Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. The Eurozone managed to avoid a recession by registering no growth for the region, but with absolutely no growth (a goose egg) comes no contraction either. Germany printed a better number than anticipated for Q1 GDP yesterday and that initially lifted us (Spain and Italy printed a worse number) through the morning and into the afternoon. And then bam, just like that we were derailed again by the same little (or big) wagon at the end of the train. Greece. And like lightning the market sellers got to work. The Jozi all share index closed the day at 33486, down 47 points or 0.14 percent, not the worst result in the world, but we were held afloat by a weakening currency. Industrials rallied half a percent, Sasol benefitted from a weakening Rand, the "sector" up one and a third of a percent. Resource stocks sank three quarters of a percent. Platinum stocks sank over a percent. Gold miners fell over two and a half percent as the respective underlying metal prices fell heavily. Hey? Question here, the same one that I ask every time we have a mini crisis, why doesn't the gold price rocket? It seems to be in more of an anti lock step with the Dollar. So, is it an asset class thing and not a safety thing? But as Byron said to me, stop bashing that asset, history is basically against you. Yes, he is right. And he is going to cover it, today!
The Greek announcement, which was widely expected anyhow, was that Greece would now be heading for a fresh round of elections as the president of Greece failed to get all the political parties closer to forming a unity government. Thanks guys. On Monday alone according to the WSJ Greek depositors withdrew 700 million Euros of cash alone. Greek banks are going to have more and more liquidity issues as the panic spreads, I guess we should expect similar or higher numbers today. And German bunds are also attracting attention from Greek folks and institutions. Yip, see, even the folks inside of Greece know that they would rather have Euros. Greek banks are entirely dependent on the ECB for funding. And remember that emergency funding is only available if Greece is a part of the ECB. And the countdown now begins, because the Eurozone powers that be have told Greece that unless the reforms are put in place (remember the commitment to you, because we expect you to honour your promise), the funding will dry up. I suspect even if the Greeks are out of the Eurozone that folks will continue to use their Euros until they are fresh out.
And the message as far as I understand it is clear. We (The rest of Europe) agreed to help you, you (Greece) must maintain your side of the bargain. Otherwise...... no more money. And whilst recent opinion polls put that lefty Alexis Tsipras ahead of everybody else. BUT yet, the polls also suggest that more than a slim majority of Greeks want to stay inside of the Eurozone. The knock on is that both Italian and Spanish bonds are rising rapidly, and whilst the weather is getting better, so the heat on the central treasuries is being turned up too. The Spain-German spread has risen to 500 basis points, Italian yields have crossed six percent this morning for the first time since late January.
And last evening of course the new French president, Francois Hollande met German chancellor Angela Merkel last evening. Hollande's Airbus was actually struck by lightning on the way to meet Merkel. His plane had to turn around, and he had to hop on another one. And as such, the two lost an hour. It could have been worse. Hollande actually had been drenched earlier in the day, soft(ish) rain in Paris wet the new leader. He had waved to a distant crowd, sticking his whole body out of a Citroen, with heavy drizzle falling all the time. At the same time the made in France car was flanked by horses and the general pomp and ceremony of a presidents inauguration. And nothing was finished. The carpets looked new. The building was spotless. The guests were not wearing rags. The uniforms and gear of the military types looked outdated, but beautifully ceremonial of course.
Back to the meeting between Merkel and Hollande (the French swear word is not the new mix of the two, you know Merde, only saying it once), saw Angela Merkel say that they (HollMerk) can reach common ground. Meaning that she and her party are now listening to the voters and the austerity sucks crowd, or at least that is the way that I read it. At least they are on the same page, France and Germany are key to the whole project. They kind of like the weaker central currency, it is much better for their exports!
Richemont, the luxury goods producer and retailer, have released results for the full year to end March 31 this morning. And they look ahead of expectations, I can tell because the share price is comfortably ahead of the rest of the market. You can check out their Annual Results FY 12, from which I will be pulling a whole lot of data. Sales grew a whopping 29 percent to 8.867 billion Euros. With record operating margins (23 percent) the company has seen a 51 percent gain in operating profits which top 2 billion Euros (2.04 billion) for the first time. Net profits clocked 1.54 billion Euros, an increase of 43 percent. Operating expenses increased quite sharply by 19 percent, but obviously this is blurred when you see such good results. And you also see sharp increase in capex, to 6 percent of sales (from 4.7 percent), which is all aimed at increasing their retail presence, nearly half of all capex, and more importantly manufacturing, around 27 percent. Total capex for 2012 was 535 million Euros.
Earnings per share clocked 2.756 Euros per share, divide by ten (the Global depositary receipt here is one tenth of the Zurich stock) and multiply by the current exchange rate (10.60 to the Euro) you get to just over 292 ZA cents worth of earnings per share. The dividend in Euros declared was 55 Euro cents, on the same ratios is 58 ZA cents. But of course the Swiss government keeps 35 percent of that.
Richemont make some interesting observations about sales in Europe being driven by tourism, austerity is impacting on their southern European sales, but other clientele in Europe is fairly resilient. Russia is performing strongly, I guess largely fuelled (excuse the pun) by high oil prices, if not natural gas prices. A Russian GDP number yesterday saw a comfortable beat. But the real excitement is that now Asia Pacific is their largest area by far and away the biggest revenue contributor, 42 percent of the total. Europe represents around 27 percent of total sales. Would you believe that the presentation says that both Nigeria and South Africa are becoming good markets for their products. Upwardly mobile middle and upper middle classes, the theme that we follow and invest in, aspirational consumerism is exactly what it is. Everybody, most people like nice things, and if flashing it around means that you have arrived and your friends and colleagues think that is the case, then so be it.
