Podcast: Market disconnect?

Simon BrownJSE Direct, Latest

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  • Day 35 of lockdown, and last day of level 5, for now. S&P500 trading back at August 2019 levels and Top40 at January 2019 levels. So basically saying COVID-19 is no worry? Everything is going to be alright? Sure the US has thrown over US$2trillion at the problem, but some 13% of the US workforce has lost a job in the last month and it easy to fire, but will surely be a lot slower to rehire? This is why I am at best a W recovery person not a V shaped. We have another leg lower, no idea how much lower, but lower.
  • Locally a Stats SA survey of 707 VAT-registered companies shows that 20% have already laid off staff and 30% have decreased working hours. We also see IMF forecasting a local GDP of -5.8% and an unemployment rate of 35.3% for 2020. Then 34.1% unemployment in 2021. These are horror numbers and if they’re wrong, they be wrong on the light side with reality potentially worse. Certainly that -5.8% for GDP is the lowest I am currently seeing with even the SARB and national treasury expecting -6.4% for 2020, a number I still think will ultimately be on the low side.
  • On lockdown level 4. It not very different with tobacco products allowed to be sold (maybe) and restaurants allowed to do food deliveries (maybe) and some industry allowed to get back to work. Restaurants will be a biggie, people do not normally cook their own dinner every night, heck I know some of even ordering in for breakfast and lunch. So demand should be wild and it will get cash back into this sector, but managing demand is going to be tricky. My thought is that we should be able to book cooking times. For example, I book the 7pm slot at my fav and they have limited number of slots available at each time slot as per their capacity. This is much like a lot of the food stores were doing and it manages expectations and delays.
  • At the end of the day level 4 lockdown is expected to see about 1.5million returning back to work. But the flip side is Edcon reportedly filing for voluntary business rescue as it burns through its cash. We’re going to see a lot more large and small businesses not surviving, hence my feeling that the projected GDP and unemployment numbers are likely to be on the light side.

  • WTI still trading weak and frankly why not negative again just ahead of close out for the June delivery contract? Storage is now even tighter as demand remains collapsed and the supply taps remain turned on. Eventually supply has to decrease because demand is a long way from booming again, but nobody wants to be the first to blink and exit so instead each is hoping somebody else blinks and markedly cuts production first.
  • Biggest loser locally in this oil war (aside from Sasol (JSE code: SOL) which is now over 8000c and which I am still not buying) is MTN (JSE code: MTN). Their biggest market is Nigeria and Nigeria is an oil economy that is being nailed by both COVID-19 and collapsing oil price. The latter means less government and oil industry money and that’ll lead to lay offs and less income generally. All this means poorer people who have less to spend on data and voice.
  • PSG (JSE code: PSG) are giving “serious consideration” to unbundling their Capitec* (JSE code: CPI) holding. This makes sense, the Capitec stake is worth more than the PSG market cap essentially valuing their other assets at a negative value. This defeats the point of being listed which is largely capital raising which one would never do at such a discount. In fact PSG are fairly smart at issuing new shares when they trade at a premium to their holdings. Further, the Capitec dividend flow has been very useful for PSG over the years, but with that dividend now cancelled for at least two or more years, now’s a good time to do the transaction. PSG also states that “new legislation may potentially deem PSG (as a material shareholder in Capitec) to be a financial conglomerate” and that would increase compliance costs for PSG. Lastly depending ow much they unbundle it may well leave Capitec without a reference shareholder which is very useful in times of stress, but most of our big four are in the same boat so no train smash.
  • Staying with Capitec, Michiel le Roux, one of the founding directors, has donated R99million to three efforts to fight COVID-19 in South Africa. Well done gent.
  • Then a fascinating report on how Morgan Stanley is tracking the industrial recovery in China. They’re measuring air quality and if it is returning to normal seasonal levels.
  • Lastly, we fall out of world government bond index today (delayed from end March) as we’re now full junk. This means we’ll see selling pressure on our bonds and likely also our Rand. How much pressure? No idea and as I record on Wednesday afternoon, the Rand is stronger at 18.53 and about US$10-15billion needs to be sold, remember SARB is also a buyer in the secondary bond market. But bottom line this is hardly the end of the world and won’t crash either the rand or our bonds – just some pressure that we’ll move on from quick enough as investors like our +10% yields in a negative interest rate world.

* I hold ungeared positions.

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