Old Mutual Investment Group

Portfolio Manager, Arthur Karas, talks market recovery and commodities with The Money Show’s Bruce Whitfield

February 08, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Portfolio Manager, Arthur Karas, talks market recovery and commodities with The Money Show’s Bruce Whitfield
Show Notes Transcript Chapter Markers

Arthur Karas discusses the recent strong recovery seen in local markets and the underpin to this of the commodities sector, as well as drivers of the latest results from Telkom.

Bruce Whitfield  00:00

Thank you, Ann Bernstein at the Centre for Development and Enterprise. The Money Show, the markets. 

And on to Arthur Karas. Now, despite all of the doom and gloom and the rage and the anger and the damning report on state capture and Ann Bernstein's view on, you know, the intransigence of government to invest in the future, we got the JSE 1,000 points up a record level today, 

Arthur Karas, as we - um, from the Old Mutual Investment Group. Ja, quite an extraordinary recovery in markets over the last week or so.

Arthur Karas  00:30

Yes, I think that we've got - uh, we've got good earnings coming out of companies in many cases, with cases of good earnings, the market has digested the first Fed meeting of the year. So, we're waiting for companies to report results.

Bruce Whitfield  00:46

We most certainly are. But in South Africa, we are seeing the continued dependence, and thank goodness we've got them, of mining companies. Vast mining companies that dig holes across the globe. The underpin is very, very strong from resources and remains, I think, sort of, dare I say, bedrock of the JSE.

Arthur Karas  01:05

Definitely. I think that the mining sector is not as big as it once was. Certainly, parts of it, like with gold mining, the companies have shrunk quite dramatically, but platinum companies have gotten larger. And over time, our diversified miners have emerged because global companies all essentially become large global companies, given us a lot of exposure to that. That gives us a lot of gearing to any kind of global cyclical recovery, which we've seen quite a bit of in the last year. 

Right now, we're thinking that these companies are quite cheap, but that's because their earnings are expected to decline over the next two years. So, when we have strong metal prices, like currently we've got a very strong iron ore price that keeps going up, almost regardless of predictions of its peaking. That's good for companies like BHP and Anglo American.

Bruce Whitfield  01:59

And then talk to me about Telkom, please. The last three months of 2021, we've seen revenue fall quite sharply, two and a third percent. Earnings have declined a bit; the mobile division seems to be okay. We're seeing a sort of slow death by 1,000 paper cuts of the fixed line business, and business connection, also, is struggling. And maybe that's just symptomatic of a broader business community struggling. But it's not a pretty picture for Telkom. 

Arthur Karas  02:28

Telkom has been pretty much on a very predictable path for some time. So, we've known for probably at least a decade that the fixed line businesses is in steady decline. And to combat that, Telkom has done two things. They've rolled out a lot of fibre. They now have passed median 800,000 houses, more than 800,000 houses, and linked up to about half of those. And then they've rolled out their mobile offering. 

Now normally, the third, or I think they're the fourth mobile offering in the country, tends to do quite poorly. But what they did, is focus on the data user rather than the voice user. So, people of our kind of age make phone calls. But younger people tend to just use data. So, their offering is very much focused on data. It's been a good offering; it's become a reasonable business within them. But the decline in the fixed line business, that just steadily continues every year. And you can kind of probably pencil in an end date for it almost at some point. 

So, the decline in that business and the struggle that the BCX business - so, that's the business focused on delivering IT service to corporates, they struggled with Covid to get projects off the ground and then they also struggled with the chip shortage and the battles to get hold of hardware. So, those two businesses declined more than what the mobile and fibre businesses grew. And notwithstanding a very admirable effort on the cost-cutting side, the entire business just went backwards a little bit in terms of profits.

Bruce Whitfield  04:00

Thank you to Arthur Karas, who is Portfolio Manager for Macro Solutions at the Old Mutual Investment Group. 

The recovery in the markets over the last week
Mining companies and resources as the bedrock of the JSE
Discussing Telkom: the growth in mobile and fibre, and the declines in the fixed line business and BCX