More than half of the sales are through their jewellery maisons (51 percent), nearly three quarters (74 percent) of operating profits are from that division. Specialist watchmakers contribute roughly one quarter of both revenue and profits, the fashion and accessories (which includes Net-a-porter) segment is fast growing, but still not quite profitable yet. Time and patience is required with that business, there are many a person who enjoys shopping, but folks enjoy the end product more.
I managed to catch a little of the presentation, the bandwidth was poor, so it was just in dribs and drabs. I heard another priceless Johan Rupert classic line, that went something like this: "If you want to be successful you have to have a high dose of paranoia. You have to be worried that someone is going to eat your breakfast. Healthy paranoia is not bad". I guess he is right, and has always been very cautious about the future. When trying to explain quality and manufacturing of their products, he had this to say, holding up a bottle of Coca-Cola, "When I buy this, I am not expecting Chateau Lafite, I am expecting Coca-Cola". He basically said that you cannot confuse your well to do clients, they recognize quality. i.e. No knock offs. Their products might not be for the people that sit in this room with me, but monster sales growth means that many people are "dying to have it". Yip, they be "having" the jewellery, we be "having" the stock.
It is a great business. Really profitable. The single biggest risk that I can see is that Johan Rupert plays a really dominant role in the business. That is both a very good thing, and a very bad thing. He is clever and right there, fully involved with the business. Perhaps not really focused on the old assets over here in South Africa, he is giving his full attention to Richemont. But he almost overpowers his fellow execs. And he is the alpha of all alpha. In fact I commented to Paul that I thought that he made Patrice Motsepe's ramblings at results presentations look average, and anyone who has ever seen Mr. Motsepe's ramblings after results will know what I am talking about. So whilst he is fun to listen to and a laugh a minute, he is a risk to fellow shareholders. He might get hit on the head by a flying golf ball at these wonderful tournaments that he takes part in. He even uses that Buffett line saying that he wants to own businesses that are idiot proof, because one day they will be run by an idiot. I wonder what his fellow execs think about that? Well, they had better tow the line, because he has voting control for the moment.
A quality company with lots of cash (net cash position of nearly 3.2 billion Euros or nearly 34 billion Rand) which holds some of the best quality brands on the planet, that is Richemont. We continue to add, today there has been a big pop in the price, the stock is up as much as 8 percent this morning in Johannesburg. Having reached an all time high of 5123 too! Part of the reason is the announcement of a share buy back, I am not the biggest fan of buy backs unless the shares are retired. Richemont is the only bright spot on an otherwise sad looking market for the bulls here today.
Byron's beats looks at a charged issue, gold as an asset class. Please don't direct you insults at me today gold bulls, send it to him. Hah-hah.
- We do a lot of reading at Vestact and when I started here one of the most difficult adjustments was to establish a good system to process all the information available via the web and blogosphere. We use email, RSS feeds, Twitter, iPad and iPhone apps and various subscriptions to name just a few. While this reading is being done we have Bloomberg and CNBC running live on two big flat screen TV's on the wall.
I find it amazing how specific themes come and go and whilst they are in fashion everyone talks about them and then they disappear and everyone seems to forget about it. Remember Dubai defaults, Ireland, the silver price, Greece (which is back with a vengeance), nuclear energy, market correlations and many more. Sasha and I often cover these themes to keep you informed and on top of recent topics. One of these themes which has caught my eye and has been spoken and debated about since investments began is the gold price. At the moment everyone is talking about how gold, which is supposed to be a hedge against risk, has been falling with the market this year.
The price is now slightly down for the year, 13% below its 2012 high of $1800 and 18.7% below it's all time high of $1920. But what has confused the market is that gold has moved pretty much in line with the market and acted more like a commodity (supply and demand) and not a currency which is supposed to be a storage of value and a hedge against risk and inflation. 60% of gold demand is for actual use of the metal as a commodity while 40% is for investment and speculation.
It's the 40% that puts us off the metal. We battle to understand why people buy the metal and store it away while it pays no dividends and has no use but to look shiny and pretty. (And there is a holding cost with regards to storage - Sasha) The big issue now is that if gold loses its function as a hedge against risk we could see a collapse in the price because it has lost a huge function. Maybe this is the rerating we have often worried about and the metal will finally start trading like the commodity it is.
Just for the record, as vocal gold critics we do realise it has done fantastically as an investment class and made a lot of money for a lot of people. We are equity investors however and buy into companies who pay dividends. we don't buy commodities just like we don't buy property. As a gold play the gold miners have not done well over the last decade or so. So in that regards, within our limits, we have been correct.
Currencies and commodities corner. Dr. Copper is much lower at 351 US cents per pound, the gold price is lower at 1536 Dollars per fine ounce, whilst the platinum price is also weaker at 1426 Dollars per fine ounce. And as you guessed it, so is the oil price, down at 92.54 Dollars per barrel for NYMEX WTI. Brent last traded at 110.30 Dollars per barrel. The Rand is taking a hammering as you can imagine, down to 8.37 to the US dollar, 13.30 to the Pound Sterling and 10.64 to the Euro. We have started lower, but there was a small crumb of news that made everyone excited for a bit. And that was Angela Merkel saying that she was committed to keep Greece in the Eurozone. And she told my favourite European journalist, Sylvia Wadhwa on CNBC that there were no contingency plans for a breakup of the Euro. Meaning, read my lips, no breakup. And now Angela Merkel is saying that growth policies and austerity must go hand in hand. But as we have said many times over the last few days, the Greeks must decide that. Want to stay in, reform. Want to be out, no money. And that means totally bankrupt. And who wants that?
Sasha Naryshkine and Byron Lotter
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