Old Mutual Investment Group

Meryl Pick discusses the latest US inflation outlook on the Money Show this week

January 24, 2023 Old Mutual Investment Group
Old Mutual Investment Group
Meryl Pick discusses the latest US inflation outlook on the Money Show this week
Show Notes Transcript Chapter Markers

Portfolio Manager, Meryl Pick, discusses the latest outlook for US inflation and its impact on SA’s rate hiking cycle, markets, local companies and economic growth.

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Bruce Whitfield  00:06

Well, the US Treasury Secretary, Janet Yellen, she is in South Africa this week after visiting Zambia today. And she has been telling the new government in Zambia that they really need to seriously restructure their debt, amongst a whole lot of other things. But she was saying today, "I see helpful signs in recent US inflation data". Now, she's going to be meeting the Finance Minister of South Africa, Enoch Godongwana, later on this week. Meryl Pick, who's a Portfolio Manager at the Old Mutual Investment Group, on the line to us from Cape Town this evening. American inflation remains the biggest story in town, bigger at least in the short term, than even the electricity crisis in South Africa, Meryl. 

Meryl Pick  00:50

Good evening, Bruce. Yes. And good evening to your listeners. Inflation, and it remains a debate as to, you know, transient, not transient. Where will inflation eventually settle? I think it probably is consensus that the base set last year for inflation is quite high. But they are... you know, can assume we will settle with the norm of the last few decades of 2%, or perhaps even below 2%. And the rest we think will settle somewhere between three and four, i.e. at a structurally higher level than the last two decades. I think certainly some of the drivers of inflation to me, there are long-term structural themes in place. We've seen long trend of globalization, for example, which has made everything cheaper for every consumer around the world. We've started to see that fracture over the last few years even before Covid. But certainly, people tried to shore up their supply chains and be less dependent on China for everything. That sounds great, it makes supply shocks more reliable, but also more expensive. There are many more of those trends that points to inflation being a bit stickier this time around.

Bruce Whitfield  02:14

And I think there's an acknowledgment by many central bankers that although inflation is coming down, it's not racing down. And that's why we're going to get further interest rate hikes, possibly as much as 50 basis points again in South Africa, as odd as that might be, considering how long we've been raising and how much we've raised interest rates by, that there is still some very hard and very bitter medicine to come.

Meryl Pick  02:39

Correct. So, I think why is US inflation particularly important for a market like us, an open economy with a floating currency. Our Reserve Bank has to keep pace with the Federal Reserve's interest rate hikes, or our currency comes under pressure. So much scrutiny on US inflation why because it determines the path of their rate hikes and therefore indirectly our rate hikes. So, the more that inflation persists, the more likely it is that the US continues with rate hikes, perhaps at a slower pace. That's what they've been flagging. But it does mean that the longer it remains sticky, the further out the end of the road hiking cycle is. But bear in mind compared to long-term history, rates are actually not that high. Definitely not in the US, and even in South Africa.

Bruce Whitfield  03:35

No, they're not. But we've become quite spoiled in the last decade or so with this misplaced belief that perhaps inflation has finally been defeated, monetary policy can control it, and suddenly, oh my goodness me, guess what surprise. A bit like Jack Nicholson stepping out with a knife in your scariest movie you've ever seen, inflation re-emerges! And that brutal reality comes to bear once again. And this is, ja, it's quite scary. We've had the first two trading updates, certainly the ones I've seen come out today from South African retailers, and it gives us, I suppose, the most up to date barometer on how the companies are faring and by extension how South African consumers are faring. Can we go through them individually? The first one that came out this morning was Cashbuild and then we'll look at the Foschini Group, but Cashbuild after booming during lockdowns as people did lots of renovations, they struggled a bit. Has it recovered?

