"In short then, the growth that China achieved last year, on top of their already big economy is equal to 2.1 times their entire economy 24 years ago. I would prefer to see that as a headline rather than the slowing references, the phenomenal growth and economic miracle achieved in that time has been incredible. We are humans, we are drawn to bad news, hoping somehow that it would never happen to us. We would love to see quicker GDP growth here, half of the Chinese growth would be welcome."
To market, to market to buy a fat pig. It was a holiday in the US yesterday, the celebration of the life of Martin Luther King, the man who in many folks eyes did more for race relations in the US than any other individual. Indeed, his "I have a dream" speech is not too dissimilar in a South African context as the prepared comments by Nelson Mandela during the Rivonia Trial (in Pretoria), which the final paragraph is the most famous, even if the speech itself was very long: During my lifetime I have dedicated myself to this struggle of the African people. I have fought against white domination, and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons live together in harmony and with equal opportunities. It is an ideal which I hope to live for and to achieve. But if needs be, it is an ideal for which I am prepared to die. For the full speech, if you have a moment, you must read it: Mandela's statement from the dock at the opening of his defense in the 1964 trial.
Great people come around only ever so often, we should be so lucky to have lived in his time. Back to the local market here, stocks rose over a percent, industrials ramped up a percent and a half, a big recovery in the Richemont share price (most Swiss stock majors increased), most of the excitement came in the gold companies stock prices, Sibanye continues to do really well as a separately listed entity. I remember the talk was that it was supposed to be the worse of the two companies, Gold Fields with the world class South Deep asset was supposed to be the better one. Perhaps we should just give them all a little more time, as separate businesses they can be masters of their own destinies.
China GDP numbers are out this morning. Give me a break please, when you see headlines suggest that this is the slowest growth rates in China in 24 years (all the majors are going with that) perhaps a little context is needed, be careful of falling into that trap. Sure, 7.4 percent is not 8 or 9 or even close to double digits, it is however the growth rate of the second biggest single economy on the planet. If you grow at a quick rate, the base gets bigger and bigger, it then becomes increasingly harder to grow at the same rate. Nigh impossible, in fact. China could probably accelerate growth rates again with greater economic freedoms and democracy, the truth is that the communist party still pulls the strings and greater economic freedoms have kept the grumpiness away. The perspective that I wanted to draw on is that in 1990 the Indian GDP per capita was bigger than the Chinese GDP per capita. True story, check out this screen grab, which shows you that Chinese and Indian annual economic output were roughly the same:
Last year however, the Chinese economy grew at a whopping 7.4 percent. Check out the official statistics, from the National Bureau of Statistics: China's Economy Realized a New Normal of Stable Growth in 2014. 63,646.3 billion yuan in 2014 at an exchange rate of 6.22 to the Dollar equals 10.238 trillion Dollars. Wow, it has topped 10 trillion Dollars for the first time, I have not as of yet seen that headline, perhaps the exchange rate on Google I am using is wrong. It can't be though, it says 6.2145 on Google Finance, that is close enough to 6.22. Working backwards, 7.4 percent of 10.238 trillion Rand is 757 billion Dollars.
In short then, the growth that China achieved last year, on top of their already big economy is equal to 2.1 times their entire economy 24 years ago. I would prefer to see that as a headline rather than the slowing references, the phenomenal growth and economic miracle achieved in that time has been incredible. We are humans, we are drawn to bad news, hoping somehow that it would never happen to us. We would love to see quicker GDP growth here, half of the Chinese growth would be welcome. When someone gets anxious about Chinese growth having "slowed" tell them that they are missing the point. Anyhow, if consumption continues to accelerate (consumer goods retail sales grew 11.9 percent in 2014), that will be good for everyone.
Oil prices have steadied a little from the levels below 45 Dollars a barrel, the news is starting to filter through that rig counts in the oil and gas market in the US (according to some Baker Hughes numbers) is starting to fall precipitously, oil production from the Bakken field is starting to level off, BHP Billiton has a production report tomorrow in which they will indicate a cut in capex in the exploration report, in particular in their oil and gas segment. They are not alone, there are salary freezes and staff getting cut. That means that eventually the production will fall, the one thing that the fracking crowd have in their favour is the ability to switch on and off at will, inside of 30 days. As Jeff Currie, the chap who penned that Goldman report said, distressed independent new technology businesses need to start being acquired by the majors with the stronger balance sheets and more conservative company profile. That would be a complete 360 though, in the eighties, US oil majors were leaving local in search of major finds in far flung places.
