Episode Summary: Simon Brown dives into the week’s biggest financial and economic stories, covering Trump’s election win, Nvidia's inclusion in the Dow, rate cuts expected from the FOMC and BOE, and the latest updates on Murray & Roberts, palladium, and gold. Recorded after market open, this episode sheds light on key trades, trends, and the shifting global landscape.

Trump's Victory – What’s the Trade?

• Trump’s presidential win sparks market reactions, with immediate rallies in the S&P, Nasdaq, and Bitcoin.
• Simon discusses potential policy impacts, such as tariffs, technology restrictions on China, and implications for commodities, oil, and the South African economy.
• Notes on the uncertainty of Trump’s policies and their potential effects on inflation, EVs, and cryptocurrency.

Nvidia in the Dow; Intel Out

• Nvidia enters the Dow Jones, replacing Intel. Simon critiques the Dow's price-based index system but acknowledges Nvidia’s stock performance, fuelled by strong demand from major tech firms.
• Discussion on how Nvidia's AI hardware demand could shape future stock gains.

Nvidia | Weekly chart | Close 06 Nov 24

Murray & Roberts Update

• Murray & Roberts faces project downscaling from De Beers, revealing challenges tied to low diamond demand.
• Simon examines the ripple effects across the mining and construction sectors, highlighting how competitor data can provide insights.

Palladium & Gold Trends

• Palladium and gold face downward pressure; Simon explores reasons for the dips, including potential G7 sanctions on Russian palladium.
• Simon highlights that gold’s long-term appeal remains strong, driven by central banks diversifying away from U.S. dollars into gold.

Gold | Weekly chart | 07 Nov 24

Bank Rate Cuts – FOMC & BOE

• Rate cuts anticipated from the FOMC and Bank of England as central banks shift to a rate-cutting cycle. Insights on the potential impact on global markets and currency dynamics.

ASML and AI Hardware Market

• ASML’s forward guidance disappoints, affecting semiconductor market outlook. Simon explains the unique position of ASML in the AI chip supply chain and its long-term value as a buy-the-dip candidate.

CrowdStrike Resurgence

• CrowdStrike's recovery following a Microsoft update issue and Delta lawsuit. Simon assesses the stock’s growth potential in the cybersecurity space.

Listener Takeaway: Markets remain unpredictable but resilient, with global relations, tech policies, and central bank strategies driving shifts. Simon emphasizes informed trading and the long view in these uncertain times.

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Disclaimers: The JSE Direct podcast is independent of JSE Limited and reflects Simon Brown’s views, not necessarily those of the JSE. Always consider risks when investing.

 

Local Inflation Update

• Inflation at 3.8% - lowest since March 2021 (3.5 years ago)
• Well below SARB's target range midpoint of 4.5%
• Q3 year-on-year inflation at 4.3% (vs SARB's expected 4.4%)

SA CPI YonY September 2024

November MPC Meeting Outlook

• Rate cut expected, but size uncertain
• Possibility of 25bps vs 50bps cut
• Factors affecting decision:
  • Rand weakness
  • Rising oil prices
  • Global economic conditions

Important titbit about today's SA headline CPI print. It meant that CPI rose by 4.3% y/y in Q3 2024. In Sept, SARB expected 4.4% for Q3, implying Sept print largely in line with their expectations. Therefore, today's number will not change SARB's thinking. Folks should calm down.

— Hugo Pienaar (@hugopien) October 23, 2024

 

Currency Markets

• US Dollar showing significant strength
• DXY moved from 100.42 to 104.33 (≈4% increase in one month)
• Strong capital flows into US
• Rand trading at R17.73
• Potential to move above R18
• Long-term targets of R16.80 and R15.50 looking less likely short-term

US Election Impact

• Potential implications of different outcomes
• Trump's proposed policies could be inflationary:
  • Planned tariffs
  • Immigration restrictions
• Impact on labor markets and prices

