To market, to market to buy a fat pig. A couple of really interesting things yesterday, obviously the Chinese real estate taxes was one of them. The US budget sequester was another, remember this was delayed a couple of months from January 1 when a deal was reached. Lastly, and perhaps most importantly for us, there was a great interview with everyones favourite billionaire, Warren Buffett on CNBC the Monday after the Berkshire Hathaway annual report. It is interesting the measures that the company uses, as having underperformed the S&P 500, whilst the share price of Berkshire has done really well. This tells you that Buffett doesn't go share price watching, choosing rather to worry about the underlying investments inside of Berkshire. Separation of a business from their share price is a tough old thing to do. We will have a look at that CNBC interview with Buffett and see if he made anything available that he hadn't already through the annual report.
I watched pieces of the 60 minutes piece on Chinese real estate, it was rather revealing of the huge building going on in that country right now. Or let me rephrase that, the building that has already gone on in that country. The first piece is China's real estate bubble, which gives you some backdrop to the enormous infrastructure that stands empty, but bought. So this is not a case of someone having built some unsold buildings. It is important to try and understand that there is a culture (and I would hate to generalise) of speculation in China, alongside a culture of saving. Sometimes those two don't mix like the Gump and Jenny peas and carrots.
Remember that social security in the worlds second biggest economy is almost non-existent and reliance on the next generation is not guaranteed. If you decided to have a family after 1979 the chances are that you only had one child. The one child policy is still in place until at least 2015, as far as my reading tells me. The one child policy, according to the Wiki piece on the subject is only applicable and enforced on around 36 percent of the population. So where is this going? Say for instance, you are 60, and in this grouping, that would have meant one child. Say that your child marries someone from the same background and has their only child, that single child has 4 grandparents, two parents and their lonesome. The expectation on that individual to support their elders has disappeared. Urbanisation of course has changed this too. So it means that the elders must save like crazy. And the stock market has been wild at best. The Shanghai stock exchange was re-opened at the end of 1991, so the concept of equities ownership would be foreign to many. Which means that new found wealth as living standards rose led to property speculation.
So, how does this all stack up? Is there a bubble? The short answer is yes. Definitely yes. There are of course still around 650 million people that live in the rural areas. In China, the cross over the 50 percent threshold in urbanisation took place for the first time in 2011.
Places like Hong Kong, the Vatican, Monaco and the Cayman Islands aside, the first biggish country I can find on the list of Urbanization by country, is strangely Venezuela at 93.5 percent. Japan unsurprisingly has an urbanisation rate of 91.3 percent, that means that 115.6 million Japanese live in urban environments, the largest metropolis in the world is Tokyo with over 30 million folks. Wow. But China at around 50.6 percent rubs shoulders on the ranking tables of Indonesia (50.7 percent) and Nigeria (49.6 percent). The point I am trying to make is simple. China still has a very long way to go with regards to urbanisation. And they are doing a whole lot better at infrastructural development than either Nigeria or Indonesia that have the seventh and the fourth biggest populations respectively.
Possibly the most interesting part was the third part, an interview with Zhang Xin: China's real estate mogul. What she says at the end is pretty amazing. She reckons that full democracy will be in China in the next twenty years. Yes, she reckons inside of the next twenty years. Which I think is amazing. Because as I often say, and there are great examples, democracy and capitalism leads to richer societies. North and South Korea are brilliant examples of that. The Chinese authorities have put together a bunch of targets for this year, 2013, and Bill Bishop has a wonderful take on it, you really should sign up for his blog: Major Targets for 2013. If you are planning to add 9 million jobs, just this year, surely those folks will need a place to stay? Ultimately affordability is key here, obviously those migrant workers cannot afford the middle class apartments. Not this year. Perhaps not even in ten years time. But at some stage they will. I reckon between now and then you need not get too anxious about what is clearly a Chinese real estate bubble. Besides, what can you or I do about it? Buy an apartment in the 'burbs of Shanghai? Not likely, in the same way (and I could be way off here) that you don't see Capetonians buying Jozi property.