Meryl Pick  04:32

Ja, no, the downward trend for Cashbuild continues over a weakness. As you rightly point out, I think there was quite an elevated space during the Covid shutdown, a lot of people working from home, locked up in their homes, and a lot of attention therefore going to renovations repairs, DIY, etc. So, that weakness is perhaps due to some of those base effects, but I think also the, you know, it could be indicative of the lower-end consumer and the more rural-based consumer being under pressure, which is where Cashbuild has a lot of market share. But it's certainly not painting an all around rosy picture for the consumer and in an environment where interest rates are going up, we would expect things like home renovation, which often is funded through some sort of unsecured lending, to come under pressure.

Bruce Whitfield  05:29

Okay, so Cashbuild is still stuck in treacle, what about the Foschini Group? It's so massively diversified nowadays, and it's got so many different irons in so many different fires, is that strategy paying off?

Meryl Pick  05:41

 It would appear to be ticking over, you know, and delivering a reasonable top line growth. You know, I think the two comparators we've seen in the last couple of weeks were Mr Price and Woolworths. Foschini Group has come somewhere in the middle. If you look at the headline figures, it looks wonderful, 20% growth, etc. But the real thing to focus on is the like-for-like growth, which in the clothing division is about six and a half. For South Africa as a whole, about five, just under 6%, 5.7. The 20% headline number includes acquisitions of the Tapestry Group, which includes Coricraft and other brands. So, it's not a clean comparison. But that close to 6% sales number is a pretty decent number because they've delivered consistent like-for-like growth over a number of years. You know, Woolworths on the other hands was at 11%. Mr. Price, I think was very low single digits, 1 or 2%. So, Foschini in the middle and quite consistent. I think the Australian region continues to be very strong, despite whatever weakness, although there's some Covid lockdown restrictions still in the base. The problem area here is the UK. So, of the acquisitions that they've done outside of South Africa, clearly the UK has not lived up to expectations, it seems goodwill right down there. But Australia's more than made up for that. And they continue with the strategy of basically consolidating the South African footwear, clothing, and homeware markets because it's just announced another small acquisition of Street Fever. So, this combination of focusing on cash sales, bolt on acquisitions, and they haven't announced anything offshore in a while, which is probably a good thing means that they're finding new sources of earnings growth. What would be great is to just keep seeing that like-for-like sales number remaining in mid to high single digits, that would give you confidence.

Bruce Whitfield  07:50

Ja, it's interesting, isn't it? I mean, some sectors of the retail sector have held up well, and those that are more actively managed, and they've been very flexible during various crises, tend to do better over the long term. So far this year, it's the 23rd of January, we've had 23 days of loadshedding, Of all the trading days this year, I think we've had only three negative days, which means we've had probably three or four times as many positive days as negative days. It's a great start to the year. Are you worried that the party stops at some time?

Meryl Pick  08:24

You know, I think within the JSE, one really has to look through how much is tied to the domestic economy, how much is tied to just all out global, and how much is tied to China. Ad really about 40% of our index has a very strong correlation to how the Chinese economy is doing. And I think we're being carried for now, perhaps bailed out for now by the China reopening trade. That might have legs for the next 6-12 months. But beyond that, we see growing recessionary concerns in the US, Ukraine war is till ongoing. So, I think we should... because of the China offset, the market should be okay for the next few months. But beyond that, there are long-term growth concerns. Even for China, there are long-term growth concerns. What we're seeing now is a bounce back, so I wouldn't get too excited essentially. South Africa's issues do affect clearly the economy, it makes every company's life harder. But you can see that's where astute management comes in. Because in every crisis, there's room to consolidate, to take market share, to have clever strategy. But they are having to work a lot harder to grow profits then 10, 15 years ago, that's for sure. Spotting the ones that have got the good strategies, have got the agility, have got the balance sheet to execute on these, I think that's going to be... make the difference between a winning and losing business.

Bruce Whitfield  09:57

Thank you, Meryl Pick, who is the Portfolio Manager at the Old Mutual Investment Group. 

Meryl Pick unpacks the biggest story in town: inflation
Why we will get further interest rate hikes
Discussing the trading update from Cashbuild
Discussing the trading update from the Foschini Group
A great start to the year, but are we worried that the party stops at some point?