Internet patterns
"TenCent has been sold off as a result of concerns of the valuations of internet stocks. Yes, there are many that fall into the category that the companies share price movements in the broader "internet" sector are not too dissimilar to that of 2000, the tech bubble. I am not too sure that any two times in the market are worth comparing, back then Google was not even a household name. Most of the overvalued stocks, anything with a high multiple, early stage earnings (or none at all) have run into the sellers. And that is understandable, nervousness around what people know and remember (the tech bubble) leads to more caution, if people think that they recognise a pattern again. Humans are excellent at pattern recognition."
To market, to market to buy a fat pig. Yech. It was not pretty yesterday. This was, as far as I read, the worst three days for the NASDAQ since 2011. New tech is overheated, old tech has been ignored, that is the current flavour. Industrials, resources, there was little place to hide in the face of a much stronger Rand too. Banks caught a serious bid, Standard Bank closed near their all time high, FirstRand closed AT their all time high. Since the early February emerging market lows, Barclays Africa Group (the old ABSA) is up over twenty percent. That is in just over 60 days!! As a collective the banks are up seven and one third of a percent this year. Gold miners ended the day up half a percent.
What was up with the cell phone companies too? Vodacom is close to their all time highs, MTN is not too far away from theirs. I suppose that if you "add back" the very recent MTN dividend you are beyond that all time high comfortably. Telkom? They too have been on a tear. It depends though where you draw your line in the sand though. Telkom remains a worse investment than either of these mobile companies, we still maintain that MTN is still in the early stages of transition towards becoming a provider of more data to their relatively low (globally) on a ARPU basis customer base. The fact that fixed line infrastructure has been essentially "skipped" across our continent is good news for the mobile providers, the big risks for them is that they become more utility like. But, with mobile money becoming increasingly important for the mobile providers, these businesses are changing and morphing into something different. Just this morning we have another announcement from MTN, teaming up with Bharti:
"The landmark partnership will enable Mobile Money customers of MTN Ivory Coast and Airtel in Burkina Faso to easily transfer money between the neighbouring countries. Until now, moving money between the two countries was mired by high fees, high usage of informal channels and a lack of proximity to withdraw money."
I guess that the channels that normally transfer the funds attract prohibitive fees, so these sorts of innovations are certainly excellent news for the consumers. And as for the likes of Western Union and their peers, this news represents a seismic shift of sorts. This is just another idea that sees the business morph into something else over time, payment solutions are going to continue to grow aggressively. This is great news for regulators, less cash, more transparency, so this will be encouraged and there will be little interference (you would think) from governments. Good news all around.
What happened to Naspers shares? Well, like we tried to point out yesterday, the same things that have happened to LikedIn, Twitter, Facebook, even Google to a lesser extent. Naspers share price peaked near the ides of March (this year) at 1354 ZAR a share. Since then the traffic has been in the wrong direction, if of course you are long the stock. Last evening the share price closed at 1041 ZAR a share, down over 300 Rand from their highs. Forget for a second that over the last year the share price is up 87 percent plus, I can tell you that most people care about what has happened in the last three weeks. For one, the TenCent news has been negative, the results themselves were light of expectations. When a company is priced for growth, the problem is a miss is often met with aggressive selling across the board.
Coupled with the negative news from their home base, TenCent has been sold off as a result of concerns of the valuations of internet stocks. Yes, there are many that fall into the category that the companies share price movements in the broader "internet" sector are not too dissimilar to that of 2000, the tech bubble. I am not too sure that any two times in the market are worth comparing, back then Google was not even a household name. Most of the overvalued stocks, anything with a high multiple, early stage earnings (or none at all) have run into the sellers. And that is understandable, nervousness around what people know and remember (the tech bubble) leads to more caution, if people think that they recognise a pattern again. Humans are excellent at pattern recognition.
Let us use the trusty calculator to determine how much of the Naspers share price is made up of TenCent. First, take the TenCent market cap in Hong Kong, which closed at 948.93 billion Hong Kong Dollars. Naspers owns 34.5 percent of TenCent, that translates to 332.12 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.35 Rands. So, quite simply, multiply 332.12 billion HKD by 1.35 and that equals 448.36 billion Rand. Naspers had a market cap last evening of 443 Billion Rand.
