Monthly Archives: June 2019

New Gold Bull?


Gold is the ultimate hedge currency. Its purchasing power has not really changed significantly throughout the 5000 years of recorded human history. One ounce of gold would buy you roughly the same number of chickens today as it would have bought you in Egypt in 3000 BCE.

So, traditionally, gold is a hedge against the weakness of paper currencies – and indeed of all financial assets. The problem that gold has is that it does not give any kind of return. An investment in gold does not pay rent, interest or dividends and it does not add 10% to its weight every year. For that reason, the most secure financial assets, like the 10-year US treasury bill always seem preferable because at least they have a yield per annum of around 3%.

Over the past ten years, in a desperate effort to overcome the impact of the sub-prime crisis and avert the “great recession” the governments of the world, and especially the US government, have printed and injected more than $12,5 trillion into the world economy (through “quantitative easing”). That additional cash has not resulted in rising world inflation, mainly because of fear and low confidence levels. At the same time, the sharp fall in the oil price in 2014 has kept world inflation at very low levels. Read More

The Economy


The state of the economy of the country obviously impacts on share prices over time. In this regard, private investors need to consider five inter-linked variables – the inflation rate, the level of interest rates, the money supply, the balance of payments (BOP) and the business cycle. These five factors are alternately impacted by and impact on the strength of the rand against other currencies and especially the US dollar.

The monetary policy committee (MPC) of the South African Reserve Bank (SARB) meets every two months to adjust monetary policy and especially the level of interest rates to balance its two opposing objectives of price stability and economic growth. The level of interest rates is alternately increased or decreased to stimulate the economy or reduce inflation. So the MPC is always either putting its foot on the accelerator (dovish policy) or the brake (hawkish policy). Read More

Nepi-Rockcastle


Nepi (NRP) was part of the infamous Resilient Group of property companies which was the main reason for the collapse of the real estate investment trust (REIT) sector in January and February of 2018. Nepi itself fell from R217.50 to as low as R115.37. Today it trades for around R127.

The REIT is a R74,4bn operation which operates more than 50 shopping malls in 9 central and eastern European countries, mostly in Poland (26%) and Romania (39%). Its close association with the Resilient group of REITs resulted from the merger with Rockcastle, but has now decided to distance itself by removing key directors (Spiro Noussels and Nick Matulovich).

In its results for the year to 31st December 2018, the company reported distributable earnings up 9,5% with net rental and related income up 29,6% which puts it amongst the best REITs listed on the JSE. Vacancies were just 2,8% with a collection rate of almost 100%. The total portfolio is worth 5,9bn euros – which is 20% up on the previous year. In the 3 months to 31st March 2019, the company reported total assets of 6,6bn euros with a loan-to-value ratio of 32% and a collection rate of 99,9%. The occupancy rate was 96,3%. Read More

Sasol


Commodity shares are generally more risky than industrial or financial shares because they mostly do not have any control over the selling price of their products. The commodities which they sell are mostly priced in international commodity exchanges and subject to wild fluctuations. Sasol is really no exception. It is in the oil business and the chemicals business. In both cases the pricing of its products is largely outside its control. Despite this, Sasol offers investors an interesting option. It is an extremely well-run company with a very strong balance sheet and it is busy diversifying away from oil.

Like most South African commodity companies, its profits are impacted by the strength of the rand. When the rand appreciates, Sasol becomes less profitable and vice versa.

It has its roots in the oil-from-coal technology developed during the apartheid era in South Africa, but today about 50% of the company’s profits are directly linked to the oil price. It has two main growth areas – its $12,9bn ethane cracker plant in Louisiana, America, known as “Lake Charles Chemical Project” (LCCP), and its development of gas resources in Mozambique.

Sasol was recently awarded two new licences in Mozambique to explore for gas in an onshore development of approximately 3000 square kilometres. This could significantly add to its existing gas projects in the Rovuma province. Read More

The Confidential Report – June 2019


US Economy

The opinions of the investors of the world are averaged and expressed in the various indexes of major world markets, especially the S&P500. They have recently (just a month ago) pushed the S&P500 index to a new record high (2945 on 30-4-19). And the data coming out of the American economy is confirming their optimism. The US economy grew by 3,1% in the first quarter of 2019 – easily beating the average forecast of 2%. A good chunk of that growth came from private consumption expenditure (PCE) – which shows that consumers are spending. This is not surprising given the better-than-expected results from the S&P500 companies and the extremely low unemployment in America. At the same time, the US economy added 263 000 new jobs in April month – easily beating analysts’ forecasts of 190 000. This brought the unemployment rate down to 3,6% – its lowest level in 50 years. Hourly earnings growth was up 3,1% year-on-year at an average of $27,77.

So with all this good economic news flying around why is the S&P falling? The answer is quite simply Donald Trump. His aggressive attitude towards America’s traditional trading partners and particularly China is beginning to unnerve investors. More and more analysts are starting to talk about some kind of recession. The Trump tariffs are starting to bite.

A trade war makes no economic sense from any perspective – any economist will tell you. Everyone ends up losing. Aside from the tariffs on $200bn worth of Chinese goods, Trump last week announced a 5% tariff on imports from Mexico, effective 10th June 2019 and which would grow to 25% unless the Mexicans stopped illegal cross-border immigration into America. At the same time Trump has threatened around $200bn worth of additional taxes on Americans and put the United States-Mexico-Canada agreement (USMCA) into jeopardy. These factors are causing some investors to decide to sell out and await developments. In our view, Trump is feeling more and more pressure from the Democrats and the rising possibility of an impeachment. He is cornered and potentially dangerous. But can he really derail the economic boom in America? We don’t think so. In our view, the escalation of the trade war is probably temporary and in a few months’ time it will be history. It is far more likely that Trump is trying to use his executive powers to gain political points – or at least he is trying to distract Americans from his mounting personal problems. Read More