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JSE Direct with Simon Brown

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Now displaying: April, 2020
Apr 29, 2020

Simon Shares

  • Moneyweb NOW, starting Monday. Live stream at 6.30am and podcast from 7am - both on Moneyweb.co.za or their app.
  • Day 35 of lockdown, and last day of level 5, for now. S&P500 trading back at August 2019 levels and Top40 at January 2019 levels. So basically saying COVID-19 is no worry? Everything is going to be alright? Sure the US has thrown over US$2trillion at the problem, but some 13% of the US workforce has lost a job in the last month and it easy to fire, but will surely be a lot slower to rehire? This is why I am at best a W recovery person not a V shaped. We have another leg lower, no idea how much lower, but lower.
  • Locally a Stats SA survey of 707 VAT-registered companies shows that 20% have already laid off staff and 30% have decreased working hours. We also see IMF forecasting a local GDP of -5.8% and an unemployment rate of 35.3% for 2020. Then 34.1% unemployment in 2021. These are horror numbers and if they're wrong, they be wrong on the light side with reality potentially worse. Certainly that -5.8% for GDP is the lowest I am currently seeing with even the SARB and national treasury expecting -6.4% for 2020, a number I still think will ultimately be on the low side.
  • On lockdown level 4. It not very different with tobacco products allowed to be sold (maybe) and restaurants allowed to do food deliveries (maybe) and some industry allowed to get back to work. Restaurants will be a biggie, people do not normally cook their own dinner every night, heck I know some of even ordering in for breakfast and lunch. So demand should be wild and it will get cash back into this sector, but managing demand is going to be tricky. My thought is that we should be able to book cooking times. For example, I book the 7pm slot at my fav and they have limited number of slots available at each time slot as per their capacity. This is much like a lot of the food stores were doing and it manages expectations and delays.
  • At the end of the day level 4 lockdown is expected to see about 1.5million returning back to work. But the flip side is Edcon reportedly filing for voluntary business rescue as it burns through its cash. We're going to see a lot more large and small businesses not surviving, hence my feeling that the projected GDP and unemployment numbers are likely to be on the light side.

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  • WTI still trading weak and frankly why not negative again just ahead of close out for the June delivery contract? Storage is now even tighter as demand remains collapsed and the supply taps remain turned on. Eventually supply has to decrease because demand is a long way from booming again, but nobody wants to be the first to blink and exit so instead each is hoping somebody else blinks and markedly cuts production first.
  • Biggest loser locally in this oil war (aside from Sasol (JSE code: SOL) which is now over 8000c and which I am still not buying) is MTN (JSE code: MTN). Their biggest market is Nigeria and Nigeria is an oil economy that is being nailed by both COVID-19 and collapsing oil price. The latter means less government and oil industry money and that'll lead to lay offs and less income generally. All this means poorer people who have less to spend on data and voice.
  • PSG (JSE code: PSG) are giving "serious consideration" to unbundling their Capitec* (JSE code: CPI) holding. This makes sense, the Capitec stake is worth more than the PSG market cap essentially valuing their other assets at a negative value. This defeats the point of being listed which is largely capital raising which one would never do at such a discount. In fact PSG are fairly smart at issuing new shares when they trade at a premium to their holdings. Further, the Capitec dividend flow has been very useful for PSG over the years, but with that dividend now cancelled for at least two or more years, now's a good time to do the transaction. PSG also states that "new legislation may potentially deem PSG (as a material shareholder in Capitec) to be a financial conglomerate" and that would increase compliance costs for PSG. Lastly depending ow much they unbundle it may well leave Capitec without a reference shareholder which is very useful in times of stress, but most of our big four are in the same boat so no train smash.
  • Staying with Capitec, Michiel le Roux, one of the founding directors, has donated R99million to three efforts to fight COVID-19 in South Africa. Well done gent.
  • Then a fascinating report on how Morgan Stanley is tracking the industrial recovery in China. They're measuring air quality and if it is returning to normal seasonal levels.
  • Lastly, we fall out of world government bond index today (delayed from end March) as we're now full junk. This means we'll see selling pressure on our bonds and likely also our Rand. How much pressure? No idea and as I record on Wednesday afternoon, the Rand is stronger at 18.53 and about US$10-15billion needs to be sold, remember SARB is also a buyer in the secondary bond market. But bottom line this is hardly the end of the world and won't crash either the rand or our bonds - just some pressure that we'll move on from quick enough as investors like our +10% yields in a negative interest rate world.

