the medium term, that option is very real (and has happened already) in the developing markets. India, Russia, Brazil and Indonesia have raised rates in the last 15 months, we cut rates here last July. It is going to be hard to justify elevated inflation rates and not raise rates, the Reserve Bank will have to maintain their independence. Regardless of whether you think that there is going to be an emerging market rout when the Fed starts reigning in their bond buying programs or not, perception sometimes is reality, and you are starting to see the signs. Ironically higher emerging market yields could lead to inflows over a longer period, as rates remain low. Today the currency has sunk below 10.50 to the US Dollar, which means petrol price hikes are a distinct reality early in the new year. Ouch.
Just think about this a little. The Fed last changed interest rates on the 16th of December 2008. Astonishing! It will be 5 years on of no interest rate move, but MANY MANY programs and successes (in my mind at least) along the way. This is the longest period in decades that the Fed are going to stay put on rates, and there is a long time between now and then. First taper, and the jobs number tomorrow will be key for that as to when it is likely to happen and then of course the whole argument around rates, when will those tick higher. I am guessing that the two are independent of one another, right? Must be. So rates higher in emerging markets sooner than developed markets where it may take a long, long, time.
You have heard the saying, a broken clock is right at least once a day. Or in the case of an Analog clock at least twice a day. So unless your prediction is way out of kilter, then I guess you are going to be right. Remember the other day when we discussed that you must read loads of stuff that you do not agree with. Why is this important? Well, when forming a view, you need all sides of the story to put forward your thesis as valid, from an investment point of view. And I guess that is why when the analyst community put forward their arguments, there are catalysts (positive or negative), key risks to your analysis and lastly opportunities for the company. As well as the obvious valuation one. And all of that unfortunately leads some of the smartest people in our industry to come to something that I can't find myself doing, predicting what the 12 month price target is, or should be.
Of course you can change your mind, should something change. And you should, if the prospects of the company either improves or they hit some hurdles, your former predictions are proved wrong. Predicting companies futures is hard, predicting anything in the future is hard. Very hard. And that is why I guess you have to pay attention to what is happening around you. But as much as you pay attention, consumer behaviour can change very quickly, Blackberry versus iOS and Android is one of the best recent examples. Samsung and Apple ate Blackberries for the next decades breakfast, prompting the question, if Blackberry was really going to be a force in the future why don't the cash flush corporate American companies buy it. The current market cap is 3.22 billion Dollars. Apple could retire that business in a heartbeat.
But I have diverged away from what I am trying to get across and that is the relentless perma-bears who always disseminate the same information that the market is always going to plunge, or is due for a correction. Always. The opposite of that is believing that the equities market is always going to go up. And tied into both of those arguments are time frames. I genuinely believe, every single fibre in me, that the best way to outperform all other asset classes is to find the best companies operating in a growth sector of the economy and then stick with them. Solid management. Remember that quality businesses attract quality employees. People want to work for businesses that are innovative and are likely to advance their careers, that part we can agree on. Quality attracts quality.
What sparked this was an article from Barry Ritholtz: No, David Rosenberg's Bullishness Was Not "Purchased for $3M", which was a rebuttal of the bear of all bears, ZeroHedge. The twitter handle (ZeroHedge) of what is thought to be an ex Wall Street trader of Bulgarian descent, Daniel Ivandjiiski, is permanently filled with doom and gloom and makes for sorry reading. Now the very little that I can find about Ivandjiiski is that he was barred from the securities industry for insider trading. Do you think that if the very industry that booted you out for illegal activities would take you seriously if you blogged under your real name.
Instead the fellow blogs and posts frantically under the pseudonym Tyler Durden, who is the character portrayed by Brad Pitt in the movie Fight Club. Fighting with the world is one thing, realising that there are another 7 billion people out there who are not on your side is another. The anonymous (almost) ZeroHedge account has a wide and deep reach, 180 thousand odd followers. What is the clincher for me is the funny (but needs an ages restriction, warning for bad language) post: Are You A Perma-Bear? Take The Zero Hedge Test, which if you answer e) all the time, you are likely to fall into that category that the world is always ending. No, it is not. Warning, not PC, that link is meant to be funny and not insulting to anyone, OK? Plus it wasn't written by me. If you were not interested before and didn't click, then I bet you did now. At the end of the day you should exercise your judgement, do not let your bad experiences get into the decision of making investments. Quality over everything.
Michael's musings. Interesting SARB..
According to the SARB quarterly bulletin the South African economy only grew at 1.9% in real terms, compared to the same time last year. The third quarter had a very large negative impact on our growth for the year so far, with the motor sector strike getting a mention as a contributing factor.
The second quarter of the year had really good results and the third quarter undid most of the gains made, where the SARB made the following observation, "Excluding the contribution of the generally volatile primary sector, growth in the real gross domestic product decelerated from its most recent peak of 4 per cent in the second quarter of 2013 to a contraction of 0,1 per cent in the third quarter." Ouch "The adverse third-quarter growth outcome is largely due to a quarter-to-quarter contraction of 2,1 percent in the manufacturing sector"
The market saw red because of the growth number but, also I think because Gill Marcus is starting to hint at a rate increase in the near future, if inflation doesn't stay below the 6% mark. A big contributor to inflation is the weak currency because of all the products that we import, but more importantly the oil that we import, which then turns into the fuel used in transporting our goods around the country. Due to South Africa's current account deficit (we import more than we export), the currency only gets weaker, because we are selling more Rands to buy our imports.
On a side note, our current account deficit was made worse by the motor sector strike because the cars that weren't made, we couldn't export.
An increase in interest rates should strengthen our currency, because foreign money should flow in to take advantage of the higher interest rate. A higher interest rate should also 'cool' off the economy a bit (which is not what we need at the moment), because people will be borrowing less to buy things they don't need. The problem with 'cooling' off the economy is that the economy is very far from overheating, with retail sales only up 0.4% QoQ and 0.7% down MoM! Add to that, general lending to households is down 14,2% YoY, and household debt as a percentage of disposable income dropped 0.3 percentage points, so the consumer is not taking on loads of debt.
I'm glad that I don't have to make the interest rate decision. In days gone by where inflation was everything I think that interest rates would have been raised, but monetary policy is evolving to take into account growth rates. So even if inflation is above the 6% band, but not accelerating, I don't think that the SARB will raise rates. Good news for our economy is "Encouragingly, the construction sector is showing signs of recovery with a generally steady upward trend in the value of real building plans passed" . Construction is a leading indicator for the economy (just my drive from home to work I see numerous new buildings) and real disposable income is up 2.8% compared to the second quarter, which is good stats for the future. What to make of the quarterly bulletin? We are not growing as fast as we should be, but we are growing and the consumer is in a stronger position.
Home again, home again, jiggety-jog. Markets locally are being buoyed by the much weaker Rand, but that has reversed a little, good thing that. US GDP here today, but that is the second look, and more importantly the preliminary corporate profits, those should be interesting.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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