Peter Brooke, on this week’s The Money Show, delves into the recent shifts in market dynamics. He discusses the nuanced changes in the US Fed's stance, the SARB’s outlook on interest rates, and the intriguing landscape of the gaming industry. Peter also offers a keen perspective on market trends and the resilience of certain sectors.
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Peter Brooke, on this week’s The Money Show, delves into the recent shifts in market dynamics. He discusses the nuanced changes in the US Fed's stance, the SARB’s outlook on interest rates, and the intriguing landscape of the gaming industry. Peter also offers a keen perspective on market trends and the resilience of certain sectors.
Thanks for listening! Follow us on Linkedin.
Bruce: Peter Brook, who's a portfolio manager at the Old Mutual Investment Group, is with us this evening. Before we talk Sun International and the potential of the takeover of Peermont, we've seen a big change in tone and mood just over the long weekend, Peter. Members of the US Fed Open Market Committee, the so called FOMC dialling back on what we huge market expectations last week for rate cuts. Reality seems to be settling in the week before Christmas, a bit of devaluation in the currency once again today in a pullback in our markets, quite a sharp pullback as well.
Peter: That's right, it's a bit sad, because I went to a farewell lunch on Thursday afternoon for a staff member who's retiring. Missed all the fun, and now you get like the, the down on the next day. Um, I wouldn't read too much into it though. It, the truth is if you look at it, markets had a huge run. And, um, both in terms of currency, um, everything. And so, a little bit of a settling and a pullback, I think, is normal. The interesting thing, of course, is US futures are up. So, it's more about the nuance around it and what sort of degree of follow through that you have around the world.
Bruce: Yeah, again, there is this, I think, this burning desire for interest rates to start coming down and there even the slightest hints that interest that money becomes a little bit cheaper in 2024 sets really some quite exuberant and often irrational activity happening in markets.
Peter: I think so. But if you look at, I'll give you an example. Um, US long dated bonds, the 20-year treasuries, we've actually got a position in there. It's done something like 25, 20, call it 20 percent from the recent low up, which is huge returns. But actually, almost all of that was just a reversal of what had fallen in the previous quarter. So, I think, and even if we look at markets, broadly, they're rebounding to levels that they were at, as opposed to, we're into a new, uncharted space. So, markets are looking forward. That's what they do. The cost of capital is a critical component of it. If I look at what's happening in terms of bond yields coming down from higher levels, that makes perfect sense. If I look at the US dollar weakening a bit, that makes perfect sense. And in a lot of places where equities are jumping, it's, they were too cheap. Perhaps where I'm less convinced Is areas like, so, I mean, the US still remains expensive. Um, and so you’ve got a lot of expectation priced in now in terms of lower rates, but no, and, and no problems in terms of the soft landing.
Bruce: Yeah, certainly the US Fed is still boxing very, very carefully. Loretta Mester, who is the president of the Cleveland Fed. She's also one of the voting members of the FOMC, the Federal Open Market Committee, say markets have got ahead of themselves, and that's applying, I suppose, implying a slightly slower, um, sort of downgrading of interest rates into the new year. Certainly, on the JSE I don't think you're anticipating too many aggressive rate cuts next year for South African investors.
Peter: No, um, the SARB like to talk about a table mountain, sharp up, long flat, and then down. And they’re not incentivised to lead in terms of global rates, because the rand has actually been quite weak. So, if you look at the rand against other currencies, it hasn't been that great. So, I think that that indicates our country risk, and therefore, I think that stays the SARB's hand.
Bruce: Stays the SARB's hand. So what? No, no, certainly no interest rate cuts in the first half of next year, perhaps into the second half.
Peter: I think we'll definitely see cuts. Sorry, just to be clear. It's just the extent of them and the speed of them. We will follow the US as opposed to we're going to want to be out there trying to lead.
Bruce: Okay, very good. What do you make of Sun International's ambitions to buy Peermont? I think it's an interesting looking deal. They've certainly got it at a fairly decent price.
Peter: I listened to your interview, and I quite like the way he tiptoed around the competition commission issue talking about localisation. The truth is, I think consolidating businesses makes sense. It's a really tough environment out there. And you need to take costs out, so it makes business sense. Whether they can get it through, I think, will be a big debate. Competition Commission has been pretty tough. And in many cases, I felt slightly irrationally tough. But, um, so I think we'll just have to wait to see what happens. If they get this through, I would say it's good news, um, because consolidation does make sense.
Bruce: And it's an interesting, uh, it's an interesting sector, isn't it? I mean, it's disposable income. It's doing very well. They've had a really good rebound in the last set of results. I saw a massive uptick in earnings. And they've gradually weaned themselves off the very expensive to run resorts businesses. They had a beautiful portfolio of properties and luxury properties, and it was wonderful to go and visit. But, jeez, terrible to invest in. Gaming, at least, is a more certain income stream for investors.