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* I hold ungeared positions.


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.


 

Apr 22, 2020

Simon Shares

Day 28 of lockdown.

  • Oil, negative pricing? I thought I'd seen it all when interest rates went negative, but no ~ oil says "hold my beer". I Tweeted about it. Short version, don't now suddenly decide you are an oil trader.

 

  • Bye-bye SAA. Staff have essentially been given termination letters for end April by the business rescue practitioner, payment subject to the sale of assets and this is the worst time ever to be selling airline assets. But public enterprises minister, Pravin Gordhan, has other ideas, a new “financially viable airline”. This in the middle of a pandemic when US airlines got US$25billion, and they want more? But here's the fun part, while the minister and government is insisting no new money, the business rescue practitioner actually has less power than usual. This is because the Public Finance Management Act applies and this gives the minister a final say on major decisions and the sale of assets or a liquidation would certainly be considered a major decision?
  • Standard Bank (JSE code: SBK) gives gives us a first quarter 2020 update. "In 1Q20 earnings attributable to ordinary shareholders were 27% lower". While providing for bad debts on a forward looking basis, they specifically said " virus related stress had to a large extent not emerged yet and bad debt provision raised were based on best estimates.".
  • ETF: Same index, different price?

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Going BIG

R500billion announced by the president on Tuesday evening. We await details from the finance minister, but some highlights.
10% of GDP and some 25% of the February budget total spend.

But it not all real money, some of it is soft loans, others tax relief in delayed payments.

  • R130billion ~ budget reprioritisation
  • R40billion ~ UIF, they have R42billion excess reserves.
  • R70billion ~ tax breaks, relief and deferrals.
    • The monies will still need to be repaid, but it helps cash flow over the next few months.
  • R200billion ~ loan guarantees
    • Banks issue the loans with state under writing them. This is an easy and quick win directly into mid size and smaller businesses and banks have the processes already in place with just a few tweaks needed.
  • R60billon left over and actual new spending is some R100billion. The R60billon we can cover that from the IMF easy enough. BUT for example tax breaks hurt SARS cash flow, so more fluid then just R60billion needed.

The biggie is the increase of social grants, child grants ultimately an extra R500 a month and all others +R250 while a new unemployed grant at R350. This is to run till end October, in theory - but we'll still be in the midst of a COVID-19 pandemic then, so it will have to be extended.

Basically we have implemented a basic income grant (BIG) and it will be impossible to take that away any time. How do you say to poor hungry people, no more? Even when the pandemic has passed? Simple you can't and you don't.

For those who think a BIG is communist or evil, go check the research. There is lots starting from the 1970s in the USA and Canada, they work and they are cost effective. How do you help a poor person? Give them money. How do you help a homeless person? Give them a home. Surely there is nothing anti-capitalist about caring about the deeply less fortunate and having a little less of our luxurious lifestyles to help them? And the concerns that they will 'waste or drink' the money is simple not true. Every research shows the incidence of waste is actually lower in groups receiving state aid. As for the theory that women get pregnant in order to receive the child grant, again research has disproved that every single time. There is zero evidence to support that theory.

Lastly on social grants, we have a world class system that is also one of the largest in the world and it works. Further theft is pretty much impossible as the recipient knows what they due and if it not there, hell to pay. Now sure as we saw with Cash Paymaster Services, charges and 'extras' can get messy. But not the actual hard process.

