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JSE Direct with Simon Brown

Weekly podcast hosted by Simon Brown covering the JSE and listed companies.
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Now displaying: August, 2019
Aug 28, 2019

Simon Shares

* I hold ungeared positions.


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Prescribed asses

A lot of people are worryingly asking me about the ANC governments idea for prescribed assets. In other words a law requiring asset managers to invest in a certain way, expected that this would require buying of SOE debt or maybe even equity, albeit I think equity is almost certainly not on the table, just debt and frankly Eskom debt.

Now first off, personally I am in two minds about prescribed assets. The capitalist in me thinks they are a terrible idea. Investor should be able to invest where they want, even in 6% fee offshore funds if that rocks their returns. But we live in a developmental state with extreme inequality and as such I certainly think that prescribed assets do have a place in our economy, and we already have them in the form of reg 28 and nobody died from that. So I think the issue is balance and reg 28 strikes the right line of balance.

Let's quickly touch on regulation 28 of the Pension Fund Act. Before 1994 the NP government had prescribed assets and when the ANC came to power they scrapped that, but did put in place limits on how pension fund managers had to invest in terms of assets classes and offshore vs. local.

  • The 2018 budget increased reg 28 rules to allow 30% offshore with a further 5% invested into the rest of Africa. A maximum of 75% into equities (with a cap of 15% in a +R20billion share and 5% cap on shares under R2billion). Property is capped at 25%, commodities at 10% and alternative investments capped at 15%.

So we have prescribed assets and yes people grumble about the reg 28 limits, but in no way has it been the end of the world.

Any change too prescribed assets would likely happen within the reg 28 environment but when asked in parliament last week President Ramaphosa was very vague on exactly what the government means. But I have some thoughts.

Magda Wierzycka, CEO of Sygnia (JSE code: SYG) had an excellent idea she put forward on Bruce Whitfields show. The PIC issues a zero coupon R200billion ten year bond to Eskom. This removes half their interest payments and gives them ten years to fix their balance sheet. If they succeed, boom. If not then we are right were we are now. Nothing ventured nothign gained.

The risk of course is to the PIC returns, but as a defined benefit pension fund tax payers would be on the hook for any shortfalls to the Government Employees Pension Fund (GEPF), and right now tax payers are anyway on the hook for Eskom. Further the GEPF is currently funded at 108%, so not anywhere close to falling over.

So maybe prescribed assets is actually just for Government Employees Pension Fund (GEPF) assets? And I like this idea very much, gives Eskom wiggle room and a decade while not killing our treasury in the mean time. Now many of you are spitting into your coffee at the thought of this. But let's be realistic. Eskom is way over debted and sure it is the result of state capture. But we can't roll back the clock, all we can do now s try and fix it.

Another fun fact is that SOE debt has not been defaulted on, and this is unlikely to change. So actually the great yields offered by, for example, Eskom bonds, is actually a great return. As long as they don't default and frankly they are either directly or implicitly under written by government so default is not going to happen.

As evidence of this is Future Growth invests into SOE debt and has great returns to boot.

But at he end of the day - we await full details from government which will probably arrive with a plan to save Eskom as they're the reason we're even talking about this and Minister Gordhan has promised details in early September.


JSE – The JSE is a registered trademark of the JSE Limited.

JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Aug 21, 2019

Simon Shares

  • Shoprite* (JSE code: SHP) results a show of many parts. Locally second half much better after the disaster of the first half. Rest of Africa swings into a R265million loss after making R1.6billion in 2016 FY.
  • Dischem (JSE code: DCP) below 2000c. Was always way over valued but still on a PE of over 20x so not yet cheap.
  • AdvTech* (JSE code: ADH) decent trading update. Lots of moving parts, but stripping that all out leaves HEPS +5% - +9% up and on a PE of under 15x much cheaper than Curro (JSE code: COH) and Curro no longer has the tertiary segment which is doing better than schools right now.
  • Trump has delayed the new China tariffs because this could hurt the US consumer in the yearend shopping season. But in the same breath he says China is paying the tariffs? The man is a nut job.
  • Local CPI came in at 4%, below previous of 4.5% and expected at 4.3%. Simply there is no inflation in the system right now and another rate cut from the MPC is surely assured as we move even lower below the 4.5% mid point of the range?
  • Top40 is still green for the year. Off the +11% from earlier, but it's still +5.1% excluding dividends. But it fells like we're down 100%. That all said, over the last year Top40 is 8.8% excluding dividends.
  • ETFs for investing and retirement.
  • Dividend ETFs.

* I hold ungeared positions.



Is an IMF bailout really imminent?

"The IMF's primary mission is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to transact with each other." (source)

Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange rate arrangements between countries, thus helping national governments manage their exchange rates and allowing these governments to prioritize economic growth, and to provide short-term capital to aid the balance of payments. (source)

Lots of hype (hysteria?) about an IMF bailout for South Africa with all sorts of talking heads weighting in suggesting it is a certainty.

But an IMF bailout is not happening any time soon, the facts are simple and we're a long way off even entering talks about a bailout.

Now sure our economy and stock market are both under pressure but the IMF cares nothing about the latter and the former is struggling but it is a long way from a death spiral.