Schlumberger, the oil services business with the biggest exposure to the US is laying off 9000 people, 7 percent of their workforce and have taken a 199 million Dollar pretax charge write down in their biggest area, Eagle Ford Shale. Expected capex is down 1 billion Dollars. So there you go, real companies reporting on what is happening on the ground, the speed of the fall of the price has implications for the folks living around these big "new" oil fields. North America is still the king of shale, the main ones are Bakken (up north, in the middle on the Canadian border), Eagle Ford near the Western Gulf, Barnett in central Texas, Woodford and Fayetteville further north of Texas. Watch it and watch those states for signs of weakness, there has to be, without a doubt. Sometimes the swing producers are the ones that come and go the quickest.
Byron beats the streets
Luxottica reported sales that absolutely smashed expectations. Perhaps sunglasses sold like crazy in the last quarter as a result of being the hottest year on record. 2014 that was. Remember that this company has a strong retail presence selling sunglasses through their Lenscrafters and more well known locally that is, Sunglass Hut. You can download the Q4 results here -> Strong acceleration of Group adjusted net sales in the fourth quarter 2014: +15%. Nice. The fourth quarter was particularly strong when compared to the rest of the year, sales increased 9.3 percent at constant exchange rates. Ray-Ban, an in-house brand recorded double digit growth. Regionally North America was the best performing region, showing 19 percent growth in the wholesale division, emerging markets recorded 14% growth for the period.
I've hacked a couple of tables from the presentation which shows divisional breakdowns between the retail and wholesale divisions.
As you can see, the business is extremely well diversified geographically. It is also benefiting from a weaker Euro to the Dollar which is what Draghi and his team want for businesses in Europe who are big exporters. It's nice to have central banks on your side. Unfortunately though we are slightly hedged against those benefits because our holding is in dollars. Regardless, if the underlying business is doing well then the long term sustainability will benefit.
The more I analyse these retail type businesses the more I realise how important brand power is. I am no brand expert and I know there is plenty research and theories about consumer preferences but the way the world is going, (in my opinion) old established brands are going to outperform. Especially in developing markets where these brands had a previous untouchable aura about them. It's no secret that people with new found wealth, coming from poor back grounds will splurge on luxury brands to announce their arrival. That happens all over the world, regardless of culture, religion or background.
Take a look at the Luxottica list of brands and tell me who you think will dominate sunglass sales worldwide for the foreseeable future. It's actually ridiculous how much market share they own and the amount of branding power they have at their disposal. I also feel that Sunglasses as a consumer good will outperform. They are a huge fashion statement but also preform a practical function. This includes eyewear for many sporting activities.
The medical side of the story is also exciting. Millions of people who have bad eye sight are entering a wealth bracket where they can afford lenses. Eyesight is probably our most important sense, people will always prioritise one of the most sensitive and crucial parts of our body.
The board seems to have a found a solution for the corporate governance issues they had last year. They have gone with a joint CEO structure, Adil Mehboob-Khan is the head of Markets while Massimo Vian (previously suspended by the board during the fall out) is head of Product and Operations. My guess is that they are both "Yes Men" to Chairman and majority shareholder Leonardo Del Vecchio. It is not ideal but his interests are aligned with you as a shareholder. And to have built the business to where it is today, he is certainly no muppet.
The release only covered the sales numbers, we will get earnings data at the beginning of Feb. We will cover the fundamentals when those come out. We continue to buy the stock.
Things we are reading, we think that you should read them too
Google and Space X are teaming up - Google Is About To Make A Major Investment In Elon Musk's SpaceX. Instead of working on their own internet projects, these companies will be teaming up to get internet to all parts of the world. I think this is a win for these companies and then for humanity. Here is a link Elon Musk tweeted this morning, it is a great video showing the vastness of the universe - Gigapixels of Andromeda
Humans keep moving forward - How Yelp, Uber, And Smartphones Unite Consumers Against Crony Capitalism. Two things to note from the article, the first is that due to inefficiency gaps in the market this open up opportunities and makes things more competitive. The second is all the jobs that have been created through the smartphone revolution, so the old industries might loose some jobs but jobs will be created in the new industries.
It takes time for things to change but they are changing - There are about as many solar jobs as coal jobs in the US. If it takes another decade before alternate energy is a real contributor to our energy demands, in the grand scheme of things 10 years is not that long? Most people will live till 70/80 and the globe is millions of years old.
A bit of perspective - Burger Flippers in U.S. Make About as Much as State Bank Chiefs in India. I think that they are underpaid but it is interesting to see how different countries view government employee entitlements.
Home again, home again, jiggety-jog. Markets are marginally better here, not a whole lot, just a little bit. Perhaps the anxiety over the Chinese economy has evaporated somewhat.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
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