To market, to market to buy a fat pig. OK, Friday was one of those days when the unanimity was that emerging markets were all under pressure as a result of slowing growth and strained fiscal positions. We were the fourth worst currency inside of the majors last week, from a sell off relative to the US Dollar. So I am not too sure that the AMCU strike on the platinum belt of South Africa led to the sell off of the Argentinean Peso, or Turkish Lira or Brazilian Real, but the Rand suffered heavily at the hands of those willing to take that view anyhow. I am not saying that the two are not connected, quite clearly they are, but be careful when making that broad sweeping assumption. See this chart from the BusinessInsider: The Emerging Market Currency Bloodbath. The only thing that the chart points out is that the selling was broad based.
The four reasons given in that article, with the graph, is that Chinese weakness (their PMI number), the Argentinean devaluation (which ironically is better in the long run), Ukrainian violence and the highlighting of their crisis and lastly The Turkish central bank not raising rates, as well as all sorts of allegations against the Prime Minister there. Corruption and the like. The same could be said for Argentina and Ukraine. Struggles of the middle class against their respective politicians, unfortunately you cannot tell people to go to the polls and decide in two years time. And do not forget the violence in Bangkok either, Thailand seems to unfortunately see these protests far too often.
How long does this continue? Who knows really. Is it a good thing that middle class people are demanding more from their politicians? Yes, for sure, the middle class relies on the governments of their respective countries to draw the lines in which they can operate. If the feeding troughs are polluted by the political elites, then the people will no longer take this lying down.
Whilst I think this is always cause for concern, when everyone speaks with one voice, I also think that it is an opportunity ticking. It is never *nice* to see the value of ones investments decrease. But what it does do is present opportunities. Opportunities to buy stocks. Opportunities to add to the same investments at lower prices. When I use this strange line (next sentence) on people they normally look at me funny, or you can hear in their voice on the phone that they are bemused. Here goes: If you are adding regularly to your portfolio and have no need to draw down on the capital amount, you should hope for share prices to under perform whilst you are in this mode.
If you have no need to add and are rather building a nest egg for your retirement, you would hope for prices to be lower for longer. As counterintuitive as that may sound at first, it does make sense. The huge provisor of course is that companies continue to grow their top line and maintain profitability. Ironically you also want the value of your existing holdings to "go up" in order justify allocating further capital to the markets. So there is a fine balance. I cannot tell you how many times that I have fielded calls in which folks want to allocate further funds to stocks that have gone up, and not to stocks that have gone down.
Meanwhile the state controls of Venezuela have led to a 56 percent inflation rate. In yet another example of how state and price controls over business have the opposite effect. More price controls and government interference in the economy often equals inflation and fewer goods produced. Scarcity of products ensues and the whole idea of trying to protect the citizens of a country fails badly. Capital flight is one thing, but arguably the worst part is that hardly ever comes back. Confidence, once dented, takes an age to repair. Check it out: Venezuela grapples with 56% inflation. Why do I care about the Venezuelan inflation rate? Well, for whatever reason the people on the left of centre around here seem to think that their economic model is a good one. Turns out that it has been a disaster for ordinary people. Less equals more.
I think to end this piece I want to use the line that Paul said this morning. He said something along these lines: "I have been sitting in this seat for nearly 20 years, if I had 50 cents for every time that people said that this is the beginning of the end, I would have ten thousand Rand at least." I said to him that he should rather have chosen Pound Sterling over Rand, and kept his level at 50 pence. Over ten years for starters, the Pound has strengthened by 56 percent to the Rand, the Dollar has strengthened by 75 percent over 10 years. All that means is that roughly ten years ago, somewhere in the region of 6.25 ZAR could buy a single Dollar. In the wash out of October 2008 the Rand weakened to these levels that we see currently. In April of 2011, the Rand was back at 6.55 to the US dollar. And now we find ourselves with a local currency at above 11 to the US Dollar again. If nothing, very, very volatile.
