"If the SNB had telegraphed this to the rest of the world, the unwind would have been more orderly, the only problem would have been that THEY, the Swiss National Bank would have been on the wrong side. And why would they want to "help out" the currency speculators in New Zealand? Perhaps the pictures and adverts of happy smiling people in the currency adverts should include this event."
To market, to market to buy a fat pig. Wow. The Swiss National bank ended their Euro peg at 1.20. And at the same time they lowered interest rates to 0.75, minus. That is right, if you give them 100 Swiss Francs, they will give you back 99.25 Francs in a years time. Not exactly, you would not get that as a retail investor, you would not get much back however. They, being the SNB, stuck out a statement: Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75%. Target range moved further into negative territory. Why? The weakening Euro meant that the Swiss Franc was weakening against the Dollar, as a result of the peg. No more peg (which was put in place for emergency purposes in a time of economic stress) is needed. Goodbye peg.
The goodbye peg meant that many were caught unawares, Paul said that they (the SNB) had indicated that this was going to remain part of policy for a while. In the same way that this was instituted and caught everyone unawares, it was unwound with the same secrecy. This is too difficult and hurts my brain to try and understand why all of this should be so very important for us as equity investors, central bank currency interventions. Nevertheless it has real implications for some of the companies that we own. Richemont was down 2 odd percent as a result of a sloppy trading update, after this exchange rate announcement the stock was down 15 percent plus. At the same time, the Rand price ended down only 4 percent and a bit on the day. Why? Well, there is an opportunity to arbitrage based on the currency. The Rand at the same time was 12.5 percent weaker to the Swiss Franc, which explained why Richemont was only down that amount in Rand terms. We only care about the Rand price, that is the one that we hold for local investors.
Meanwhile there were implications for Mediclinic, which of course has a substantial business in Switzerland, their Rand earnings from that part of the world would be significantly higher, their Rand costs would be higher, of course all things inside of Switzerland would be neutral. If you got paid 100 Francs a day last week, that would be the same next week, what it could buy you however, that is the critical part. Mediclinic closed at 111 on the dot, Nelson as it is known in cricket, Umpire Dickie Bird would have been hopping all evening until the markets opened again. Swiss revenue in the last set of Mediclinic numbers was a little over 51 percent, profits 41.65 percent. So obviously a strong move in the currency would have positive implications for Mediclinic.
Credibility has been questioned of the Swiss national bank, a little like when the Romans discover that the vault has been blasted by Obelix in a Swiss bank, this is the same thing, credibility is key, most especially for the Swiss who are fiercely independent. Asterix in Switzerland, read it, it was my favourite. The FT explains it pretty well, what the implications are for the ordinary Swiss people are, is this pre-empting the ECB's stimulus program -> A poor advertisement for Swiss reliability.
Some of the implications were an implosion by a New Zealand currency trading house and major losses for a US currency broker, FXCM. It is actually a listed business. According to the WSJ in this article, Swiss-Franc Move Cripples Currency Brokers. The situation is manageable for FXCM, the stock tanked 15 percent in ordinary trade and another 12 percent after-hours. According to the article, liquidity became a problem, a huge problem for Global Brokers NZ. Unresponsive and illiquid for hours is a death knell for a company that prides itself on (in the Why choose us section) tight liquid pricing, 7 milli second execution time and client fund protection, it all seems rather ironic now. Poor chaps, it could have happened to anyone.
A former Fed official had a good take, pleased that the SNB did this, suggesting that they could have been more subtle: Rolexes Just Got More Expensive-Or, You Can't Keep A Good Currency Down. As Michael said however, if the SNB had telegraphed this to the rest of the world, the unwind would have been more orderly, the only problem would have been that THEY, the Swiss National Bank would have been on the wrong side. And why would they want to "help out" the currency speculators in New Zealand? Perhaps the pictures and adverts of happy smiling people in the currency adverts should include this event.
Company corner snippets
Mr. Price stuck out a trading update yesterday, this was for their third quarter to end December, rather than the usual half year numbers that we have been seeing mostly. You would say that Mr. Price is a company that likes to offer fashion right now, at affordable prices, more affordable than their peer grouping. Perhaps in large part that has been the beauty of the success of the company, as they say in this release, they target young customers in the mid to upper LSM groups offering fashion at good prices. Against the corresponding quarter from the prior year, Mr. Price managed to grow sales by 14.2 percent, a fabulous achievement. The more I see from all of the clothing retailers (other than the first to report, Truworths), I am starting to get the sense that the average consumer is looking marginally better. What leads me to believe that the nearly three weeks that we have had this year so far (post the hurrah period) sales have been at a similar level from the prior quarter. The stock closed up 2.3 percent, near a record high.
The TFG group, better known to you as Foschini (I heard from someone once that the company prefers TFG), have announced after their cautionary from a couple of days ago that they are buying Phase Eight. Phase Eight? What is that? Follow the link and you will see that it is a UK based retailer mostly, with concessions and stores elsewhere. In total 438 outlets globally with annual sales (to LAST January, 2014) of 140.7 million pounds or 2.573 billion Rand. EBIDTA of 23.8 million pounds or 435.5 million Rand. This compares against the group having annual sales (as at last March, 2014) of 14.159 billion Rand and EBIT of 2.536 billion Rand.
TFG are buying 85 percent of this business, there is the right of TFG (to buy) and of the management (to sell) of Phase Eight at a 9.36x EBITDA multiple. The price? For TFG, as per the release: acquires c.88% of the equity value for a consideration of GBP140m (ZAR 2561m). So 2.561 billion Rand, or 2.91 billion Rand for the equity value. Total enterprise value is 4.353 billion Rand. TFG current market cap is 30.5 billion Rand. So whilst this is a category two transaction not requiring their shareholders approval, the funding is also "not a problem" being financed from the proceeds of the RCS sale and existing resources. South African companies buying companies offshore. After the transaction, 54 percent of group sales will be cash, 20 percent of revenue will be non South Africa, see the associated presentation. Believe it or not, Phase Eight sells products through existing concessions in Australia in David Jones stores. Good for them, at the same time the company released a sales update that was above expectations. Oh, and last thing about Phase Eight, online sales (ecommerce) account for 17 percent of total sales. Richer working women with disposable income, that is the current market, nice! Good work, the market agrees.
Things we are reading, we think that you should read them too
Quality jobs are what count. There are many articles around talking about how the spending power of the middle class is being eroded, the good news is that most of the jobs created last year where in areas that paid higher than the average wage - Jobs Machine in U.S. Created More Than Burger Flippers Last Year. Note though that all these jobs are skilled jobs and the forecast for the coming years is that there will be a global shortage of skilled workers and a surplus of unskilled workers.
More on the jobs front, this time from the impact of the lower oil price - Schlumberger to slash 9,000 jobs as oil prices plunge. Ouch!
Remember when Bitcoin was the craze and the opportunity of a lifetime? - The bitcoin crash is worse than both crude oil and the ruble. We might find that Bitcoin was ahead of its time but for now I think the huge drop in price is its death nail because it has left a really bad taste in people's mouthes. Why buy a currency where you can get wiped out and a currency that not many people accept?
A very cool idea and a good way to spend your time on the daily commute - Beijing opens first underground library
Home again, home again, jiggety-jog. Markets are lower here today, there was a worse looking session in the US, banking stocks were all looking rather weak. US inflation number a little later today, that will be keenly watched and observed. South African retail sales were quite good, a couple of days back, pity that it was for November when all the companies are telling us what happened in December.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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