Summary: In this episode of JSE Direct, Simon Brown delves into the latest developments in South African markets, focusing on the impact of China's major economic stimulus and the strengthening of the Rand. Key highlights include:

Rand Strength: The Rand has seen notable appreciation, reaching levels of R17.12 to the US dollar. Simon discusses the drivers behind this, particularly US dollar weakness and foreign purchases of South African bonds. He explores possible future movements, with a target of R16.80 and potential for further strengthening.

USDZAR | Weekly | 26 Sep 24

Global Stimulus: China's massive stimulus measures, including relaxed lending rules for banks and lower interest rates, are aimed at boosting consumer demand. This is the largest Chinese stimulus since 2008, with significant potential to impact global commodities and bolster the South African economy.

Commodities & Bull Market: The commodities market is seeing positive movement, with Chinese demand driving up prices for industrial metals like copper, iron ore, and coal. Simon notes how the previous commodity bull run in 2021 significantly strengthened the Rand and discusses the potential for a similar scenario if China's economy continues to gain momentum.

Market Performance: South Africa is outperforming other emerging markets, particularly Brazil and Mexico, over the past six months. Simon explains the drivers of this outperformance and highlights the continuing bull run in the JSE Top 40 and All-Share indices.

SA Equities: Our fortunes have changed significantly since the GNU was formed in June.
SA has dramatically outperformed (in US$) not only Emerging markets in general, but Brazil & Mexico. SA has tilted more centrist, with a focus on the economy. Brazil & Mexico both shifted left. pic.twitter.com/Zz6OOM4dCJ

— Karin Richards (@Richards_Karin) September 23, 2024

Rate Cuts: South Africa and several other global economies, including the US and Europe, have entered a rate-cutting cycle. Simon emphasises the importance of this for markets, especially property stocks, which are benefiting from lower bond yields and improved investor sentiment.

JSE Index Changes: Anglo Platinum has been removed from the JSE Top 40 index, replaced by Pepkor. Simon discusses why Pepkor’s entry is significant, given its position as a retailer and its attractive valuation compared to competitors.

Key Discussion Points:

• Rand’s strengthening trajectory and foreign capital inflows.
• China's economic stimulus and its potential effects on global commodities.
• Outlook for South Africa’s bond and equity markets.
• Changes in the JSE Top 40 index with Pepkor replacing Anglo Platinum.
• Global rate-cutting trends and their impact on local property stocks.

Simon Brown

* I hold ungeared positions.

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Episode Overview:

In this episode, Simon Brown dives into the current economic landscape with a focus on interest rates, inflation, and the state of the South African Rand (ZAR). He also explores asset-light businesses and why they make great investments, followed by a breakdown of the latest market activity and local company results.

Rate Cuts & Inflation Outlook:

• South African CPI (August): 4.4%.
• A possible drop to 3.5% in October discussed with Johan Els, Chief Economist at Old Mutual.
• The need for rate cuts to stimulate the economy, with experts debating between 0.25% and 0.5% cuts.
• Fed decision and its potential market impact.

SA Prime and CPI September 2024

ZAR Strength & Market Trends:

• Rand showing strength, potentially reaching sub-17 levels.
• Global market highs: S&P 500, NASDAQ, and JSE Top 40.
• Consumer confidence in the US and South Africa rising but still negative.

Platinum Group Metals (PGMs) & Palladium:

• A strong bounce in PGM stocks, driven by oversold positions and palladium production cuts.
• Palladium’s recent performance and its potential future breakouts.

Palladium weekly chart | 18 September 2024

Asset-Light Businesses & Their Investment Potential:

• Definition and benefits of asset-light businesses (e.g., Santova, Nvidia).
• Simon breaks down why businesses with fewer physical assets can provide higher returns on equity and efficiency.
• Comparison to asset-heavy businesses like banks and retailers.
• A deep dive into asset-light models like Shein, Temu, and logistics firms.

Company Updates & Local Results:

• Outsurance: Strong financial results and special dividends; analysis of the short-term insurance industry’s ability to reprice premiums annually.
• Altvest IPO: Simon discusses the upcoming Altvest IPO on the JSE and why he's not taking part in it, despite its interesting SME funding model.
• Finbond: A look at the excitement surrounding Finbond’s potential delisting and the company’s moves in the US market.

Noteworthy Quotes:

"Rate cuts are coming, and I think we'll see a short-term sell-off as markets react."
"Asset-light businesses like Santova and Shein are great investment opportunities because they don't carry the heavy burden of owning physical assets."
"Outsurance continues to impress with strong numbers and dividends, proving the strength of short-term insurers."

Chapters
00:00 Economic Landscape and Rate Decisions
03:09 Understanding Asset-Light Businesses
05:54 Market Psychology and Upcoming Events
09:11 Local Results and Investment Insights
11:52 Exploring New Investment Opportunities
15:10 Finbond and Market Speculations
17:59 Larry Ellison and Oracle's Rise

Simon Brown

* I hold ungeared positions.

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Summary

In this episode of JSE Direct, Simon Brown discusses various topics including the troubles faced by Anglo Platinum, the performance of leisure stocks, Anglo Gold Ashanti's* acquisition of an Egyptian gold miner, and the impact of two pot withdrawals. He also touches on the future of PGMs, the growth of electric vehicles, and the psychology of markets. 

Takeaways

• Anglo Platinum is facing challenges as Anglo American wants to get rid of their stake, causing a sell-off in the market.

• Anglo Platinum weekly chart
• The PGMs market is uncertain, with palladium and platinum prices experiencing fluctuations.
• The World Platinum Council projects a second year of meaningful platinum deficits, with jewelry demand expected to rise.
• The growth of electric vehicles is impacting the demand for PGMs, but the market is still uncertain.
• Investors should wait for positive price action before considering investments in PGMs.
• Anglo Gold Ashanti's acquisition of an Egyptian gold miner raises questions about the use of equity and the future of gold prices.
• Two pot withdrawals have resulted in over 4 billion rand being withdrawn from the market.
• Leisure stocks, such as City Lodge and Sun International, have mixed performance, with City Lodge experiencing lower occupancy rates.
• The growth of sports betting raises concerns about its impact on poorer individuals and the fairness of the industry.

Sound Bites

"Anglo Platinum has a problem which is perhaps a little more unique than just the PGMs."

"There is that initial overhang. A whole lot of people will get Anglo-Platinum shares and say, 'I don't want these' and sell it."

"The World Platinum Council is saying we're gonna have deficit again, that's the important point."

Simon Brown

* I hold ungeared positions.

All charts by KoyFin | Get 10% off your order

Chapters

00:00 Challenges for Anglo Platinum and the PGMs Market
02:22 The Future of PGMs and the Impact of Electric Vehicles
07:54 The World Platinum Council's Projections
09:16 The Diminishing Role of Internal Combustion Engines
11:09 The Impact of Low Prices on Production
14:55 Anglo Gold Ashanti's Acquisition and the Use of Equity
17:56 Pot Withdrawals and their Effect on the Market
19:18 Performance of Leisure Stocks: City Lodge and Sun International
19:42 Concerns about Sports Betting and its Impact
20:10 Upcoming Events: Investment Goals and the Psychology of Markets