Monthly Archives: August 2019

Shoprite


The price of Shoprite shares on the JSE has now tumbled to far less than half of its peak value of R275.50 achieved on 7th March 2018. Consider the chart:

Shoprite (SHP) August 2017 to August 2019 – Chart by ShareFriend Pro (Click to Enlarge the Image)

There are many reasons that could be advanced for this downward trend, from the bad economic environment to the difficulties with hyperinflation in Angola (where Shoprite has 60 stores).

But none of these reasons is particularly convincing in the face of the excellent results recently announced by Pick ‘n Pay for the 53 weeks to 3rd March 2019 where headline earnings per share (HEPS) climbed by 18,8%.

The simple fact of the matter is that Shoprite has over-extended itself at exactly the moment when it lost its most valuable asset – Whitey Basson. Read More

Wall Street Analysis


Private investors in South Africa should always keep their eye on what is happening on Wall Street – because the long-term trends on stock markets around the world, including on the JSE, begin there. As the old saying goes, “When Wall Street sneezes, the rest of the world catches a cold”.

The S&P500 represents the weighted average movement of the 500 largest companies trading on Wall Street and we see it as the most useful index for establishing what is happening in that market.

We all know that the S&P500 is in the throes of a great bull trend – one which has been going on for more than ten years which makes it a record as far as bull markets are concerned. That bull market is being driven by three major forces:

  1. The massive monetary policy stimulation which occurred in the decade following the sub-prime crisis of 2008.
  2. The fall in oil prices in 2014. While the oil price has recovered somewhat, it is nowhere near where it was in March 2012 – when North Sea Brent reached $120 per barrel.
  3. The massive advances in technology which have and continue to introduce new and profitable efficiencies in the way that business is conducted.

You should also bear in mind that the low oil price has kept inflation rates very low world wide – despite unprecedented quantitative easing and very low interest rates. Central banks have been able to maintain low interest rates precisely because inflationary expectations have remained very modest. Read More

Gold Surges


Six weeks ago, on 24th June 2019, we ran an article about gold under the heading “New Gold Bull”. In that article we drew attention to the fact that gold in US dollars had broken convincingly up out of a long-term wedge formation and we suggested that it was probably entering a new bull trend. Since then the dollar price of gold has risen by a further 7,8% to reach $1506. Consider the chart:

US Dollar Gold Price October 2010 to August 2019 – Chart by ShareFriend Pro

For South African investors, however, an investment in gold or gold shares on 24th June 2019 would have been significantly enhanced by the recent collapse of the rand to levels above R15 to the US$. The rand price of gold has surged from R20052 to R22596 – a gain of 12,7%.

Gold always has been and remains the world’s best defense against the weakness of paper currencies. It is the ultimate store of value. Unfortunately, it does not pay any dividends rent or interest, but it holds its value through thick and thin. Read More

Banks


The back-bone of the South African economy is the banking sector – dominated by the “big five” banks – Standard, FNB, Nedbank, ABSA and now Capitec. Banking shares offer private investors a very solid long-term investment. Mostly they are relatively safe investments which grow steadily as the economy grows.

It is important to understand that they are service companies and unlike manufacturing companies or mining companies, they don’t have large amounts of capital tied up in fixed assets such as land, buildings, plant and equipment. Their primary assets are their staff and their systems. They do obviously have capital at risk and indeed risking capital is the essence of their business, but generally, they are much lower risk investments than the other sectors of the share market.

And they are immensely profitable. Nedbank (which is arguably the smallest of them) has just produced its results for the six months to 30th June 2019. In that half-year Nedbank made a headline profit of just under R7bn – in one of the most difficult, low-growth economic periods on record.

And their income is mostly annuity income that they take directly off their clients’ bank accounts at source. They do not have to invoice their customers and wait to be paid like other businesses. Read More

The Confidential Report – August 2019


The Rand

For most of June and July this year, the rand was strengthening as international investors became more confident of the reforms which the Ramaphosa administration was implementing. Now the battle between Ramaphosa and the Public Protector has become sufficiently aggressive and dangerous to unnerve international investors – causing some of them to withdraw their funds from our government bonds with the result that the rand has fallen 7,5% in the last two weeks.

The yield on our R186 long bond has increased by 6,3% to 8,46%. Overseas investors are now willing to forgo this relatively high return because of the increased political risk in the country. Clearly, this trend is not good for South Africa or private investors. The fight within the ANC comes on top of the problems of financing Eskom and lower tax collections to indicate that the government deficit is probably going to widen substantially. Moody’s is under mounting pressure to follow the other ratings agencies and downgrade us to sub-investment.

Unfortunately, it is very difficult to ascertain exactly what is happening behind closed doors. We can only watch the markets, especially the rand and the yield on the  R186 for clues – and right now the news on that front is not good. The markets are communicating that there is a chance that Ramaphosa might lose his position of power in the ANC – and if that happens then the economy and the stock market will be in dire straits.

A new concern has arisen with RMB’s John Cairn’s saying that there is a high probability (47%) that the rand will fall by as much as 30% or more once the US begins a new cycle of reducing rates over the next year – simply because it always does that when interest rates are falling in the US. Against this, it seems that the recent cut in rates in the US is just a “mid-term adjustment” and not the beginning of a new trend of lower rates. Read More