"It was with great relief that the collective rallied as much as 6.1 percent, some heavyweights such as Kumba Iron Ore added 7.9 percent on the day (the last 12 months the stock is still down nearly 23 percent), whilst the heavyweight diversified companies, such as Glencore (up 3.68 percent), Anglo American (up 6.57 percent) and BHP Billiton (up 6.19 percent) helped the market higher. Industrials and financials unperformed the broader market, still managing a more than two and half percent gain.
So what now? Is this the recovery in commodities prices that many are looking for? Perhaps in the short term. When I read headlines that US imports from OPEC producing companies are at a thirty year low as a result of the shale revolution in North America, I am pleased for Joe consumer"
To market, to market to buy a fat pig. Wow. I am not too sure that I have seen a day as big as that, in the direction of the bulls (sell offs are always worse than rallies), in the end the overall market gained 1583 points to close up near 51 thousand points, a gain of 3.2 percent on the day. What happened, global peace? No. Out of the blue and unexpected, just around lunchtime here Friday, the People's Bank of China (PBOC) cut interest rates, the first such move in 2 years. This obviously indicates a willingness to encourage business to borrow more against the backdrop of a rate of growth that is slowing in China. There is lots of room to manoeuvre for a bank of its size that very little if ever is talked about. People speak about the ECB and Fed until the subject has been beaten to death with a long, long stick, it is rare for the PBOC to be brought up, unless of course there is action on this sort of scale.
The upshot of it all was an epic rally in commodity stocks, something that I have not seen or am struggling to remember on this sort of scale. Reminder, Friday we pointed out that resources were down over five years, as a whole, platinum stocks as a collective had nearly halved and gold stocks more than halved over the same time period. It was with great relief that the collective rallied as much as 6.1 percent, some heavyweights such as Kumba Iron Ore added 7.9 percent on the day (the last 12 months the stock is still down nearly 23 percent), whilst the heavyweight diversified companies, such as Glencore (up 3.68 percent), Anglo American (up 6.57 percent) and BHP Billiton (up 6.19 percent) helped the market higher. Industrials and financials unperformed the broader market, still managing a more than two and half percent gain.
So what now? Is this the recovery in commodities prices that many are looking for? Perhaps in the short term. When I read headlines that US imports from OPEC producing companies are at a thirty year low as a result of the shale revolution in North America, I am pleased for Joe consumer. Lower energy prices however mean that alternatives look a whole lot less attractive. Locally I have spoken to a few people over the weekend, going off the grid (electricity) seems to be more and more appealing. Unfortunately if there is a bunch of folks talking about it, seeing the conversion process is the next big shift for relieving the grid. The problem is that those folks converting are revenues that the parastatal supplier rely on, once gone, they will not return. Price is everything. As alternatives become cheaper and cheaper, the parastatal (Eskom) continue to ask their customers for more money (and their industrial customers to use less of their product), it has to crack somewhere. That is another story altogether.
I am not suggesting that this is some sort of a false dawn, as far as the commodity producers are concerned, some of the key markets remain well supplied and as technological advances in cost savings (i.e. less resources used for same outcome) proceed, we are possibly going to see a well supplied market remain exactly that. That means that whilst China continues to build infrastructure, albeit at a slower pace now than before, the absolute steel consumption per capita should continue to rise, not at the growth pace seen before. A BHP Billiton presentation (see more below in company corner snippets) suggests that China still has around 250 million more people to urbanise over the next 16 years. The potential is mind boggling, I don't want to steal (steel!!) too much from the BHP Billiton presentation related to cost savings, the projections are pretty amazing however.
75 million motor vehicles per annum to be produced in Asia by 2030, 100 million new air conditioners to be installed in India by 2030 and 24 million tons of extra meat to be consumed in Asia per annum. In-between now and 2030, there are expected to be 1.7 billion people who will gain access to electricity for the first time. The growth in energy demand from India and China will be equivalent to the entire current US energy demand. That is pretty huge. More people, with more money needing to eat more. Time to diet and get used to fewer calories!! Or grow crops on the roof. Or something of that nature! It makes for interesting thinking about the futures of the commodities market and what the world will look like in 15 odd years. I guess that is why making such long dated predictions is a tough old job. Talking predictions, this one from The Ladies Home Journal titled What may happen in the next hundred years from 1900 makes for interesting reading, predicting wireless phones, TV's, ready cooked meals and satellites got some "stuff" right, equally much wrong. Quite fun to read!!