Famous Brands Results Analysis Using AI

• Demonstration of AI analysis using Google Notebook LM
• Key findings:
  • Leading Brands: Operating margin >50%
  • Signature Brands: Operating margin -6.7%
  • Manufacturing: Improved margins due to diesel savings
  • Geographic performance varies:
    • South Africa: 1.8% margin
    • UK operations showing significant decline
    • Cash generation at R498 million (7% decrease)
    • Plans for 89 new stores

Chapters

00:00 Local Inflation and Economic Outlook 06:01 Using AI for Investment Analysis 12:06 Famous Brands Results Analysis 18:05 Comparative Analysis with SPUR

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Strong Retail Sales and the Two-Pot System:

• Retail sales show a positive trend, rising 3.2% in August, exceeding expectations of 2.1%.
• The Two-Pot System has already released R20 billion in six weeks, with the money used mainly for paying down debt, saving, and spending.
• Retail sales recovery, though from a low base, is a strong indicator of improved consumer health due to factors like slightly lower interest rates and inflation.

South African retail sales | YonY

Tribute to Tito Mboweni:

• Simon reflects on the passing of Tito Mboweni, former Finance Minister and Reserve Bank Governor.
• Mboweni’s contributions include institutionalising the Reserve Bank’s MPC meetings and implementing key labor reforms during his tenure as Labor Minister.
• His lasting impact on the country’s economy and financial sectors was highlighted, along with his personality as a Twitter chef and self-styled "Duke of Magoebaskloof."

Johnson & Johnson – A Smooth Dividend Play:

• Simon shares his reasons for holding Johnson & Johnson: consistent dividend growth (around 3% yield) and a steady 8% annual share price growth in US dollars.
• Despite some issues, the company offers reliable long-term returns in a competitive health and consumer space.

Johnson & Johnson quarterly dividend payments

Bytes Technology Group and Investment Opportunity:

• Bytes operates in the UK, offering hardware, software, and services. The stock showed mixed market reactions but has strong support around certain levels.
• With a forward P/E of 20 and a dividend yield of 3.6%, Simon sees it as an interesting opportunity for long-term investors in the tech space.

Quilter Trading Update:

• Quilter’s strong Q3 results follow a good first half of the year, with significant inflows supporting future earnings.
• A solid financial services player with a dividend yield near 4% and a forward P/E of 15, Quilter is performing well and trading at all-time highs since its 2018 listing.

Sasol – A Weak Chart:

• Simon discusses Sasol’s ongoing struggles, with a weak chart suggesting possible further declines.
• Investors should wait for technical indicators before making any moves.

Brent Oil Price and Rand Volatility:

• Brent crude oil hit highs recently but is now retreating to $70 per barrel, with potential for further declines due to global oversupply.
• The rand, affected by dollar strength, is volatile but could see a return to 16.80 against the dollar in the coming months.

Chapters

00:00 Retail Sales Recovery and Economic Outlook 04:29 Tribute to Tito Mboweni 08:32 Johnson & Johnson: A Steady Investment 09:52 Bytes Technology Group: Market Reactions 12:32 Quilter's Strong Performance 14:29 Cecil's Ongoing Struggles 15:56 Brent Oil Prices and Global Economy 17:48 Volatility of the Rand and Market Predictions

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Overview:

In this episode of JSE Direct, Simon Brown breaks down the latest market updates, key stock analyses, and insights into the South African investment landscape. Episode highlights include discussions on property developers Calgro M3 and Balwin, Capitec’s strong performance, Purple Group’s rise, Afrimat’s challenging update, and Wilson Bailey’s long-term chart breakout. The show also covers upcoming events and Brown's views on Nvidia’s stock movement.

Property Developers: Calgro M3* vs. Balwin

• Calgro M3: Delivered a strong trading update, attributed to its flexibility in targeting lower-income segments. Calgro’s ability to adapt and scale down offerings positions it well, with potential for significant price appreciation. Trading at a low PE of 3.5, Brown argues that in a normal market, it should command a 10x PE, suggesting a fair value of around R9.
• Balwin: Struggling with higher entry price points in its developments. Despite weaker performance, there may still be value. If results improve in the future, Balwin could present a solid opportunity. Brown speculates that a delisting could be on the cards if the stock remains undervalued.

