The Money Show | Perspectives on global and SA market dynamics

In the latest interview on 702’s The Money Show, Siboniso Nxumalo, our Chief Investment Officer discussed the subdued activity on the JSE and the global market dynamics. Siboniso shed light on the dichotomy between the South African and US markets. He explored the contrasting valuations, the concentration of the US market in the "Magnificent Seven," and the potential risks and rewards of investing in both regions.

The perspective on South Africa's market, including its global contributors and the opportunities presented by undervalued stocks, challenges conventional wisdom, making this a must-listen for investors looking for a unique insight.

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Transcript

Bruce Whitfield  00:03

Nxumalos are taking over this evening. Siboniso Nxumalo is Chief Investment Officer at the Old Mutual Investment Group with us this evening. Martin Luther King public holiday, it's always a bit of a damp squib of a day and you've inherited it today, Siboniso. So, not that much activity on the JSE.

 Siboniso Nxumalo  00:20

Ja, it was a very, very quiet market. Obviously, when the Americans are not in the market, being the biggest market makers in the world, nothing much is going to happen, Bruce. So, a lackluster of a day. The commodities traded downwards, we saw the platinum miners, Sibanye's down four, Impala's down two and a bit, Anglo American Platinum is also down two, and so nothing there. The South African banks reflect some conflict in the world, there's a risk off world. So, First Rand down 4%, Absa down two, Standard Bank down two, and whenever the world is a little bit shaky, you see it in the banks, because the banks actually ultimately are an accurate reflection of global risk.

Bruce Whitfield  01:04

Ja, and certainly it played out negatively for the JSE today. Globally, however, the picture is not that much more cheerful. Considering that the... I think the, you know, when looks at European markets today, they're a bit lackluster. Perhaps the week improves from here as well. Locally versus internationally, this is the consistent mantra, you've been singing this mantra for a long time. Last year was deeply disappointing for the JSE because if shares were offering good value this time last year, they were offering better value at the end of last year, and possibly even better value today. And I'm wondering whether or not many investors, and we've heard this criticism levied in the past or just not getting trapped in their South African investments, which are not growing, while the rest of the world, many parts of the rest of the world, are growing and growing much better.

Siboniso Nxumalo  01:56

Yes, Bruce, I think let's spend a few minutes on this particular topic, because, you know, at the beginning of the year it's always good to start and look backwards. And I want to talk about the dichotomy between the American market, the US market, and the South African market. And I'm going to start off with this word called "expectations", you know, a share price that we see for any company is a reflection of a set of future expectations. So, if people expect the company to do very well, then that share price will go up, if they expect the company to perform poorly, that share price will fall down. Now, Bruce, let's look at what's happening here. So, when we look at the South African market, the South African market is trading on nine times earnings if you're looking forward. And so, that is fairly cheap relative to South Africa's own history. So, it is the South African market, the JSE is looking at South African saying, okay, all this bad news? No, there's some truth in that. So, the expectations are very low in South Africa. Now, the US market, on the back of some really stellar returns last year, is trading at close to 20 times, about 19.6/19.7 times earnings. So, South Africa, low expectations, nine times, America, high expectations at close to 20 times. 

Now, the trick here, Bruce, is that the American market is actually trading at a very high multiple and it's driven by only seven stocks, what's called "The Magnificent Seven". Those are the companies we're familiar with: Microsoft, Google, Facebook, those are the companies that are driving the market. And Bruce, if you look back at history, the US market is at the point of being more concentrated now than it has been probably since 2000, the 2000 tech bubble, and then before then you've got to go back to the 1940s to actually find a market as concentrated. Now, even with that, if we delve further, when we look at the earnings or the profitability growth that is expected, in South Africa, the market seems to be expecting about 9% earnings growth. In America, they are expecting about 11% earnings growth. So, offshore, you are paying a hefty multiple, close to 20 times to get 11% earnings growth. In South Africa, you're paying nine times multiple to get 9% earnings growth. At some point, Bruce, whatever the pessimism that is in the country, you've got to look at what returns am I going to get versus what price I'm paying, and there's an argument here that actually, we might just be overpaying for seven phenomenal companies, but we're paying a lot of price. And there might be a lot of risk in that. So, I'm questioning why we're paying that much money for US companies.

Bruce Whitfield  04:45

And I couldn't concur with you more that the valuations are nuts in the United States. But in terms of - and we just had the horror story of how the DMRE is not doing its job in terms of approving licenses and applications or just rejecting out of, you know, rejecting those that are fraudulent and handing over to the national prosecuting authority. Those that may very well be crooked in the world of mining applications. They are two sides of a very, very large coin. On the one side, we are concerned about the hype and the over exuberance in the United States. On the other side, we are concerned that perhaps we're too pessimistic about South Africa. But there are lots of reasons why those valuations are as low as they are in South Africa. And why they may not recover to the level that would justify risking capital into them.

Siboniso Nxumalo  05:40

That is fair, Bruce, except when we delve into the detail of what makes the South African market, when you look at the South African market, I think close to 60% of South Africa's profitability doesn't come from South Africa, because remember, in that nine times earnings, that includes companies like Richemont, it includes Naspers, it includes the mining companies, which make money, the big ones that make money outside of South Africa. And so therefore, not all those earnings or profitability in South Africa you're buying actually is from South Africa itself. So, you are getting access to take a company like Anhauser-Busch, which is the largest beer company in the world, whose fundamentals are looking good. And so therefore, if you then strip out the global companies out of that number, the South African stocks even look far cheaper. So, things are even more pessimistic in South Africa than what the headline number I've just given you are. And so therefore, with that in mind, you are actually starting to buy some really good businesses at really discounted prices. And historically, Bruce, whenever prices get to a certain point, that's how you make money, you don't make money in terms of investment returns, by doing what is popular. You make really amazing money by actually sometimes going against the grain and saying there's value here. It's not being recognized. And when the profitability comes through, actually the market then can reward you, that tends to be very profitable, which is a good thing. 

Bruce Whitfield  07:11

Siboniso Nxumalo, Chief Investment Officer at the Old Mutual Investment Group.