SIKI MGABADELI: We are going back to basics – those things that nag you. So when you listen to the show and you wonder what on earth we are talking about. This is your chance to call. You can even use a fake name, we don’t mind, as long as you are asking a proper question.
As I said earlier, we are giving away five double tickets to the RMB WineX Show which take place on Thursday 29th or Friday 30th October at the Sandton Convention Centre. It’s all on a first come, first served basis. If you call first, you get the ticket. Terms and conditions apply, which my producers will explain to you.
Simon Brown, we are in loopy territory – cyclical, all of that stuff. Markets do move in cycles and I just wonder where you think we are at the moment.
SIMON BROWN: Evening, Siki. Markets absolutely move in cycles. Broadly they go up, they go down, and nothing goes up in a straight line and nothing goes down in a straight line. And most things don’t go down forever. African Bank is an exception. But most things don’t go down forever.
At the moment, quite simply, commodities and resource stocks and mining stocks and the like are at bottom levels, and much of the rest of global markets is at the upper levels. While it’s fairly easy to point that out and to notice that – in other words the timing of it – to say well, then, if resources are at the bottom at some point they’ve got to move higher, yes, when is the billion-dollar question. No one knows until it actually starts to happen, until we start to see it.
SIKI MGABADELI: So how do we know if we are at the top or the bottom?
SIMON BROWN: There are a couple of metrics. If you look at markets, for example, we use metrics such as price/earnings, which is an indication of value in a sense. Price/earnings on our market at the moment is probably about 18.5. The average is probably closer to 14. So that’s getting chunky. And that’s probably the easiest one.
But even if you just stand back, if you look at the rand over the last decade and what it has done, you could say that R14-and-change to the dollar seemed to be a blow-off. Nothing moves in a straight line – we are going to see that move coming back. I stress it again, it’s easy to sit here and point this out. People say then we can trade it and get rich in a hurry. Those nuances are a whole lot harder – the big picture is quite easy. Minute by minute is a lot harder.
SIKI MGABADELI: Wayne was just saying now you are not sure what the right answer is. Do we want a stronger rand, will we feel richer, that ooh, I can buy things, the purchasing power is great, or the weaker rand we are told theoretically is going to help our exports and we are going to boost the economy. What do you think?
SIMON BROWN: I don’t think we export enough, to be perfectly frank. That’s the trick. What’s our export? Commodities. Where are commodity prices? In the absolute doldrums. We are not exporting enough. I remember a couple of years ago Cosatu said we needed R10/dollar and everything would be fine.
WAYNE McCURRIE: Well, here it is, R13/dollar, and it’s not fine.
SIMON BROWN: No, it’s not fine.
SIKI MGABADELI: Isn’t that part of the problem? This is one of the points I put to someone we spoke to earlier this week – that, even if we get that rand to R13/dollar, we’ve got other issues. We’ve got the electricity issue, so you can’t get the productivity.
WAYNE McCURRIE: That is in theory a relatively temporary thing. In theory that’s two or three years. If you are building a factory you take a 30-year view. So I don’t think that that in itself is holding the country back. Personally I think it’s a case of volume. To manufacture things cheaply you’ve got to have volume, and our economy is just not big enough.
SIKI MGABADELI: Do we not have the competitiveness either? Can we compete with all these other…
WAYNE McCURRIE: Competitiveness is volume. If you take we make half a million cars a year in South Africa, one factory in South Korea will make three million cars a year. You just can’t compete on a per-unit basis.
Now a lot of people will say no, it’s labour, it’s government regulation, no, it’s unproductivity. All of these things are factors but the single biggest factor is we just lack size. The volume is just not there.
SIKI MGABADELI: We are going to take some calls. Let’s hear from Pumlani in Pietermaritzburg. Hi, Phumlani.
PUMLANI: Good evening Siki. I’ve just got one quick question. The property [market] – just some guidelines on where it’s going in this current situation, volatility and everything. That’s my only question, if possible.
SIMON BROWN: At this point property is one of those asset classes that are expensive. We’ve seen a massive listing boom in property over the last four or five years and that’s another indication of a market that’s closer to a top than a bottom. But property itself – I’ve been calling property expensive for a while. It’s not going anywhere. If you look at US property, it’s cheaper. If you look at European property, on the metrics it’s cheaper than ours. But our property market is still full of beans. It has slowed, but it’s still full of beans
SIKI MGABADELI: What do you think, Wayne?
WAYNE McCURRIE: Look, the yields are very low. So I agree with Simon. They are expensive. You can buy a long bond yield and get a 1.5% bigger yield buying a long bond than you can on property, and normally it’s the other way around. Property yields are normally higher than a long bond yield because, although your distributions or your rentals grow, there is risk there. It’s not a risk-free investment. So I would concur with that. And I also agree that particularly European property looks a lot cheaper than South African property. Australian property also looks cheaper than South African property.
SIKI MGABADELI: We are talking about listings – so many listings this month.