Calgro M3 weekly chart | Close 09 October 2024

Capitec: Expensive, but Resilient

• Capitec continues to outperform with robust growth, though it trades at a high PE of 27 and a price-to-book of 7.8. Despite concerns about its premium valuation, the company’s diverse ventures, from mobile services to expanding insurance offerings, make it a long-term core portfolio holding. Historical growth shows Capitec’s resilience and market leadership in the South African banking sector.

Purple Group*: A Breakout Stock

• After months of a consistent seller at 80 cents, Purple Group’s stock broke higher, reaching 98 cents before pulling back. Brown remains optimistic, particularly as trading volumes in the JSE pick up, benefiting Purple’s core business. Although trading at a high PE of 45, Brown is bullish about its prospects in a rising market.

Afrimat: A Tough Year, but Long-Term Potential

• Afrimat’s trading update indicated a sharp drop in earnings (down 75-85%), partly due to the acquisition of Lafarge, which is still loss-making. While the near-term outlook is challenging, Brown remains optimistic about Afrimat’s long-term potential, especially if South Africa enters a construction boom. He sees the stock as attractively priced for long-term investors.

Wilson Bayly Holmes-Ovcon (WBHO): A 16-Year Breakout

• Brown discusses WBHO’s impressive 17-year chart, finally breaking out after a long consolidation period. He suggests the stock could benefit from renewed local construction activity, while Afrimat remains his preferred pick in the sector due to its diversification into industrial metals.

A breakout after a 17-year consolidation is very bullish in TA. Add the fundamental underpin. I think this still has lots of room to run. pic.twitter.com/fBk5BCKtvk

— Richard Thomason (@richytee) October 9, 2024

 

Nvidia: Breaking New Highs

• Nvidia, another stock Brown holds, is testing all-time highs after a series of consolidations. With Nvidia's historical pattern of doubling after breaking key resistance levels, Brown remains confident in the stock's potential for further growth despite its high valuation.

Nvidia weekly chart | Close 09 October 2024

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Chapters 00:00 Market Overview and Calgro M3 vs Balwin 07:11 Capitec's Performance and Future Outlook 12:43 Exploring Other Stocks: Purple Group and Afrimat 18:15 Long-term Trends: Wilson Bailey and Nvidia

 

China's Market Rebound

Stimulus Measures: The Chinese government has initiated a stimulus, which includes cutting reserve requirements and lowering interest rates. While spending has not picked up fully, the China 50 ETF (in US dollars) has wiped out losses dating back to July 2022. Hong Kong’s Hang Seng index shows a similar trend.

Market Sentiment: Short squeezes have played a role in pushing the prices of big Chinese companies like Alibaba and Tencent higher. Despite concerns about China's long-term investability (raised by experts like Viv Govender of Rand Swiss), Simon remains optimistic about continued growth in the medium term.

Shift in Hot Money: There's been a notable shift away from tech stocks like Apple and Nvidia, with more capital flowing towards China in recent days. Simon discusses the potential for short-term pullbacks, but he sees this as an opportunity.

South African ETFs Performance

Top Performers: Property ETFs have outperformed, with the CSPROP, Satrix Property, and 1nvest Property ETFs gaining between 30% and 31.7% over nine months ending in September 2023.

Underperformers: ETFs linked to palladium, platinum, and tech innovation (e.g., Sygnia’s Fourth Industrial Revolution ETF and Satrix Healthcare Innovation ETF) have shown negative returns.

Outlook for South African REITs

Simon expects further growth in the property sector but at a more moderate pace than this year’s 30% returns. He highlights the potential impact of upcoming interest rate cuts, consumer spending at malls, and the demand for yield as government bond rates decrease. Some REITs, particularly those in rural and township retail spaces, are performing exceptionally well.

The market tends to move ahead of the cuts based on expectations, but technically any cut is great for cheaper debt and more consumer spending at the underlying properties, plus a lower rate for the valuations which means a higher present value. So yes, they can keep going.