So effectively, all of us South Africans in our infinite and superior wisdom have decided that the people in Hong Kong are mad, and should not value TenCent on that crazy multiple. But the truth is that you get the rest of the business, the hugely cash generative DSTv business for free. Remember of course that the Russians, Crimea, the Ukraine and Mail.ru must be weighing to a certain extent. Mail.ru however has hardly moved, the share price that is. The gap between what our smarter South African investors afford Naspers relative to TenCent calculation has not changed much over time. So all the movements in Naspers can be attributed to the negative move of TenCent. But I think that you knew that already. As ever, in the short term whilst all these other ecommerce businesses are in ramp up mode, the Naspers share price will be joined at the hip to TenCent, so it almost entirely hinges on what you think in terms of the future of TenCent.
Ha-ha. Check this FT article: Nigeria and South Africa intensify rivalry after GDP figures. Does it really matter though? At the end of the day if you have a reasonable sized economy and your citizens are all richer than before, isn't that the goal, rather than having an absolute size argument. How long will it take for all of us to achieve the per capita GDP of say, Monaco, or Singapore? Or perhaps those examples are not really warranted because after all, those are island states.
South Africa has a GDP of 11500 USD (PPP) on a per capita basis, Norway is somewhere around 54 thousand Dollars. We would need to expand our economy five fold in order to achieve that figure. If we wanted to have the same output on a per capita basis (information from here -> List of countries by GDP (PPP) per capita) as the EU average, then we would have to increase our economy three fold. That would also be roughly the same as say for instance, South Korea, which has a very similar population size to ourselves.
We are the 25th largest country by population on the planet, Nigeria with an estimated 173 million souls comes in at seventh place on the ranking tables -> List of countries by population. The DRC (67.5 million), Egypt (86.25 million) and Ethiopia (86.6 million) are the other three countries on the continent that have bigger population than ourselves, an estimated 53 million people live in Msanzi according to StatsSA. Oh, and just as an aside, our equity market in Dollar terms is ten times the size of Nigeria.
But we needn't feel bad about anything, with Nigeria's economy now 509 billion dollars, that is bigger/equal to Norway. But Norway has only 5.1 million people, a population the fraction of the size of Nigeria. In fact there are 34 Nigerians for every Norwegian. One you associate with snow and reindeers, the other with heat and hectic traffic. The question, the one that really counts however, if a Nigerian had the choice for their child (and they were the average Nigerian) where would they want it to be born? In order for the opportunities to be maximised for that child? Climate aside, the financial answer is still Norway. Opportunities might be easier to come by, from an investment point of view in Nigeria, and there may be a lot of money to be made, but there are also many pitfalls. I guess at the end of the day one must always do the risk versus reward investment case. The other point worth making is that both Nigeria and Norway have economies that are greatly skewed to oil and gas.
Am I off the mark here? I think all I am trying to say is that there is a difference in where you are born and your subsequent standard of living and education, relative to your investment destinations that are available to you. That makes a massive difference to both the outcomes. The big negative here for South Africa, with this Nigerian debasement is that companies looking for investments in Africa's biggest economy, they would enter into Nigeria and not here. But our capital markets are very deep and liquid, I think that is a point well worth making again.
Michael's musings: Keeping it simple for the best returns
I read an interesting article this morning on how school children had better investment returns than their university counterparts. Here it is, Fargo 6th-graders mop up against college investors. That link is via one of my favourite newsletters and websites, Quartz.
The reason that the school children had better returns than their university counterparts (in my opinion at least) is because they didn't get too technical and make things complicated when selecting their stocks. The approach that the school children followed was, "I thought the best idea was to pick a stock that you believe in, a company that you liked, a company that you were interested in, and stay with them". That approach is probably too simple and it is easy to make money when the market is going up, but I think that there are traits to be learnt from their approach.
There is a Buffett quote that ties into the article, "If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor" There is at least one person in our office whose IQ is above 130, in case Buffett is wrong. The article was thought provoking and reinforces my view that investing is about keeping it simple and having patience.
Home again, home again, jiggety-jog. Markets are flat here in Joburg, US futures are a little lower. The Ukraine and Russia and that whole environment are starting to hot up again. Not good.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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