Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We were comfortably off the worst levels of the day, but we were also quite a way off the highs. Resources were lower by half a percent, retailers were strongly higher, up nearly three quarters of a percent. Platinum miners rocked in the face of a Rand that strengthened to the US Dollar. Banks added nearly two thirds of a percent, in what was a tale of two separate sides of the market, again largely driven by fluctuations in the currency. After all was said and done the Jozi all share closed down 31 points to 33076. That is a loss of 0.09 percent, nothing to write home about I guess.
Byron's beats looks at an interesting announcement from last Friday. Which once again confirms to me that the levels that the retailers trade at, is about right. Because of what others are prepared to pay, if not locals, who are stuck on past valuations.
- On Friday we saw some more evidence that the developed world find our retail sector very compelling. Last week a SENS was released by Spar Group stating that the Government of Singapore Investment Corporation has acquired a beneficial interest in SPAR securities and now holds 5.18% of the company. Now we all know about Wal-Mart's 51% acquisition of Massmart and although this is of a smaller scale, it is still significant as a vote of confidence.
This now makes them the third biggest share holder of Spar behind the PIC and Coronation and is valued at around R1bn. But this is a strong trend we have seen over the years with regards to our retailers. We often hear South African analysts talk about how our retailers are overvalued. But in truth their opinions do not count for much. That sounds harsh but I say it because most of our retailer shares are owned by foreigners.
Annaleigh Vallie from BusinessDay wrote this article about the Spar announcement and found the following stats on the foreign ownership of our retailers. "International investors own about 70% of Truworths, SA's largest clothing retailer, from 67% a year ago, and more than 90% of Massmart. Almost 60% of shares in Mr Price and 54% of Woolworths are owned by foreign funds, increasing from 51% for both stocks in May last year, according to Bloomberg data."
What does this tell me? It tells me that cheap money from developed markets is coming into developing markets trying to grasp the developing market consumer which is growing stronger and stronger. It is a massive growth theme that many are trying to grasp. We have ample exposure via Massmart, African Bank, Cashbuild, Woolworths and Famous Brands. I am sure that many of these foreign investors have done very well over the last few years. In 2009 the retail sector was up 26.2%, 55.8% in 2010, 14.7% in 2011 and 14.25% so far this year. That's good going.
Poor Telkom, the news is hardly getting any better. A friend of mine who works over there said that the senior execs had used up as much as 70 percent of their time speaking to the Koreans and were introduced by government to each other, only for the government to "pull the plug" on the deal. Sounds about right. But I am not talking about that, rather a trading update that came a little late yesterday. Here is the trading update that deals with their pending results. There was already a trading update that "things" were looking poor, we covered these, here -> Telkom. More write downs. More bad news.
Turns out it is going to be slightly worse than initially thought: "Telkom hereby advises shareholders that basic earnings per share from continuing operations for the year ended 31 March 2012 are expected to be between 95% and 100% lower than the comparative period. Headline earnings per share from continuing operations are expected to be between 30% and 35% lower than that of the prior year."
Restated headline earnings per share for the period to end March 2011 clocked 484.8 cents, for continuing operations. As such, it is pretty easy then to work out. So, you should expect around 325 cents worth of headline earnings per share from continuing operations. Which means that the stock trades on no more than six and a half times earnings. And I am guessing that the dividend payment will be very slim, last year it was 145 cents for the final dividend. At current levels, if the dividend payment is maintained (I would think unlikely), then the company could be on a yield of close to 7 percent. That seems all too cheap, but I guess if the main shareholder cant be convinced by the company of what their strategy is, then neither can the rest of the market. Who then can't afford a higher rating to the company.
The G7 are going to be holding emergency talks on matters of the Euro zone debt crisis today. The G7 who does not include the Chinese or the Indians, but in all fairness, this debt crisis should rather be the focus of the olde worlde rather than the newer entrants. Because of course the crisis impacts on all of them. France, Germany, Italy, Japan, the United Kingdom, the USA and Canada are part of the G7, but the European commission also sends along a representative to these meeting. WHEN the Euro project gets closer to completion, perhaps the EU can have a single member there on their behalf, and then we can include China and India, perhaps even the crazy Russians can get a look in.