— The Finance Ghost (@FinanceGhost) October 2, 2024

 

The South African Rand and Global Markets

The Rand has seen fluctuations, dipping to as low as 17.02 against the US dollar and facing pressures from global events such as the Iranian attack on Israel and rising oil prices. Simon expects the Rand to strengthen and potentially break below 17, possibly reaching levels as low as 14.

Oil Prices: OPEC is grappling with maintaining production discipline. Oil prices are likely to hover around $70 per barrel, which is positive news for South African consumers in terms of petrol prices. South African PMI and Vehicle Sales

PMI: South Africa’s PMI for September was positive, indicating slight economic expansion. The absence of load shedding and lower interest rates have contributed to the improved outlook.

Vehicle Sales: September saw better-than-average vehicle sales (44,000 units). Simon emphasizes the potential upside in companies like Combined Motor Holdings (CMH), which has started to perform after years of stagnation. Investment Strategy in a Bull Market

September SA vehicle sales

Simon reiterates his bullish stance, noting that while there will be pullbacks (up to 10% corrections), the overall trend remains upward. He advises staying long in the market, especially in a bull phase.

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Summary: In this episode of JSE Direct, Simon Brown delves into the latest developments in South African markets, focusing on the impact of China's major economic stimulus and the strengthening of the Rand. Key highlights include:

Rand Strength: The Rand has seen notable appreciation, reaching levels of R17.12 to the US dollar. Simon discusses the drivers behind this, particularly US dollar weakness and foreign purchases of South African bonds. He explores possible future movements, with a target of R16.80 and potential for further strengthening.

USDZAR | Weekly | 26 Sep 24

Global Stimulus: China's massive stimulus measures, including relaxed lending rules for banks and lower interest rates, are aimed at boosting consumer demand. This is the largest Chinese stimulus since 2008, with significant potential to impact global commodities and bolster the South African economy.

Commodities & Bull Market: The commodities market is seeing positive movement, with Chinese demand driving up prices for industrial metals like copper, iron ore, and coal. Simon notes how the previous commodity bull run in 2021 significantly strengthened the Rand and discusses the potential for a similar scenario if China's economy continues to gain momentum.

Market Performance: South Africa is outperforming other emerging markets, particularly Brazil and Mexico, over the past six months. Simon explains the drivers of this outperformance and highlights the continuing bull run in the JSE Top 40 and All-Share indices.

SA Equities: Our fortunes have changed significantly since the GNU was formed in June. SA has dramatically outperformed (in US$) not only Emerging markets in general, but Brazil & Mexico. SA has tilted more centrist, with a focus on the economy. Brazil & Mexico both shifted left. pic.twitter.com/Zz6OOM4dCJ

— Karin Richards (@Richards_Karin) September 23, 2024

 

Rate Cuts: South Africa and several other global economies, including the US and Europe, have entered a rate-cutting cycle. Simon emphasises the importance of this for markets, especially property stocks, which are benefiting from lower bond yields and improved investor sentiment.

JSE Index Changes: Anglo Platinum has been removed from the JSE Top 40 index, replaced by Pepkor. Simon discusses why Pepkor’s entry is significant, given its position as a retailer and its attractive valuation compared to competitors.

Key Discussion Points:

• Rand’s strengthening trajectory and foreign capital inflows.
• China's economic stimulus and its potential effects on global commodities.
• Outlook for South Africa’s bond and equity markets.
• Changes in the JSE Top 40 index with Pepkor replacing Anglo Platinum.
• Global rate-cutting trends and their impact on local property stocks.

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Episode Overview:

In this episode, Simon Brown dives into the current economic landscape with a focus on interest rates, inflation, and the state of the South African Rand (ZAR). He also explores asset-light businesses and why they make great investments, followed by a breakdown of the latest market activity and local company results.

Rate Cuts & Inflation Outlook:

• South African CPI (August): 4.4%.
• A possible drop to 3.5% in October discussed with Johan Els, Chief Economist at Old Mutual.
• The need for rate cuts to stimulate the economy, with experts debating between 0.25% and 0.5% cuts.
• Fed decision and its potential market impact.