SIMON BROWN: What’s been bothering me is how we can have a market that’s expensive and at the top without a listing boom? Forget property for now. It’s a different asset class. We were missing the listing boom. We had one in 2007/8, we had one in the dotcom, and we had one in the 1980s. It was worrying me because without that we can’t have a market…now we are ticking those boxes.
We can argue about the quality of the listings coming through. I still think that many of them are decent. They might be expensive, they might be crazily over-subscribed – Sygnia comes to mind – but they are viable businesses.
What we saw to a degree back in 2007 and very much in the late nineties, what I called the PowerPoint listings, was a couple of guys getting together, making a great PowerPoint presentation and raising a couple of hundred million in listing. We are not quite there yet.
But why do you list? You list to raise capital, you list to sell some of your business, and you want to do that at the best valuation possible, of course. So naturally when markets are most expensive that’s when you are going to see the greatest number of listings. So listings will be cyclical, like everything else. At a market top we’ll see more of it. When the market is crashing or a bear market and having a tough time, suddenly they’ll all disappear and you are not going to come and sell your company at low valuations. So the listings pull away.
SIKI MGABADELI: Let’s take a call from Zwele in Potchefstroom. Hi, Zwele.
ZWELE: Hello, Siki. I’ve got a question. The last interest-rate increase by the governor of the Reserve Bank – one of the key reasons given was that it was anticipated that the US Federal Reserve Bank was going to raise interest rates over there. Now the Federal Reserve Bank did not do that. Should our interest rates drop now that that did not happen?
WAYNE McCURRIE: No.
SIKI MGABADELI: I love that question. Thanks, Zwele.
SIMON BROWN: The logic is 100% sound. Of course it won’t happen because what the Monetary Policy Committee in South Africa will say is that the Americans willraise interest rates. I’m with Wayne – I’ve been saying all year – I’ve got a bottle of whisky riding on it, and it’s bitterly close – there’ll be no US rate increase this year.
SIKI MGABADELI: Why was I not in on that bet?
SIMON BROWN: I might win the whisky, but I don’t think we are going to get it in February, I don’t see it happening. But is it going to happen in 2016? Absolutely. The bigger question is should our governor of the Reserve Bank and the Monetary Policy Committee frankly be watching US interest rates? I suppose the answer to a degree is this is a global economy, but what about the internal factors? They are worried about the implications of a US interest-rate rise for global economies, as is Janet Yellen seemingly. She keeps on looking to Europe and deciding not to.
SIKI MGABADELI: And Wayne, the concern of course is we are in low growth versus rising and high inflation.
WAYNE McCURRIE: I must say, some days I think I’ve got a tough job but compared to the Reserve Bank governor I’ve got an easy job. There is a lovely thing called stagflation. Let me explain that. That’s no growth and high inflation, which is probably the second-poorest set of economic circumstances you can be in.
Secondly, as a country we need – what’s the number – R400bn a year foreign inflows to balance the books. As a country we spend more than we earn, we import more than we export, and you’ve got to balance the books, the same as everyone. If you spend more than you earn each moth you’ve got to go to the bank manager. South Africa as a country goes to outside people and borrows money and sells assets like SAB and Massmart to try and fund this difference – and that money only comes if the interest rates look good.
That’s why our rates must go up when the US rates go up, because we’ve got to offer more interest than the US – otherwise the money is not coming.
SIKI MGABADELI: The carry trade.
WAYNE McCURRIE: Ja. You’ve got to get money. It’s unfortunate – we run a massive trade deficit and to even complicate things more we run a very big government deficit. So our country’s borrowing needs are actually huge and the only way – not the only way but one of the big attractions – you get that money is by offering high interest rates. That’s what it boils down to.
SIKI MGABADELI: [Sigh] Simon, if you are an investor right now and you are watching this market, what are you thinking?
SIMON BROWN: I’m thinking two things. One, it’s expensive. And I’m thinking, two, but I’ve seen this all before. I was around when the crash of ’87 happened. When I say “around” I was a school kid. I was in my matric year. I remember ’98 and I remember 2007, and there will be another one. Will it be as bad as ’07, or will it be a more modest ’98 – I don’t know. What I do know is I’m youngish, I’ve got time on my side and these things are going to come and go. I’m not going to try and time it. I’m going to hold quality [stocks], I’m going to buy them when they are cheap and when the markets go down I’m going to buy more of the quality. And the key point is to forget the short-term stuff and make sure that you own quality. If you don’t own quality it can get very, very messy.
SIKI MGABADELI: What are you doing, Wayne? Where were you in ’87?
WAYNE McCURRIE: I’m quite a bit older than everyone here, so I actually remember it well. Luckily enough it didn’t burn me. I was very lucky it didn’t burn me, but it burnt a good friend of mine. So I remember it well.
What am I doing now? I own quality shares and I just hold them and I don’t buy them and I don’t sell them and I just keep them for very long periods.
SIKI MGABADELI: All right, we’ll leave it there. Thanks, gentlemen.
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