  • Our government debt is +/-90% in Rands, so currency weakness does not kill our debt burden, whereas foreign currency debt kills when the currency weakens. Tis is a big reason for most bailouts and it is simple not a risk for us.
  • Our Balance of Payments (BoP) is fine at some 4-5 months. Now sure more would be better, but that is not anywhere near a crisis. When Pakistan got their recent bailout BoP was down to a few days.
  • Our currency is fairly stable, certainly it is not crashing

Bottom line, we're not seeing capital flight so no IMF bailout waiting in the wings.

So why are we seeing all sorts of hysteria headlines saying an IMF bailout is practically a certainty when it patently is not?

Also, why the fear from market friendly economists and the like? All these economists who criticise government for not being market friendly enough would surely love the IMF market friendly conditions for a bailout? Or are they practising double speak?

Both the in country IMF head (Montfort Mlachila) and our own SARB governor (Lesetja Kganyago) state that it is not currently on the table.

Now sure, 'currently not on the table' can change. But which of the above will trigger the change? What else could trigger the change?
Short answer is Eskom, but there are plenty of balance sheet / debt options for Eskom and minister Mboweni says we'll have details soon.


JSE – The JSE is a registered trademark of the JSE Limited.

JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Aug 14, 2019

Brought Index and Structured Solutions, Absa CIB

Simon Shares

  • US yield curves have inverted across the range. Shorter term rates are higher then longer-term rates. Now every recession has been proceeded by a yield curve inversion. But not every yield curve inversion has been followed by a recession. So maybe it's warning us or maybe it's not. In short, we'll see lots of hysteria and end of world doom sayers out in force, but as always just carry on carrying on.
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Managed volatility ETFs with Len Jordaan

Index and Structured Solutions, Absa CIB

Three Exchange Traded Funds (ETFs) issued by Absa earlier in the year.

  • NFEHGE
  • NFEMOD
  • NFEDEF

Download the managed volatility product brochure Absa Volatility Managed SA Equity Indices.


JSE – The JSE is a registered trademark of the JSE Limited.

JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Aug 7, 2019

Simon Shares

  • Trade wars are back, but this time 'only' 10% on US$300billion of goods. No surprises? China is responding by allowing their currency to weaken to decade lows.
  • Fed cuts 0.25%. Trump says that's not enough, but he is priming an excuse. He has an election next year and if the market / economy is weak - he'll blame the Federal reserve.
  • Iron ore futures lost 10% last week and are currently around US$92, I been warning of this and Vale is producing again so the shortage is disappearing. Now sure Kumba Iron Ore (JSE code: KIO) has high quality lumpy iron ore which attracts a higher price. But the US$108 / tonne they got in the last results will not be repeated.
  • Delta (JSE code: DLT) and Rebosis (JSE code: REB) talking about a possible merger? In many ways it makes sense, but the issue is debt on the Rebosis CEO is quoted as saying they need to fix their debt levels, not sure that does this.
  • Nedbank (JSE code: NED) results show the quality of our banks. They're growing (yes very modestly at low single digits) but in an economy that is not growing. That takes skill.
  • Curro (JSE code: COH) trading update was bleak. HEPS growth of 3% - 9% after one offs are stripped out on a stock on a PE of around 35x (after 13% sell off on Tuesday). Stock back at 2013 levels and some c70% off the highs of late 2015. The lesson here is simple, all business models mature in time, growth slows and one needs to be very careful about what price we pay. On a PE of over 100x with slowing growth was madness.
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* I hold ungeared positions.


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How lucky are your investments?

Delphine Govender tweeted a great comment from Daniel Crosby about the role of luck in investing, or trading.

 

Truth is when luck strikes we claim it as skill, when it really was just pure good luck. Now don't get me wrong, when luck strikes - grab it with both hands.

But the problem is that by claiming luck as skill we skew out actual ability claiming credit where it's not due and as such we think we're better than we actually are and the problem here is glaring.

So in short when we're dissecting an investment we need to ask the question about how much of the return was luck vs. how much was skill. Now sure this isn't easy, but if we're honest with ourselves we certainly can spot luck and we need to admit as such.

Personally I know I had two very lucky trades. My first purchase in October 1987 (DiData) and Capitec* (JSE code: CPI). The former I was actually trying to buy another stock and the latter was more a purchase in anger as I had missed my preferred entry price and it just kept on moving higher. These two transform my portfolio returns, without them I still beat the market - but by a lot less.

So how did we spot that luck?

  • Did something significant happen you never expected?
  • Major competitor going bust?
  • New market proving way more profitable?
  • Serious shift in the landscape they operate in?
  • Legislation changes that favour their products?
  • Finding what they weren't looking for (gold miner finding PGMs)?
  • A serious expected risk suddenly disappears?
  • Did the stock valuation far and away exceed any realistic expected valuation?

None of this is rocket science to spot, you had reasons for buying. You list them (you do write down your research?) and then something comes out of left field to boost profits?

The flip side of course is bad luck, and sure that happens as well. So we also need to dissect bad luck. How much did it hurt but also do we keep on experiencing bad luck? If yes, maybe it's less about bad luck and more about lack of skill which we're blaming on bad luck because that's easier? Maybe we're just not very good at figuring out the risks?

I have long stated that the only book by Nassim Nicholas Taleb worth reading is Fooled by Randomness as it goes deep into the role of luck in investing, trading and life. Read it.


JSE – The JSE is a registered trademark of the JSE Limited.

JSE Direct is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

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