Category Archives: Current Market

The Confidential Report – December 2019


America

The strong upside break of the S&P500 index above its previous cyclical high at 3025 shows that the potential for a “triple top” formation is now behind us – together with October month. Consider the chart:

S&P500 Index January 2018 to December 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

There had been some concerns among investors that the rising triple top (with tops in Jan 2018, September 2018 and July 2019 shown above with the red circles) would predicate a new bear trend potentially from October 2019. October is traditionally a scary month for investors following the collapses of 1929 and 1987.

We never had that opinion. We always thought that the underlying power of the booming US economy would drive share prices higher in a continuation of the great bull market which began in March 2009. The S&P has powered ahead and is more than 4% above the last of the tops in a strong new upward trend. On average, the S&P has gained about 1,7% in December month. While markets tend to have lower volumes because of the holiday season, once October is past there is usually a relief rally through to January of the new year. Read More

Remgro/RMB Unbundling


South Africa is the land of monopolies. Historically, under the National Party, South Africa was cut off from the rest of the world and isolated from international competition. This led to the development of massive local monopolies such as that of SA Breweries and Anglo American (which at one stage controlled more than 50% of the blue chip companies on the JSE). Many of those monopolies consisted of enormous conglomerates of companies tied into structures which usually left them trading at considerably lower prices than the value of the share which they owned.

In the new South Africa, there has been a trend towards breaking up those structures and releasing shareholder value. One of the most recent examples has been Naspers which first unbundled Multichoice into the hands of its shareholders and then restructured with the formation and listing of Prosus on the Euronext in Amsterdam.

It is a well-known fact that investment holding companies traditionally trade at a discount to the value of their underlying assets. This discount can be anything from 10% to 40% depending on the company. One of the ways to “unlock” this value is for the holding company to unbundle the shares of a subsidiary or a large holding into the hands of its own shareholders.

Thus, if company “A” owns a 40% interest in company “B” it can distribute that holding of company “B” shares to its own shareholders and then it steps out of the picture and the structure is simplified. This often has the effect of increasing the prices of both companies’ shares on the JSE. Read More

The Moment of Truth


It is becoming very evident that South Africa is now facing a “moment of truth”. Following the mini-budget of end-October, it is clear that the fiscus has exhausted most of the normal and politically acceptable methods of dealing with its growing debt problem. Taxes are at an all-time high and borrowings are rising steadily to untenable levels.

Various highly-respected experts have pointed to the fact that we are now entering a national debt-trap and that radical action must be taken. CEO of Sibanye, Neal Froneman recently pleaded for the government to adopt investor-friendly policies to attract investment. He pointed out that many aspects of South Africa – mostly within the government’s control – have the effect of scaring investment away. These are things like the interference in visa regulations, the third mining charter, the uncertainty around land redistribution policy and the high crime rate. At the same time the recent paper by Michael Sachs, formerly of the Treasury, calls for immediate action to avoid further debt – mainly through the reduction of the civil service and privatisation of various state owned enterprises. But the government is unwilling or unable to take these measures because of their fear of a union backlash. Read More

Looking for Quality


The JSE Overall index (J203) shows an average of most of the shares listed on the stock exchange. It used to be dominated by commodity shares involved in extracting South Africa’s vast mineral wealth and exporting it overseas. Today, those massive mining companies have shrunk to a fraction of their former glory and instead the index is dominated by massive international companies like Naspers and Anheuser Busch. A large proportion of the JSE’s market capitalisation represents businesses which are not in South Africa and which offer local investors a hedge against the weakness of the rand.

Over the past 34 years, the JSE Overall index has trended upwards, mainly because of the decline of the rand against hard currencies like the US dollar, the euro and the British pound. On average shares in the index have paid a dividend yield of approximately 3,5% per annum. Consider the semi-log chart:

JSE Overall Index (J203) Semi-Log Chart 1985 to 2019 – Chart by ShareFriend Pro

This shows that the JSE Overall index has been moving up steadily over this very long time period despite the 1987 crash, the dot-com bear trend in 1998 and the sub-prime crisis of 2008. Read More

The Balwin Bargain


Private investors are always looking for a “sure thing”. This is an investment where there is plenty of upside potential, but limited downside – and they want that at a very good price. Balwin properties comes very close to that ideal. It is a small property developer that focuses on developing, either for sale or for rent, secure properties mainly in the major centres.

The three years that it has been listed have been among the worst ever recorded for property shares in South Africa – especially 2018 when the JSE property index (JSE-SAPY) fell a whopping 25%. This was mainly the fault of the Resilient Group of companies which were the subject of several negative reports which suggested that they were involved in share manipulation arising from their cross-shareholdings and directorships. Most of those allegations have now been shown to be untrue, but the rumours and negativity associated with them have combined with a very difficult property market to cause property shares to be severely re-rated downwards.

And this situation has now created an opportunity for private investors, because some property shares are now trading at ridiculously low levels – well below the value of the properties which they own. Balwin is now trading for 322c per share and has a recently updated net asset value (NAV) of 567c – which means that it is trading at a 43% discount. Among other things, this makes it a potential take-over target. And what is nice about property shares is that the NAV represents tangible properties which have been independently valued. Read More