Stephen Harper (Canadian PM) is a lifer politician. Barack Obama is a lawyer by trade. David Cameron is sort of a lifer politician with a journalism background. Yoshihiko Noda sort of has some business background, but is mostly just a politician lifer too. Mario Monti (Italian PM) is an academic economist and bureaucrat. Angela Merkel holds a very impressive doctorate in quantum chemistry, but is outside of that a lifer in politics. Francois Hollande is a lifer politician, heck, he even studied it, as they do in France. So what do we have? One economist, one lawyer, one chemist and four politicians are going to save the European debt issues, how confident are you now when I put it like that? Less, or more confident? What does make me confident is that these masters of the planet are going to be getting together using technology, we are told by conference call. Awesome. BUT, lucky for all of us, it is the Finance chiefs that are going to be on the call, not the butcher, the baker and the candlestick maker. Resolution? Hardly expected, but at least folks will get a better understanding of what the Germans are thinking relative to what each of the others are thinking.
Remember that very fun "dis is ze German coastguard" YouTube clip, where the poms say "Mayday, mayday, we are sinking". To which the young German coast guard operating the radio asks the stricken ship "What are you sinking about?" It definitely seems that this is the kind of space that we are in right now, everyone is not understanding each other. What still amazes me is that English is one of the three "working languages" of the European commission, along with French and German. And the ECB press conferences are almost always in English. Are we expecting any press release to make the bears shudder and awake the bulls? Or is this just getting a plan together ahead of the next G20 pow-wow in Los Cabos in 13 days time? Possibly both, but posturing at these meetings is high on the agenda and a nice relaxing environment to say hi to new buddies in the form of Hollande. In the meantime a European services PMI read BEAT expectations, but both a German and French read did not. Time for the big hitters to be big hitters and come out of the dugout methinks.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. It was better later in the day than in the middle of the session where an early rally had been rubbished by another set of weaker data in the form of US factory orders. Not huge in the bigger scheme of "things" but I guess jangling the frayed nerves. I do see a lot more talk about valuations, which does at some level mean that common sense will prevail in terms of when the buyers do eventually come back and are believers again.
I was then quite interested by a series of tweets from a fellow by the name of Matt Busigin, who describes himself as an amateur investor and economist, in an interaction he was having with another fellow I follow, Barbarian Capital who is a nameless fellow, but has lots of interesting things to say, including last night that 12.4 billion visits were made to drive thru spots in the US last year. Michael Bloomberg should outlaw that too in New York, but at least people actually walk there. Matt said two things that caught my eye, first:
- "I calculated it at as 25% of foreign sales in January, and 48% of sales are foreign. Discount EZ to 0, you get $93 from $105."
He is talking about the S&P 500 earnings expectations for this year, and has adjusted his Euro Zone profits to zero for the collective companies. And he still gets to 93 Dollars on the S&P for this year. And the level is 1278 for the S&P 500. So, at the current levels, even in an absolutely disastrous outcome from Europe, the S&P 500 is trading at 13.74 times forward earnings. And if worst case does not transpire, then the market leaves even a cheaper 12.2 times forward. Pretty cheap sports lovers. He then goes onto to something a whole lot more complicated:
- "That still leaves us at a ERP of 5.67%, or LERP of 2.32%. So you could make the argument that's baked into valuation."
ERP is equity risk premium. The Investopedia definition is as follows: "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium."
Risk free of course is the US ten year treasury which yields a paltry 1.52 percent right now. Yech, what sort of an investment is that, no really? Many people are starting to call for the US to issue a whole lot of debt at these rates for future funding. I mean, if someone is silly enough to want to earn only 1,5 percent per annum for ten years and then get their money back, well then..... perhaps they should not be paid to run money. Anyhow, I like the arguments about the valuations, they appealed to me.
I am not the only one cherry picking and putting on a brave face here, remember the Goldman Sachs note from yesterday that Byron was talking about? Yes? Titled: Do The BRICs need Replastering? The conclusion from Jim O'Neill was quite similar, it goes as follows:
"It all looks rather grim doesn't it? And it isn't even May any more. But, as I saw from a broker note this week, if you look at the valuation of many European markets, their current level relative to the CAPE (cyclically adjusted price earnings) are at such low extremes that this could be close to one of the best investment opportunities in a long, long time. Our own CAPE analysis suggests the same."
Long, long time, is that a few year, five years or ten years? Either way the conclusions that I am beginning to draw is that the market is cheap. And quite a few people think that too.
Currencies and commodities corner. Dr. Copper is last at 334 US cents per pound, the gold price is 1618 Dollars per fine ounce, better on the session, whilst the platinum price is also starting to get a little traction, up at 1438 Dollars per fine ounce. The oil price is 83.87 Dollars per barrel. The Rand is steady. 8.49 to the US dollar, 13.05 to the Pound Sterling and 10.56 to the Euro. We have started about flat here.
Sasha Naryshkine and Byron Lotter
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