It won't be enough, we'll have to do many more. Likely this will take us into the third quarter at best (note the extra grants end in October and COVID-19 is expected to peak around September for South Africa). But eventually we'll need well in excess of R1trillion, I think maybe some R2trillion to take us into the end of 2021.

  • For reference the US did US$2trillion and have now passing another bill.
  • Now sure, we're not the US and we don't have their balance sheet nor is the ZAR the worlds reserve currency. But we're trying to save a country here.

How do we pay for the R500billion? Well as per above, majority of this is not real money. But short answer is we borrow and print money, especially for the next rounds we'll have to do later in the year. US$4billion is available for South Africa from the IMF (via the rapid financing instrument, here are the T&Cs of those loans) with pretty much no strings attached, that's almost R100billion. Is that all a risk to the currency and inflation, indeed it is.

But firstly if all countries are doing the same, we're all in the same boat and it becomes moot?

Also understand inflation, it means every Rand a person has is worth a little less in terms of what it can buy. Now the rich have the most Rands so end up paying the most, and why not pay up a little to help save the country? Certainly I happy with that as one of the rich.

The president also promised 'structural reforms' and 'radical economic transformation' which is trying to work both sides of the fence. We'll see which side he really ends up on in the end, but don't forget Minister Mboweni, he not going quietly into any night. He did speak a bit on essentially a new way of doing things, on that he's right.

Post COVID-19 the world will be a different place and we as individuals need to give serious thought as to how we want this new world to look. Then we need to start making it happen otherwise before we know it, we'll all be back to the same old same old.

A concern is about the actual process and fears of looting of the monies. Not unfounded considering our recent past. But thoughts on this.

  • We have a new administration, this is not the Zuma government, sure still the ANC - but markedly different. Close your eyes for a second and imagine COVID-19 in South Africa under President Zuma.
  • Secondly, what's the alternative? Let people starve?
  • Thirdly, as per above grants are pretty much corruption free, except for the actual process now managed by the Post Office.
  • Lastly, there is actually little hard cash, some billons to municipalities for water, but not that much in real Randelas.

One questions is does this 10% of GDP offset the expected 10% or so drop in GDP? The answer is no, it means maybe we only drop by the expected 6%-10%, not more.

As a last aside, the president said that the 2% repo rate cut adds R80billion into the economy in lower debt repayments. This is massive and helps middle to upper LSMs with their prime linked debt. Unsecured debt of the lower LSMs is not linked to prime, rather it regulated by the usury act, but that's why the increased social grants.


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.


 

Apr 20, 2020

Lockdown day 25

22million unemployment claims in US in 4 weeks (entire 2008 saw only 8.8million) opening economy

China GDP fell by 6.8% YoY in Q1 (first fall since 1992)

Wall Street gained 15% in the past two weeks, its strongest fortnight in 80 years.

Oil price .. crude oil getting smashed as global storage fills up

Earnigs season kicks off in US this week, includes March so some sense of impact but not entirely

Goldman Sachs cuts Apple to sell & cut its price target to $233 from $250 as it sees revenue dropping a third

Amazon trading at all time highs

Big cabinet meeting today (Monday)

End of the road for SAA (US airlines getting $25bn, and that not enough)

Another 1% repo rate cut, but still SARB expects SA to contract by 6.1% this year

Treasury looking to borrow $60bn, potentially from IMF

Apr 6, 2020

Lockdowns being extend everywhere (Spain +15 days, Italy +2 weeks, US wait and see, but likely end April)

ZAR blowing out

US jobless claims 6.6m this week Unemployment at 4.4%, non-farm payroll down 701k jobs (first down in a decade), -100k expected Numbers don’t add up, latter is only to mid March

Lots of lagging data, two issues here, one is data coming out at record worst, and even just a 1 month delay makes data largely useless

Woolies update

Famous Brands bails on GBK

Spur suspends franchise fees amid Covid-19 closures

Nampak gets their R1.5billion for selling glass biz

Anchor reports record demand for fixed-income assets

British American Tobacco working on COVID-19 vaccine

Apr 1, 2020

Simon Shares

New weekly podcast in the RSS feed every Monday late morning. BUT only in the RSS feed, not on the website. So subscribe to the feed, it is here.