I took a ten year graph of the US Dollar performance relative to the BRIC countries, and then ourselves. We are the worst, next there is India, which has seen the Dollar strengthen by 43 percent, then the Russians at 21 percent. And would you believe it, the Brazilians have actually seen their currency strengthen, the Dollar has weakened by 17 percent to the Real over 10 years. Of course you would expect the Chinese currency, the Yuan to have been stronger, and this is the case. The Dollar has weakened (artificially or not) by 27 percent to the Chinese Yuan over that period. Listen to this for weird, over the last ten years, the Dollar is nearly two percent weaker to the Japanese Yen. All the ructions and strength, coupled with a period of relative inflation and marked weakness (of the Yen) has led to basically an unmoved position. But lots of moves in-between.
So what is the long and short of it all? Nothing really. We use Rand notes to buy goods. The purchasing power in Dollars has been crushed. And inflation is of course the scourge of the poor, not the rich. If rich peoples grocery bill rises, they notice, but it is not a matter of urgency. More irritation than worry. We watch this space.
Byron's beats the coffee streets
Last week Starbucks released there Q1 results which saw 12% revenue growth to a record $4.2bn. Margins also impressively expanded to 19.2% while EPS rose 25% to come in at 71c per share. Geographically they have good growth in most regions. Americas and the U.S grew 5%, Europe and the Middle East grew 5% and China/Asia Pacific grew 8%.
The company made some very interesting observations over the festive period, here is what CEO Howard Schultz had to say.
"Holiday 2013 was the first in which many traditional brick and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. As our solid traffic growth and record Q1 results demonstrate, Starbucks unique combination of physical and digital assets positions us as one of the very few consumer brands with a national and global footprint to benefit from the seismic shift underway."
Wow that is very interesting, online retail is really starting to have an effect on the retail sector and how we go about shopping. It is not something I would be worried about as far as Starbucks are concerned. They are an extremely innovative company and also supply in home coffee options. When I was overseas we often popped into a Starbucks just for the free wifi (and aircon) and ended buying an ice coffee. Great concept that.
That sales growth was very impressive as the business still has many areas where people would love a Starbucks to open. I am sure the business would do very well here in SA. So there is still lots of potential to get into new markets, especially in China and India, historically tea drinking nations. They are at the beginning stages of their global expansion.
At 71c for the quarter the company expects to make around $2.67 for 2014. That is up 18% from the $2.26 it made last year. The stock is far from cheap however trading at $75 or 28 times this year's expected earnings. But as you can see it is growing very fast. 18% is what earnings are expected to grow this year and a further 18% is expected for 2015.
It is an extremely profitable business with a great brand. People love coffee and I expect that to grow as more wealthy people can afford this premium brand. But it is not just coffee, they have also made inroads into tea, juices, food and pastries. We continue to add at these levels
Michael's musings: Seeing red opportunities
Things are looking ugly this morning as I am writing this. If you were a trader sitting long and leveraged to your eye balls, then the red that is seen across the market would be a bad thing. For investors like you and me this is a "non-event", because our time frame is a couple of years and when we look back in three years will be talking about the start of 2014? Probably not.
One of my favourite quotes for investing is, "The time to buy is when there's blood in the streets.", which is attributed to Baron Rothschild from the famous banking family; who started in the mid-1700s and used to marry within the family to make sure no outsiders got their hands on the family wealth.
According to Investopedia the original quote is, "Buy when there's blood in the streets, even if the blood is your own." I prefer this version, because normally when there is "blood" on the street your blood is there as well and then the normal reaction is to not buy because of fear that you will bleed some more.
Do I think that there is blood on the street? No, not even close. When markets pull back 30 – 50%, then I would say that there is blood on the street, and there are not many that come along in a life time, so when the next one comes along take the opportunity with both hands (definitely easier said than done!). There is a saying in trading circles that the bull takes the stairs and the bear takes the window. The selling in the markets is probably mostly done, and my guess is that it will drift sideways for a while and then continue slowing ticking up.
As Sasha said above, when markets pull back it presents an opportunity to buy, so I will be doing just that; I am glad that payday was on Friday and not Thursday because I might have already been in the market.
Home again, home again, jiggety-jog. You know where markets are, we told you that. A lot. I did not win a grammy, nor was I nominated. Next time when I sing in the shower, I will be sure to wear a motorbike helmet.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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