The Money Show | Recent Market Trends

Siboniso Nxumalo was on the 702 Money Show discussing the resources’ recent bounce back, after being under immense pressure this year, especially when looking at the platinum group metals. He also shared his views on the Italtile results, which came out weak. They reported a profit decline of 15%.

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Chapters

• 0:00 Why are resources shares rallying on the JSE today?
• 0:27 Siboniso Nxumalo unpacks the rally in resources shares and the demand from China
• 1:17 The three problems impacting China's economy
• 2:02 What China's government is doing to stimulate their economy
• 2:37 Discussing results from Italtile and their similar commentary to ADvTECH

Transcript

Motheo Khoaripe  00:00

A great day on the markets, the JSE up more than one and a half percent, pushed up really by industrial shares, which were up one and a half percent as well, while resources shares did most of the rallying up 3%. Today, we are joined by Siboniso Nxumalo, the CIO to Old Mutual Investment Group. Siboniso, why the rally in the mining part of things in terms of our index locally? Because we've seen a lot of weakness throughout August for resources shares.

Siboniso Nxumalo  00:27

Good evening, Motheo, good evening to your listeners too. So, a strong day for resources. Resources have been under immense pressure this year, especially even if we look at the platinum group metals. I think they've halved this year. And so, why did they recover today? So, we've first got to then understand what are resources used for and where's the biggest demand for resources come from? Well, it comes from China, China is dominant in consuming resources that are produced around the world. So therefore, if China is growing and it's strong, it consumes resources in order to build the things it needs to drive its economy. If China is weak, it doesn't consume as much resources. And so therefore, we see demand falling off. And so therefore, what has happened, what has driven resource prices lower: China's weakness. 

China's economy, Motheo, has got three problems. They call them the three Ds: it's got lots of debt, which means actually, its ability to keep funding growth is limited. Its demographics are poor. And when we talk about demographics, China's got one of the largest populations in the world, it's either number one or number two depending on which study you look at. But that population is now old and declining. So therefore, Motheo, if you're going to build houses and build things, on a declining population, that demand is being challenged. The demand picture is being challenged. And the last one is deflation, and prices. The rest of the world has got inflation issues. China's got deflation issues. People are not spending, that is not good for the economy and not good for economic growth. 

And so, on Friday, now, why did the resources shares then bounce on the back of all these issues that I'm pointing. Well, on Friday, the Chinese economy, they said, hey, we need to do something here, this housing market is very weak. So, they're trying to stimulate it. But they've been trying to do this for a while. And then they reclassified people into first-time buyers. And so therefore, they don't have to pay much in terms of deposits for buying new homes. And the market kind of liked that and said, okay, fine, we'll buy a little bit more of the commodity companies. So, that's what drove that. We're seeing a little bit of stimulus in the Chinese economy.

Motheo Khoaripe  02:37

Ja, long may it continue, Siboniso. When we look at those interesting results from Italtile. They're saying the spend on solar panels and backup power as well, as boreholes for water from South Africa's household crowding out spending for beautiful bathrooms and all the renovations that we normally do. So, reporting quite subdued results, then. 

Siboniso Nxumalo  03:00

Very, very weak results. I mean, they are what's called a vertically integrated, I suppose, they manufacture, and they sell ceramics or tiles, baths, etc. etc. in South Africa. We saw their turnover was up 1%. But obviously, their expenses were up a little bit higher than that, but their profit then resulted, declining by 15%. 

And again, when they opened up in terms of the narrative, when they comment on their results. In the beginning, if you read their results, they have the same commentary as ADvTECH in terms of the pressure in South Africa, the pressure on the consumer, but actually, they've got a very different business, in that ADvTECH, which as you were speaking to them about, ADvTECH is education. And so, it's difficult to postpone that kind of spending. But when it comes to renovations, and buying tiles and bathrooms and taps, that you can postpone, and we saw the effects of that. And so therefore, ADvTECH is a lot more of a staple type of company, because it's difficult to postpone. But Italtile is discretionary, completely discretionary. And so, then people say no, we don't need to do this now. And we saw that, and the impact of that on- 

Motheo Khoaripe  04:13

And that just speaks to the cost of living crisis, of course, people really, really making tough decisions at the shopping hours. Our market commentary today covered by Siboniso Nxumalo, the CIO at Old Mutual Investment Group, thank you for that.