SA Prime and CPI September 2024

ZAR Strength & Market Trends:

• Rand showing strength, potentially reaching sub-17 levels.
• Global market highs: S&P 500, NASDAQ, and JSE Top 40.
• Consumer confidence in the US and South Africa rising but still negative.

Platinum Group Metals (PGMs) & Palladium:

• A strong bounce in PGM stocks, driven by oversold positions and palladium production cuts.
• Palladium’s recent performance and its potential future breakouts.

Palladium weekly chart | 18 September 2024

Asset-Light Businesses & Their Investment Potential:

• Definition and benefits of asset-light businesses (e.g., Santova, Nvidia).
• Simon breaks down why businesses with fewer physical assets can provide higher returns on equity and efficiency.
• Comparison to asset-heavy businesses like banks and retailers.
• A deep dive into asset-light models like Shein, Temu, and logistics firms.

Company Updates & Local Results:

• Outsurance: Strong financial results and special dividends; analysis of the short-term insurance industry’s ability to reprice premiums annually.
• Altvest IPO: Simon discusses the upcoming Altvest IPO on the JSE and why he's not taking part in it, despite its interesting SME funding model.
• Finbond: A look at the excitement surrounding Finbond’s potential delisting and the company’s moves in the US market.

Noteworthy Quotes:

"Rate cuts are coming, and I think we'll see a short-term sell-off as markets react." "Asset-light businesses like Santova and Shein are great investment opportunities because they don't carry the heavy burden of owning physical assets." "Outsurance continues to impress with strong numbers and dividends, proving the strength of short-term insurers."

Chapters 00:00 Economic Landscape and Rate Decisions 03:09 Understanding Asset-Light Businesses 05:54 Market Psychology and Upcoming Events 09:11 Local Results and Investment Insights 11:52 Exploring New Investment Opportunities 15:10 Finbond and Market Speculations 17:59 Larry Ellison and Oracle's Rise

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Summary

In this episode of JSE Direct, Simon Brown discusses various topics including the troubles faced by Anglo Platinum, the performance of leisure stocks, Anglo Gold Ashanti's* acquisition of an Egyptian gold miner, and the impact of two pot withdrawals. He also touches on the future of PGMs, the growth of electric vehicles, and the psychology of markets. 

Takeaways

• Anglo Platinum is facing challenges as Anglo American wants to get rid of their stake, causing a sell-off in the market.

• Anglo Platinum weekly chart
• The PGMs market is uncertain, with palladium and platinum prices experiencing fluctuations.
• The World Platinum Council projects a second year of meaningful platinum deficits, with jewelry demand expected to rise.
• The growth of electric vehicles is impacting the demand for PGMs, but the market is still uncertain.
• Investors should wait for positive price action before considering investments in PGMs.
• Anglo Gold Ashanti's acquisition of an Egyptian gold miner raises questions about the use of equity and the future of gold prices.
• Two pot withdrawals have resulted in over 4 billion rand being withdrawn from the market.
• Leisure stocks, such as City Lodge and Sun International, have mixed performance, with City Lodge experiencing lower occupancy rates.
• The growth of sports betting raises concerns about its impact on poorer individuals and the fairness of the industry.

Sound Bites

"Anglo Platinum has a problem which is perhaps a little more unique than just the PGMs."

"There is that initial overhang. A whole lot of people will get Anglo-Platinum shares and say, 'I don't want these' and sell it."

"The World Platinum Council is saying we're gonna have deficit again, that's the important point."

