The Money Show Interview | Market Insights

Meryl Pick delves into the recent market dynamics, including the recovery bounce on the JSE after a series of challenging days and the complex interplay of global commodities. With a focus on China's growth trajectory, Meryl offers insights into the challenges faced by regulators and the potential impact on the economy. From the intricacies of consumer-led growth to the implications for global markets, we explore the multifaceted landscape of investments. 

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Chapters

• 0:03 The recovery bounce in markets, but commodities are still under pressure
• 1:02 Meryl Pick unpacks China in the headlines
• 3:53 Discussing results from Tungela
• 7:04 Discussing results from Curro

Transcript

Bruce Whitfield  00:03

To Meryl Pick we go, who is a Portfolio Manager at the Old Mutual Investment Group, Meryl is with us on the line from Cape Town. It was good after days and days and days of obliteration of shares on the JSE, wiping out all of the gains so hard won during 2023 last week. We had a bit of a recovery bounce today, Meryl. 

Meryl Pick  00:25

Good evening, Bruce, and good evening to your listeners. Yes, a recovery indeed, rather broad based but perhaps somewhat skewed towards the resources and the financials, with certain sectors still taking pressure, precious metals in particular still under pressure today,

Bruce Whitfield  00:48

Commodities generally, though, I mean, that's a global demand thing, isn't it? With China sort of slowing down to a retreat. It's hard to see how the commodity prices get any kind of support anytime soon.

Meryl Pick  01:02

Absolutely. You know, I think China is dominating headlines last few days. You know, I think the expectations coming into 2023, a big theme, certainly that we had conviction in was that we would have a desynchronized growth for the year, you know, that the US, Eurozone, and developed markets in general would slow down. But that Covid reopening of China, post-Covid reopening of China would offset some of the sogginess and softness creeping into global growth. And I think while the Covid reopening speed exceeded people's expectations, Chinese growth has not. And we've seen a mild response from the regulators, they're trimming rates by 15 basis points. But they do seem to be stuck between a rock and a hard place, the usual playbook of stimulating the property market, which is obviously very commodity intensive, has got issues because they are really trying to reform the property sector with a long-term view. So, how do they this stimulate the economy without reversing the progress on cleaning up the property sector. That is the challenge.

Bruce Whitfield  02:33

Yeah, it's huge. And it's been - things has been slumbering for a decade or more. We've just been waiting for a catalyst for it to break. And I wonder if this is that moment.

Meryl Pick  02:46

Well, time, you know, time will tell. I think our view has been that any recovery in China will more likely be consumer led. So, we've seen that play out, to some extent, you've seen performance of Tencent and Richemont hold up this year, you know, and that's the property sector is structurally challenged that that traditional playbook that we've seen from China simulating through property, we would not see a repeat of that. So, so far that has played out and it's played out through the resources counters, as you mentioned. And we also, you know, it's got broader implications for, I guess, the level of global growth, as I mentioned, which is why our stance has been to prefer more defensive positioning, the likes of British American Tobacco, Anheuser-Busch, because without China, this huge growth engine to bail out global growth, the global growth level could actually be under stress for the remainder of the year.

Bruce Whitfield  03:53

Tungela results today and hopefully we'll catch up with July Ndlovu, the Chief Executive, but the Financial Times encapsulating it very well in an article that has just been published on their site. Thermal coal producers Tungela hardly lived up to its Zulu name, "to ignite", when it listed in Joburg and London about two years ago. Global miner Anglo American spun it off, because of its vulnerability to South Africa's political risks. The loss making group accordingly did not set the investment world alight. Not much has changed since then. It's quite a damning indictment of a company that after a real boom of supplying un-mothballed coal fired power stations, you know, immediately after the attack by Russia on Ukraine, that the times are tough again.

Meryl Pick  04:38

Quite. You know, so I think earnings are down some 70%. And really, Tungela was the beneficiary of skyrocketing coal prices last year, as you mentioned, related to the Russia Ukraine invasion and the impact of that on energy prices globally. So, you know, we saw a resurgence in demand for thermal coal, particularly in Europe, and constrained supply. So, I think the constrained supply part of the story is not going away, and this is long-term theme, due to ESG and climate change concerns. Definitely, there's been under-investment in this as a commodity. Most miners have come out and said, they're not going to reinvest in new capacities going forward. There's been limited investment in new coal fired power stations as well outside of Asia. But we saw delays and we saw multiple things being reopened last year. So, with that being said, South Africa has its own specific issues. Transnet being one of them, and Tungela's fate is tied quite strongly to Transnet's performance. So, what is the volume that we can export even versus what potentially could be mined? Then we know that the operating assets are not, you know, on the lower end of the cost curve, these are not amazing assets in terms of operating performance. But given where coal prices were, that did not matter, for about a year. And now with coal prices falling, you know, those specific issues are coming back to the fore, they're still trading on a healthy dividend for generating some cash. But certainly, any resurgence in and pickup in demand and pickup in coal prices, which is still possible, given Europe's fragile gas supply, it is possible if we go into a cold winter that you could see a spike in oil price, etc. But I think they're not going to see a repeat of last year.

Bruce Whitfield  07:04

It's highly, highly unlikely. A quick thoughts on Curro, the private education business, seems to be in far better shape today than it was a year or two ago.

Meryl Pick  07:13

Yes, one of the few, you know, SA Inc counters that still delivering resilient results folder, still delivering growth. And in all likelihood, the long-term structural theme of needing to access private education, you know, I think that is something that is there to stay. So, there is some resilience and they have found a new base there. So, positive results from an SA Inc counter. 

Bruce Whitfield  07:43

Which is really good to see. Thank you, Meryl Pick, Portfolio Manager at the Old Mutual Investment Group.