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Lockdown, day six as I record (seven as you listen). COVID-19 numbers globally continue to rise, but I'm watching Italy. They're now at three weeks of lockdown and are seeing daily new cases decline, but still at 4,000 a day. I am also seeing reports that they'll extend lockdown to after

Easter, which is bad news for us. Our new cases are minimal, but still likely to spike higher and come the end of three weeks surely we'll be winning but not wanting to let the virus back in the front door, so lockdown extended? My thinking is extended to first weekend in May. It's after the two public holidays and means we'd have been in lockdown for 5 weeks.

Longer term we're waiting for a vaccine, and that's 2021 at best, so even if lockdown gets lifted, heavy restrictions will be the norm and new lockdown periods very likely if the virus starts to spread with speed. Remember all data is two weeks old due to a 14 day incubation period.
Overall I agree with our governments response and think the president and health minister are doing a great job under unimaginable conditions.

Hardest hit is without doubt small business. Closing for even just 21 days with zero revenue can kill a business, even a strong one.

SaySiyaBonga.co.za

We also have extreme inequality in South Africa that makes lockdown frankly just not impossible for most South Africans. It's easy in Bryanston, but impossible in Alex and add in poverty we have an entire extra layer of impossible.

  • First quarter moves;
    • Top40 - 19.8%
    • Indi25 -6.7%
    • Fini15 -40.2%
    • Resi10 -25.9%
    • SA Property - 48.9%
    • ZAR/USD -28.2%
    • S&P500 - 20.0%
    • FTSE 100 -24.8%
    • Nikkei225 - 20.0%
    • Gold +4.2%
    • Brent oil - 61.4%

Questions is if the worst is behind us and the honest answer is that nobody knows. We've seen a massive rally in the last ten days, but that is more about liquidity as governments (especially the US) pump cash into the system. Certainly rallies of around 15% in a bear market are totally normal, we saw about half a dozen during the 2008/9 crisis. I also don't think the market is going to be able to ignore the horror data that will be coming out over the next many months.

The other issue is that markets try and price in the future, but our forward view is limited to days, maybe weeks. Markets want to price in the next 12-18 months and we have zero visibility that far out. The data for the rest of 2020 will be bad, very bad. But we have no real idea or reference as to just how bad.

We're going to see a number of bankruptcies, large and small, local and global. Some are easy to spot; airlines, high debt companies, cruise companies. But a lot will surprise us.

I continue to only buy ETFs (ASHGEQ my preferred).


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Hello junk

And now we're junk. Full junk status, or in the lingo ~ non investment grade.

The outlook was negative and this is significant, means we can go further into junk status at the next review in October. Ideally we don't want to slip too far down that status because it makes coming back that very much harder.

The immediate response was the local market green, Rand weaker at R17.95/USD and bonds about 1.5% higher yields.

The yields are what matters. We issue new bonds every week to cover costs, so far his weeks auction was over subscribed and that's what I expect. We're not actually at risk of default so the +11% yield is very attractive. Also with SARB buying in the secondary market we've got lots of liquidity.

But overall, it was pretty much priced in, now government needs to get us out.

Practically we're now also out of the Citi World Government Bond Index (WGBI) at the end of April. This will see selling in our bonds, also a lot of mandates don't allow junk bonds, so more selling. The flip side is a lot of mandates only want junk bonds (for yield albeit at higher risk). So in a way we've gone from a tiny fish in a giant pond to a large one in a large pond. Nice, but still not want any country wants.

We'll also see the local banks downgraded to junk, when the sovereign is junk so go the banks. But it will potentially increase their borrowing costs and that will be passed onto consumers.


Question from Njabulo Nsibande

What happens if all REITs or the top ten REITs (as they make up about 50% in the case of CoreShares income property fund) in an ETF all go bankrupt.


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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