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Chapters

00:00 Challenges for Anglo Platinum and the PGMs Market 02:22 The Future of PGMs and the Impact of Electric Vehicles 07:54 The World Platinum Council's Projections 09:16 The Diminishing Role of Internal Combustion Engines 11:09 The Impact of Low Prices on Production 14:55 Anglo Gold Ashanti's Acquisition and the Use of Equity 17:56 Pot Withdrawals and their Effect on the Market 19:18 Performance of Leisure Stocks: City Lodge and Sun International 19:42 Concerns about Sports Betting and its Impact 20:10 Upcoming Events: Investment Goals and the Psychology of Markets

Episode Summary:

In this episode of JSE Direct, Simon Brown delves into the impact of anticipated interest rate cuts and how they may affect various sectors and stocks. He shares his thoughts on potential beneficiaries like consumer stocks, REITs, and companies with high levels of debt. The episode also covers key updates on Nvidia's earnings, Nike's stock valuation, and a new ETF listing by ETFSA.

Interest Rate Cuts and Market Impact:

• Jerome Powell's Jackson Hole Speech: The anticipation of rate cuts as early as September, with an expected reduction of around 75 basis points by the end of the year.
• Benefiting Sectors: Companies with significant debt, consumer stocks (Mr Price, Foschini, Shoprite), and REITs are likely to benefit from lower interest rates.
• Sector-Specific Insights:
  • REITs: Discusses the potential for real estate investment trusts like Storage, Spear, and the concerns around office spaces with high vacancy rates.
  • Consumer Stocks: Simon reiterates his positive outlook on consumer-focused companies and the strong performance of used and new car sales, highlighting stocks like CMH and Motus.

Stock Analysis:

• Nvidia: With results due, Simon highlights the market's expectations and the potential for significant movement based on the earnings report.

• Nvidia | Close 27 aug 24 | Weekly chart
• Nike: Simon discusses Nike’s current valuation, seeing it as a strong buy at its multi-decade support levels, despite its challenges.

Nike | Close 27 aug 24 | Weekly chart

ETF Updates:

• ETFSA's New Actively Managed ETF: Introduction of the Balanced Foundation ETF, which is actively managed due to the lack of a specific index and includes a mix of local and foreign equities, bonds, and property.
• Satrix Nasdaq ETF: The transition from a feeder fund to a standard fund, reducing total expense ratios and offering cost benefits to investors.

Housekeeping:

• No Show Next Week: Simon will be on vacation and the podcast will resume on 12 September.
• Money Summit: Scheduled for 10 September in Johannesburg with free tickets available using the code "MONEYWEBGEST" at MoneySummit.co.za.

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ETFSA is listing an Actively Managed ETF, The ETFSA Balanced Foundation Prescient AMETF (JSE code: ETFSAB). 

Simon spoke with Gareth Stobie from ETFSA about the ETF, the listing process, where it fits in a portfolio and what it will be holding.

• IPO opens: 26 August 2024
• Listing date: 02 September 2024
• JSE code: ETFSAB
• TER: 0.52%

ETFSAB

In this landmark 600th episode of JSE Direct, Simon Brown reflects on the podcast's journey from its beginnings as a radio show in 2008 to becoming a leading podcast for market insights. The episode covers a range of topics, from South Africa's local CPI and a strengthening Rand to the surprising twists in the gold market and a mixed bag of corporate earnings.

Local Inflation Data:

South Africa's CPI has come in better than expected at 4.6%, fueling speculation on whether the next rate cut by the MPC might be more aggressive than anticipated.

South Africa CPI | July 2024

Rand Strengthens:

The Rand has shown significant strength, dropping below 18 to the dollar, with Simon analyzing the contributing factors, including foreign investment in bonds and a weakening US dollar.

Bull Market Sentiment:

Simon reaffirms the current bull market, highlighting the JSE's all-time highs and advising listeners to stay invested while cautioning against the risks of sitting on the sidelines.

Top40 20 August 2024 | Weekly chart

Gold Market Rally:

Gold prices have surged above $2,500, driven by central banks' increased purchases and concerns about the US dollar's stability. Simon discusses the potential for further gains in the gold market.

Corporate Earnings Recap:

• Coronation Fund Managers: Special dividend announced but falls short of expectations.
• CMH*: Despite low liquidity, the stock continues to climb, reflecting the breadth of the bull market.
• Sasol: Disappointing results with no dividend payout, a situation Simon had previously predicted.
• Spur Corporation: Strong earnings, signaling improving economic conditions.

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