Bruce Whitfield 00:01
To Meryl Pick we go, Meryl is a Portfolio Manager at the Old Mutual Investment Group. And when Evergrande was publicly revealed to be in trouble three years ago, it sent shockwaves through markets. Today, we've got a court in Hong Kong saying that Evergrande should be liquidated. And the shock waves are not present. It's almost as if this was an inevitable outcome of a tragic story of a property bubble in China that's been allowed to burst.
Meryl Pick 00:29
Absolutely, Bruce. Good evening, and good evening to your listeners. So, the muted response today, the natural place to look would be the China sensitive shares, such as Tencent and the diversified miners, looking at the commodity prices. And there's not a marked response today. I think it's been clear that the Chinese government has had several chances to step in and re-stimulate the property sector, certainly, if they had wanted to orchestrate a bailout for Evergrande, they would have done so by now. One of the themes that we've had as a negative theme for commodities is actually the peak of this property cycle in China and most likely going to be a protracted slowdown in in that sector, which will weigh on commodity demand.
Bruce Whitfield 01:26
It was quite strange today to look at all of the sectors on the JSE. The one sector that actually held up quite well was local property shares. And, you know, I found that ironic, considering the scale of what is being proposed in Hong Kong for Evergrande.
Meryl Pick 01:42
Certainly, property sector in South Africa has naturally been underperforming, has been underperforming for quite some time, and is coming off quite a battered base, shall we say. And I think, although we didn't see any talk of rate cuts at this past NPC meeting, looking ahead, for South Africa, certainly it feels like a matter of time. And we should see rate cuts at some point this year, which would be positive for all the interest-rate sensitive sectors. And in particular, there are certain segments of SA property where there is a lot of value on the table.
Bruce Whitfield 02:27
In that environment, though, in an environment where the South African economy, of course, is going nowhere in a hurry, where we are seeing vacancies rise in some shopping centres, not all, it just strikes me that this is a very fragile environment to be building any kind of real case for optimism until we get a clear sense of how aggressive the Reserve Bank is prepared to be in reducing interest rates and when in particular, it will do so.
Meryl Pick 02:52
Yes, I think the timing of cuts, as well as the scale of cuts, will matter. It's not entirely dependent on our own economy, the Reserve Bank will be looking to the Federal Reserve in the US in order to stay in sync and protect the Rand. But, you know, astonishingly, when we look at a lot of the retail trading updates and results that we've seen over the last six months, there seems to be a rather resilient - no pun intended - commitment to add space. Space is still growing around half a percent, one percent, still ticking along. So, you know, whether that is a further consolidation of the sector, or whether it’s a response to new space that has actually been added, you know, time would actually tell. The loadshedding base is a bit easier going into this year, and that certainly hit both retailers and landlords alike. So, cash flows should be incrementally better going into 2024. And any alleviation on the interest bill falls to the bottom line.
Bruce Whitfield 04:06
And again, I mean, you're a specialist in the retail sector, you look at the retailers very closely, they've all come out with trading updates in the last 10 days or so, we get a picture of a really battered, a really bruised retail sector, but a sector that seems to have managed the considerable pressures of the last three and a half years quite effectively in terms of weathering the difficulties around electricity, weathering the South African consumers decline, and weathering this very high inflation and interest rate environment that we all have to endure, but they seem to be enjoying it better than most.
Meryl Pick 04:44
Yes, and the question is whether this is going to be the trough year. Perhaps everyone is optimistic in January and as the year unfolds, we might be disappointed, but there are some reasons to be optimistic for this year. We do expect to see peak interest rates, although calling the exact timing is difficult. The instances of stage four, stage six, the threat of stage eight loadshedding seems to have dissipated for now, although attention has shifted to port congestion, so there's always an issue. And I think what we see the South African retail sector, both in food and clothing, these sectors are quite all oligopolistic. So, the weakest, more independent franchisees or single store owners, those are the ones that fall over first and some of the small scale M&A might continue just to prop up the earnings line.
So, we saw Truworths report today, quite strong cash sales, very flat credit sales, but they are in control of that and can certainly open the taps if we see interest rates falling later in the year. So, they have all weathered the storm, very weak sales growth hasn't been a great place to be, but they have survived potentially the toughest part of the cycle.
Bruce Whitfield 06:12
It's astonishing, isn't it? I mean, they've done okay, but they need a little uplift like we all do. Meryl Pick, who's a Portfolio Manager at the Old Mutual Investment Group. Thank you, Meryl, for joining us this evening on The Money Show.