That CNBC Buffett interview is always really fun. He really is a lovable old man and speaks a lot of sense. Further to that, because he has this wonderful nearly 50 year amazing investment history, when he speaks, people sit up and take notice of what it is that he is saying. He basically said that if he was Tim Cook he would ignore David Einhorn. And what he said made sense, you can't look to run the business to see the stock up every other day. Try and create as much value as you can over the next five to ten years. At the end of the last quarter, Apple had 137 billion Dollars worth of cash. Buffett reckons that they should buy back a whole lot of stock at these levels. The companies cash pile to market cap is nearly 35 percent. At the depths of despair in the market washout of 2008 and lows of March 2009, that percentage was at 37 percent. Surely the company is in far better shape now than it was then? That is a discussion for another day. To finish off, Apple have annual operating cash flows of nearly 51 billion Dollars. The stock trades nearly 21 million shares a day. At the current trade rate the entire company will turn over in 45 days. That is just nuts.
Buffett also thought that the sequester won't have the impact that everyone thinks that it will, and perhaps this is the start of a bigger cutting in the future. Yeah, perhaps. And whilst growth returns, perhaps the small cut here and there is not inappropriate. What I find quite interesting though is that cuts were off the table, and indeed even the discussion around the debt levels were pretty much non-existent half a decade or so ago. When cash receipts increase, then the problem will take care of itself. A country is not a household, it never moves, it "lives" forever.
Buffett also thinks that long term government bonds in the US are the dumbest investment. I guess many are actually in agreement with him. Oh, and he is still buying stocks. The upshot of it all is that he is still cheerful and adding when he sees fit. Buy quality, keep it. It sounds so easy. And then you see the Apple stock volume turnover numbers. And then you know that Berkshire has owned Coca-Cola for nearly three decades. We are buying them because we think that we are getting good value for them: Buffett Still Sees 'Good Value' in Stocks. That clip is getting a lot of attention. The Dow Jones is within touching distance of the all time highs. And judging by the futures market, today could quite likely be that day. And still, there are loads of people looking for some sort of a pull back.
- Byron beats the streets. It's always difficult writing about a stock that you like which has done badly. It makes me feel like I am trying to put lipstick on a pig when absorbing bad news. But, if you just invested in stocks that were doing well you would be considered a momentum investor which is not always a good thing. Just ask those trying to ride the wave of the dot com rally. Sometimes, if you feel you are justified, you have to fight the crowd and take a contrarian view. That is often how the real money is made, when the situation is not what everyone from your hairdresser or in this case even Carte Blanche is telling you. And then the stock gets a massive rerating.
This morning we had another negative announcement from African Bank stating that Moody's have downgraded their global and national debt and deposit ratings by one notch. This was expected as the agency had already put the company on negative outlook in October last year. Again, I maintain my thesis on ratings agencies, they are just one piece in the valuation puzzle. Yes they are a factor investors have to consider when lending Abil money but they are far from the full story.
Leon Kirkinis had this to say about the downgrade: "African Bank deploys extremely conservative funding and risk management measures to its liability portfolio and we view the term wholesale funding as a strength and the more recent diversification into foreign markets is a step in reducing concentration. The robust and sustainable business model will continue to deliver high returns, through market cycles. Notwithstanding the downgrade, African Bank maintains its global investment grade rating, with a stable outlook."
Also don't forget that the company is trialling retail banking as a form of raising money which will improve their diversification even more. I am not too fazed with this announcement. It was expected and has happened to most of our banks following a downgrade on South African debt.
More importantly, and why African Bank are in fact up 2% today was a trading statement from Capitec which indicated headline earnings per share growth of between 32% and 36%. Wow that is huge and off what has exceedingly become a high base. Yes Capitec are a mixture of retail banking and unsecured lending but this is definitely good news for the sector.
As we have always said, the earnings have been growing and the book with which the earnings are made has also grown tremendously. But the share prices have not followed because people are worried about the future. Capitec, once the darling of the JSE is trading at a similar level to where it was in May 2011. They too got downgraded from positive to stable by Moody's. This was not as severe as African Bank, probably on the basis that they have retail banking as an extra way to raise money.
Our thesis on these unsecured lenders remains the same. Most of the bad news is factored in. At these levels the potential for upside is much higher than the potential for downside. As the reaction to Capitec's trading update is showing. More good news like this could be the start of a rerating, who knows. So yes I put lipstick on the (shareprice) pig, but who says a good investment has to be pretty. Patience.
Crow's nest. We are up like crazy today, part the Chinese growth projections and targets and the improving commodities complex. Did you see that China overtook the US as the biggest oil importer. In part growth of the US shale gas story, which is a modern wonder. No really, a modern economic wonder.
Sasha Naryshkine and Byron Lotter
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