Peter: It is an extraordinary business because it's actually very concentrated in terms of those repeat gamblers. Those high-net-worth players are very valuable to the casinos and it's less, I mean, it's a, it's a stickier business in a way. The other area that it's important is small businesses. So, a lot of the people who've got that sort of risk appetite to, who enjoy going for a bit of a flutter at the casino. Also, people who have built their own businesses and generally are out there making a difference in a way. So, I think when the small business sector battles, the sector battles as well, but there's still a resilience and it's incredibly cash generative. So, it's not a bad business model, at all.
Bruce: And it's kind of easier to follow, I suppose, than the madness of the commodity cycles. Commodity cycles, when they're going in your favour, are fantastic. At the moment, the commodity cycle, particularly the platinum sector, has not been going in the favour of investors, except for the last couple of weeks, where there's been a resurgence in demand for platinum group metals, and today's movements were just astonishing. I mean, Impala up 11%, big gains for Northern and Anglo-American Platinum and Sibanye, and notes from a very low base. But is this the beginning of something new, do you think, or dare you hope that there's a bit of a recovery coming through in that sector, which is really quite browbeaten and down beaten?
Peter: Yeah, I think you're right to sort of flag up that that 11 percent gain still leaves Impala down 60 percent for the year to date. A good friend of mine from the UK actually called me two weeks ago and he says, hey, look at platinum. It looks amazing. The price has dropped down to, or the PGM basket price has dropped down to the fiftieth percentile of costs. And that's always a sure-fire indicator that, you've got a floor in there and now the time to be looking to buy. So, I think, yeah, that's really what's going to play out. You've got all this different regulatory impact. So, there's a little bit of good news today about some delays and EV rollout, which is helpful. But on the other side, you have Canada coming out saying, well, we're going completely away from internal combustion engines, I think by 2035. I personally think it's more around Anglo American’s announcement saying that they're going to start taking volumes out. And that is where you can start to build a price floor.
Bruce: Yeah, and that's going to be interesting and in terms of the way in which the technology moves, of course, because yeah, platinum group metals are absolutely still pivotal in the world of batteries. There's a really interesting signal and it's going to have ramifications for oil markets. We've seen the oil price shoot up over the weekend. I saw BP's decided to suspend oil shipments through the Red Sea. There's a particularly narrow gap between Djibouti and Yemen. where rockets have been fired at ships that are suspected to be doing anything in favour of Israel. These Hamas supporters Evergreen, the company that owns that ship that blocked the Suez Canal about four years ago. It's not carrying any cargo for Israel through the Red Sea, and it's a massive conduit for oil and for fuel shipments, of course, for the entire global economy. And suddenly you just look at that. little sort of pre-Christmas risk coming into the mix, and you just realise just how unstable and unsettled the global environment is at the moment, particularly when we're as dependent still on fossil fuels as we are.
Peter: Yeah. I suppose I'd interpret it rather as I wouldn't want to be a Houthi rebel right now.
Bruce: No, because they are going to find a little bit of heat. I'm sure turned and turned towards them.
Peter: The interesting thing about oil is it's actually, it's fallen a lot. And for the first time, we've actually seen a little bit of inventory run down. And the other, if you think slightly longer term, the Fed was incredibly dovish. I mean, an extraordinary statement to sort of pivot quite so sharply. We are facing an election year next year. I'm not sure if that had anything to do with it. But are they getting a little bit softer on longer term inflation? And what that means, I think, would be quite positive for commodity prices generally, and definitely for oil. So, sure, you get, I mean, obviously you get sort of spikes on short term news flow, but generally they don't last very long. But the oil price at this level, I do think looks quite interesting.
Bruce: Peter Brooke, thank you very, very much indeed. Peter Brook is, of course, a portfolio manager at the Old Mutual Investment Group. Today was a disappointing day after the exuberance of the closing days. As Peter said, he went to a farewell for somebody who was retiring on Thursday last week and missed all the Thursday afternoon excitement where we saw share prices rocketing. The All Share Index on the day down 988 points, one and a third percent lower. That's 74 301 financials down two and a half percent on the day. We saw quite a sharp selloff happening in Sanlam, Standard Bank, Capitec, Firstrand and Absa. And of course, the gold sector with Anglo Gold Ashanti, a negative in that gold market with also. The share prices of local retail and telecommunication stocks falling off quite sharply, but there was a good day across resources. The resources index positive with Impala leading the charge higher, but as Peter Brooke, points out, the Impala share price, although up 11% today, still down by two thirds this year alone. So, there's been a huge amount of reshaping and reshifting and repositioning of portfolios. Gold price is steady. Brent crude price is picking up a little and our currency, which has been at a really good week last week, losing two percent of its value today. So that was somewhat disappointing on this Monday afternoon, but hey, the week is but a pup and we still got a lot to go before Christmas day. So, we hope. That, uh, things settle down a little as we move toward the Christmas holiday break, which is usually very much quieter than the rest of the year.