Portfolio Manager, Siboniso Nxumalo, unpacks the strong start to markets across the board this week, driven by a surge of optimism around peaking inflation and interest rates.
Thanks for listening! Follow us on Linkedin.
Bruce Whitfield 00:00
Siboniso Nxumalo, a Portfolio Manager at the Old Mutual Investment Group. Didn't you drive up and a new car today?
Siboniso Nxumalo 00:12
Not quite, Bruce.
Bruce Whitfield 00:13
Just checking, because the markets had such a good day, nearly 2000 points turn around.
Siboniso Nxumalo 00:18
Bruce Whitfield 00:18
What was the catalyst for it? Because everything, everywhere today was flying like, like nothing else.
Siboniso Nxumalo 00:25
Yes, Bruce. So, we've got to start last week. Last week, we saw some high inflation numbers from the US. And the market didn't like that. And then, the market then started coming down. But now, with inflation persistently high, then that means central banks, the Fed, is going to raise interest rates. If they raise interest rates, there's going to be a lag, which means that's going to impact company earnings and slow down growth. That's the purpose of raising interest rates. So, the market today roared back into life and suddenly looked at this and said, hey, if inflation could be peaking, that means that rates will stop rising. That means actually, at some point, we'll see a recovery. Well, the markets said risk on, bullish. And today, we saw that even in the dollar, the dollar became slightly weaker, which is why the Rand is actually suddenly becoming a little bit stronger. And with that, we saw better commodity prices. We saw the platinum companies up 4.6%, with Anglo Platinum up 5.6, and Sibanye up 4.3. And we even saw Naspers/Prosus, they were up 3.8 and 3.4, different to Tencent, Tencent was down about 80 basis points. And so, it's a strong performance. Then in South Africa, we saw the banks. First Rand up 4.64, Absa 3.5 My employer, Old Mutual, which has been underperforming in the market, was up 5% So, that's been a good day, Bruce. But not like a new car, though.
Bruce Whitfield 01:42
No, it wasn't a new car kind of day, but there was this huge surge. And I love the way you apply logic to illogical markets. It's a very brave... it's a very brave thing that you've done there.
Bruce Whitfield 01:54
One looks at the United Kingdom and the massive U-turn there and I wonder just how much of a role that played. The adults back in charge of the economy in the United Kingdom. Liz Truss' reform agenda completely discredited and thrown out the window by the new chancellor, Jeremy Hunt, to replace Kwasi Kwarteng, who got fired on Friday, things are moving fast.
Siboniso Nxumalo 02:13
Things are, Bruce. I mean, I think the market, we've got politicians in the world who aspire to populist opinions, and every now and then the market comes back and is an arbiter and the judge. And the market says, no. And that's exactly what happened in the UK. So, that's why we're starting to see a retraction, because you can make these statements and you can make these plans. But the market has looked at the UK and said, hey, you've got too much debt to be doing this. And actually, your economic policies aren't logical. And so therefore, we're going to price a lot of risk in, and then obviously, that is not good for the UK economy. And then that being backtracked, that's a lot more sensible. So, the market says, hey, we like this. And so well, good luck to Liz Truss.
Bruce Whitfield 02:54
Ja, and then have a look at Murray & Roberts. I mean, they built some of our greatest infrastructure, of course, and we chatted a little bit earlier this afternoon - this evening, I beg your pardon, to our analyst tonight, and that was Makwe Masilela at Makwe Fund Managers, and he says, you know, Murray & Roberts actually is the smartest of the bunch. They've done the right things in terms of diversifying risk and offshoring their business and getting their business on track in a different way. They're getting screwed over by their clients, not their fault, cut them some slack. Would you agree?
Siboniso Nxumalo 03:25
Oh, I'm not sure about that, Bruce. Because if you think about it, what is Murray & Roberts? Murray & Roberts is an engineering company. So, engineering company, they go out in the market, and they've gone globally, and they've bid on some projects. Now, what happens is, even when you and I are busy building something, we say to the contractor, hey, I'm gonna pay you once you've built this part of the project. And so, you pay them what's called milestone payments. Now, what's happened with Murray & Roberts, they build obviously projects in the billions. What's happened in this particular instance, is that they've said, hey, there these supply chains, we can't get the parts in order to be able to build what we need to build in order to get paid for it. The clients are saying, hey, you signed a contract with me, an agreement that you said you would build this thing on this time, and then I would pay you. So, their customers are not paying them. They're not completing the work. And yet, they've still got the expenses. And so, Bruce, this is a bit of a problem, especially when you have this thing called debt. If we look at their balance sheet, as of June, that was their year-end, they had about 3 billion Rand in debt, and in theory, a billion Rand in net debt. So, after their cash. The market cap today was 1.8 billion Rand. And so, all of a sudden, the market is telling you something, that these guys need a rights issue. Why, the balance sheet can't support the business. And so that's where the issue is. Now, Murray & Roberts was opened at R14 in January this year. It closed at R4 today. So, the market is telling-
Bruce Whitfield 03:26
The market says this business is going bust unless it does something dramatic really quickly. It's a little bit like the problem Sasol had when it was stuck in Louisiana, and it was spending too much on building Lake Charles and it didn't have the income to support the debt that it was writing. Murray & Roberts is in a bit like that sort of situation.
Siboniso Nxumalo 05:04
It is, Bruce. But what is interesting about Murray & Roberts is they've got this large shareholder, ATON, which tried to buy them a while back. Now, ATON owns 44% of Marion Roberts. And so therefore, now this is very interesting, because you've got ATON, who obviously have to make a decision. They've so far, they've been a very passive shareholder. But well, when there are no balance sheets, you can't be passive anymore. You've got to stump up that cash. So, let's see what happens here.
Siboniso Nxumalo 05:32
Dischem getting itself caught in a nuclear fallout over transformation, a lack of transformation. Michael Bagraim being massively outspoken this evening, the labour lawyer saying, hold on a second, the big business can't be held to ransom in this sort of way, and it's good that Dischem is pushing back, and the board of Dischem saying hold on a second, Ivan Saltzman was out of line and it's very, very noisy. The share price though is barely moving.
Siboniso Nxumalo 05:54
Well, Bruce, I mean, I think this is the thing about markets, markets discount the future. So, markets look at the future, say of Dischem, and they say, over the next 10, 20, 30 years, how much cash are you going to make? We're gonna bring it back to today and ascertain a value. Now, from a PR perspective, this is obviously not good, but from people - you and I - going to shop at Dischem, that really hasn't changed. And so, that's why the market's saying the share price, okay, well, this doesn't change the business. This is just a PR matter. And the company needs to do that a little bit better.
Bruce Whitfield 06:25
Siboniso Nxumalo, nice to see you in the flesh. He is our market commentator this evening. He's with the Old Mutual Investment Group.