Portfolio Manager, Siboniso Nxumalo covers the somewhat quieter market activity that started out the week, as investors await the Fed’s decision on US interest rates due later this week.
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Portfolio Manager, Siboniso Nxumalo covers the somewhat quieter market activity that started out the week, as investors await the Fed’s decision on US interest rates due later this week.
Thanks for listening! Follow us on Linkedin.
Bruce Whitfield 00:00
...this morning, plus, of course, we're waiting to see what the United States does on interest rates, and the European Central Bank says about inflation and interest rates this week. Portfolio Manager at the Old Mutual Investment Group, Siboniso Nxumalo, is with us this evening and, Siboniso, I mean, I suppose it is all about the data. Once again, it's boring. But them's the facts. We're waiting for the ECB and for the, for the US Central Bank to make announcements.
Siboniso Nxumalo 00:27
Yes, Bruce. Good evening to you, and good evening to your listeners. Yes, Bruce, the market today, one of those boring days, rather quiet. The market is looking for direction, and these days happened when the markets' saying, wait, let's look at what the Fed's gonna do. How much are they going to increase interest rates by? Because the market is basically trying to assess is this the peak in terms of interest rates, because if this is the peak, then the market then might start getting a little bit more optimistic about the future in terms of will rates start declining at some point in the future. So, an important data point. And obviously, nothing much happened today.
Bruce Whitfield 01:04
Nothing much happened today. But it is all about how the US Fed perceives the inflation threat and how the ECB perceives the inflation rate, that's going to determine whether or not this boom of a January we've had persists into February and March.
Siboniso Nxumalo 01:19
Yes, I mean, Bruce, the markets are what's called a discounting mechanism. So, markets look ahead. And they say, these are the future profits that companies are going to generate in the future. And then the market then assign some form of interest rate and discounts that back to today. And that's the price that investors pay for today's assets. Now, with that long story that I've just said, what does that mean? It means that the higher interest rates are, the lower investors are gonna pay for today's profits - for tomorrow's profits. And so therefore, that's why interest rates matter. That's why interest rates matter.
With the Fed then, the world is looking forward and investors are looking at this and trying to digest and say, wait, if inflation persists, if inflation stays high for longer, then actually our investment returns aren't going to be as attractive. And so therefore, we need to pay lower prices. Now, what's happened in January, the market started off with a roar because they're saying, the market is anticipating, I suppose lower rates in the future. So, we're about to find out whether that is true or not. We think it is not true. The market could come off, Bruce.
Bruce Whitfield 02:26
It could absolutely, so we watch very, very, very, very closely. PEP's trading update today wasn't all that inspiring. Do you find it inspiring? I didn't find it inspiring. Was it inspiring?
Siboniso Nxumalo 02:37
It wasn't inspiring, Bruce. But it's got to be within a context. Because we saw PEP's three months trading update, and said ja, you know, they talked about group revenue's up 6.5%. If you look at it, and you break down the actual segments, clothing, and general merchandise, that was up 10.8%, that is inspiring, Bruce. And a lot of that is driven by their... what they call a successful back to school, and they're very good at that. They are back to school, that's the biggest segment of their business, it's close to 70% of their business. But when we look further, like the furniture business, that one was basically tanked, 0.3% revenue growth, the building materials one that was at 3%. Again, not inspiring, but actually the laggard in that group is their FinTech business. So, that one's down 10%.
And so, yes, a bit lacklustre, but the consumers under pressure in South Africa, we've got load shedding, and so the cost of running businesses, that's a bit high, and so you can see that coming through. But Bruce, I do think that if we look at their clothing and general merchandise, 10.8% increase in revenue growth, that is quite solid. So, the devil is sometimes in the detail, and the details there are saying, there's some good segments in PEP and what we know them for, and actually, there's some ones which are just struggling.
Bruce Whitfield 03:49
Wonderful. And there's an advertising industry guy running one of the country's biggest grocery firms. Now, this is weird. I mean, Mike Bosman has got a long career in the South African advertising industry. He was a director on the board of Spar, then was made the chairman when this chairman was moved aside, then the CEO resigned - or retired - and Mike Bosman is suddenly now interim CEO as well. He's got a lot on his shoulders, hasn't he?
Siboniso Nxumalo 04:15
Yes, he does. I mean, Spar, which... generally, Spar actually had historically long-tenured executives who have been brought up within the business, within running the business, but obviously the business, they went and acquired some assets offshore, and especially in assets in Poland. And that hasn't worked out well. And so, then that heralded quite a lot of pressure on those managers, and we saw quite a change in the senior executive roles. Mike Bosman has come in as chairman. And while they're looking for a CEO, so they're saying, hey, while we're looking for a CEO, Mike's gonna occupy both the chairman role and the CEO role. It is quite a bit, but Mike's a very competent man.
Bruce Whitfield 04:57
Okay, good. We watch his new ‘new’ job - I mean, he won't be the CEO in perpetuity, they are saying they expect to have a full-time CEO in the next three months. Gavin Hudson, he's been the guy involved in the attempt to turn around at Tongaat. Four years in, a business rescue plan due at the end of next month. And he'll be leaving at the same time.
Siboniso Nxumalo 05:17
Yes, Bruce, this is an interesting one, Bruce. I remember four years ago when this announcement came out, and you and I actually discussed this. And it took them four years to try and turn this business around from that accounting scandal. The court case is still continuing. I mean, it was adjourned, I think, until the end of February too. So, coincidentally, we're going to have the court case with the executives that were accused of that accounting fraud coming back, we're going to have Gavin finishing his tenure of four years of attempting to turn around the business. And then we're going to have the final business rescue plan which has been postponed, it was supposed to be today or tomorrow. And then now, it's extended a month. So, we're going to be able to tell a lot of information on Tongaat at the end of February. And ja, that devil will be in the details there too.
Bruce Whitfield 06:05
if somebody stays in a job for four years, can you call it a tenure? Anyway, Siboniso Nxumalo, thank you, Portfolio Manager at the Old Mutual Investment Group. Thank you very much for joining us this evening on The Money Show.