Why bother with a daily newsletter, is it not information overload? I mean, more to the point, why do we write such a thing? Why would it be valuable to any customer or potential customer of Vestact? When this business started, we wanted to bring people direct access to equities markets with transparency, sharing our thoughts and encouraging a community to interact with us was also one of the goals. Sharing our thoughts and writing about it also interrogates the investment thesis on specific companies. Whilst following the broader market and fretting about absolute levels is important, the most important thing is to make sure that you follow each and every company closely, the ones that you own for clients. We will continue to try and bring you our insights on a daily basis, the research and interaction with each and every one of you is just as important for you as it is for us. If it wasn't, we would tell you where the absolute level of Mr. Market was, what the ZAR was trading to the XYZ currency and what metal prices were, too many platforms to compete with on that score.
Company corner snippets
BHP Billiton issued a media release this morning our time: Focusing on Operating and Capital Productivity, in which they suggest that they can save more money. 4 billion Dollars of annualised productivity gains, which is half a billion Dollars more than previously guided. Reducing spend with no change in volume growth. There is also an associated presentation, titled Maximising value and shareholder returns. A few slides in there of importance, one of the more interesting ones is the post demerger, the core business will only have four legs, Petroleum & Potash, Copper, Iron Ore and Coal, 19 other assets ditched. Simpler management structures, less duplication means higher cost savings. NewCo, the company with all the other assets will list sometime in the middle of next year, we can cross that bridge of what to do when we get to it.
Pioneer Foods have released results for the full year, you can download the presentation by following the link. Quantum Foods has been unbundled post these results, it is profitable, ever so slightly. Forget that, the main business is their Essential Foods division, which used to be known as Sasko. 10.927 billion Rand of sales and 1.074 billion Rand worth of operating profits relative to a group level of 21.588 billion in revenue and 1.712 billion operating profits. Strip out 3.591 billion Rand in revenues from Quantum foods (profits of 21.6 million) and you can see quickly that the bulk of the business is still a bakeries, maize, rice and pasta business. The staples, hence the naming of that division Essential Foods, the brand names such as Sasko (obviously), White Star, Spekko and Champion. There is now a Groceries segment which is Ceres (Liquifruit, Cerese) and Bokomo (Weet-Bix, Moirs biscuits, Safari fruit and nuts) combined. Together, the Groceries segment is 8.06 billion Rand in revenue, 735 million Rand in operating profits. Nice balanced business, well run by an ex Tiger bloke, Phil Roux (he is not yet 50). Is it expensive? It trades on a 24 times historical earnings, not cheap. We continue to prefer Tiger Brands, this is a well run, good business, the share price is a little expensive.
Netcare have announced their results for the full year to end September this morning. What a good business, did you know that Richard Friedland (sorry, Dr.) is both a vet and a medical doctor, as well as the chap that runs the business. He can possibly fix about anything, in a way had to fix the balance sheet of Netcare. All the metrics are moving in the right direction, download the results booklet to take a closer look. What has changed significantly is that there is now a big rental bill to pay to the GHG property business, the flip side of that is that the interest associated with the debt (having acquired the property portfolio with the hospitals) has diminished. We certainly prefer Mediclinic, the hospitals business in Switzerland has better margins than the one in the UK, less government intervention and less chance of competing against the government.
Things that we are reading, that we think you should be too
Given that the South African government is planning to spend more to get our growth rates up and unemployment rates down this article has some relevance - Can we measure the benefits of government spending?.
The first half of the article is all about your health, the second half of the article deals with the economic side of things and some of the possible reasons that people are working 50 - 60 hour weeks - What working long hours does to your body.
Two heavy hitters in the financial world - Bill Gross to manage $500m for George Soros.
Things don't change until the money runs out - Not quite all there?. Given Russia's current track record the money will run out.
This is the reason why we own Nike and sold Mc Donald's and Coca-Cola - Obesity rivals smoking and war, with $2-trillion hit to global economy. As governments have to pay out more due to poor eating and lifestyles they will begin to tax the negative foods more. Add to that, companies will be willing to pay more for fitter healthier employees due to their increased productivity levels.
Home again, home again, jiggety-jog. Stocks are lower, the afterglow of the super rally on Friday waning a little. Some European data this morning seems pretty positive, as you were!
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
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