Old Mutual Investment Group

Portfolio Manager, Siboniso Nxumalo shares his latest insights on market news with The Money Show’s Bruce Whitfield

February 15, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Portfolio Manager, Siboniso Nxumalo shares his latest insights on market news with The Money Show’s Bruce Whitfield
Show Notes Transcript Chapter Markers

Siboniso Nxumalo unpacks this week’s jittery markets driven by concerns around war in Russia and global inflation, as well as discussing the surprising strength of the rand and results from Shoprite, Spur, and Dis-Chem.

Bruce Whitfield  00:00

...ultimately, because he's got a garage. The Money Show, the markets. 

Steinhoff is arguing in court filings that it's got emails that were written by Markus Jooste, the former chief executive, and Sanlam says that proves that he was part of a fraudulent scheme that led to the retailer being swindled out of hundreds of millions of rand. And these email extracts are part of a court case that is being brought against a guy called Malcolm King and his son Nicholas, they've got a company called Formal Holdings. And there are two Steinhoff subsidiaries that are suing Kings in a British court for about 1.6 billion rand, saying that the Kings' business, Formal Holdings, colluded with Markus Jooste to get money out of the retailer and there was a series of sham loan agreements. 

Curiouser and curiouser around Steinhoff, of course, as the details emerge of what led to the very near implosion of the entire business. 

Siboniso Nxumalo is a Portfolio Manager at the Old Mutual Investment Group, and there's nothing like the twin risks of war and inflation, Siboniso, to wreak havoc in markets.

Siboniso Nxumalo  01:13

Yes, Bruce, good evening to you and your listeners. The market was on a risk-off mood today. There's two worries. The first worry is war in Russia, obviously Russia invading Ukraine, that's got the market a little bit jittery. But the other risk is global inflation. We saw in the US. that inflation CPI was basically at levels only seen 30 years ago. And so therefore, the market is a bit worried. 

But these two things, Bruce, although completely unrelated, actually drive the same stocks, in that Russia is a commodity producer, much like South Africa. So, especially in the platinum group metals, and so therefore, hence we saw gold companies flying. That did well, Gold Fields up 11%, Anglo Gold up 8, Harmony up six. And then we saw the platinum miners, Impala up almost 2% also. And so, we saw those counters go up. And obviously Sasol was up 4% because of oil, Russia is also an oil producer. 

On the other side, Bruce, the financials in South Africa, well, those took a little bit of a hit, which is what happens when it's risk-off and the markets are jittery. So, we saw Old Mutual down 4%, Sanlam down 2%. And then, in the industrial side, Naspers and Tencent continue their most disappointing performance, which has been more than a year now. Naspers down 4.6% and Prosus down 3.4.

Bruce Whitfield  02:37

Ja, it's pretty rough. I mean, those old bellwethers, it's been particularly rough, as the commodity cycle has taken over. But it's this - the fear of inflation in the United States I find so interesting. And I mean, we saw inflation at seven and a half percent on Friday. And that is leading to lots of talk of very high and speedy interest rate increases in the United States. Ordinarily, that would have been absolute agony for the rand versus the dollar, but the rand has actually not only stayed strong, but had a remarkably good week last week, and has built on those gains over the last 24 hours or so.

Siboniso Nxumalo  03:12

Yes, it has, Bruce. I mean, I think this is actually very interesting, because obviously we're quoting the rand relative to the dollar. So, it's being referenced to the dollar. So, it's always important to look at what's happening to the dollar. And if you think about it, over the last few - actually, over the last few decades, as money has become cheaper and cheaper. So, in terms of interest rates, that's the price you pay for money. Interest rates have obviously going down in the US structurally for a couple of decades. And then money has also been freely available, especially after Covid because the central banks did what's called monetary and fiscal stimulus. So, it flooded the market and actually physically gave people money. So, money has been abundant, and money's been cheap. 

Now, inflation changes both of those two things. The Fed are coming and say, well, we need to retract some of this money we've given, and money is going to cost you more. Now, that changes things. It means consumers have less money to spend, it means that actually, there are a little bit more question marks. How does that relate to the rand? Well, actually, if you look at how much money has been pumped into the US economy by the Fed, that actually usually causes wobbles in currencies. And I think the dollar is starting to head to that point where there's so much debt that's gone into the system, especially in the last two years, that actually that dollar is not behaving the way one would think normally.

Bruce Whitfield  04:35

Okay, no, I get you. That's an interesting sort of view, I think, on the sort of trends that the rand may follow this year. Talk to me about Shoprite, please. I mean, it is in the food retail sweet spot. It's everybody's favorite food share. Shoprite is doing an awful lot right. 

Siboniso Nxumalo  04:53

Yes, but let's start at the very beginning. So, Shoprite obviously had Whitey Basson, who ran a phenomenal business. In 2017, they appointed a new CEO, who was the COO in Whitey's time, called Pieter Engelbrecht. And Pieter came in, and Pieter and his team have done a fantastic job. And us as long-term investors love companies like this. They came in, they invested in systems, they changed the business, they simplified the balance sheet, which had debt. Then they also said, hey, there are these regions in Africa that we need to exit. So, they took a lot of pain and the market criticized them. 

And Bruce, all of a sudden, we're seeing them issue trading updates, where they're saying the earnings are going to be up between 20 and 26%. Very strong. They've innovated with the Sixty60. But again, great management, who took hard decisions up front, and now it's paying off. And actually, these guys deserve all the credit. And so, this management team has done well. And our clients have benefited on the back of them.

Bruce Whitfield  05:54

And what about Spur? I mean, that's under new management, of course, and Val Nichas who came out of the Famous Brands group, they are still 9% below where they were before Covid.

Siboniso Nxumalo  06:08

Yes, Bruce. Now, this is clearly a very, very tough sector, because you can see that on a six month to six months basis, that the Spur Group is running around 30 or so percent in terms of growth. But the issue here that I think we're facing, is that people haven't really gotten comfortable to going back to restaurants again. And so, that's going to take time to recover. So, just like we've seen other companies recover. 

So, for instance Bruce, Nedbank just recently actually showed us their trading statement, and in December, Nedbank came out and said on the fifth of December, earnings would increase by 90%. But now, Nedbank, just as markets closed, are saying actually, things have gotten better. They say on the backfoot of stronger than expected performance in the last few months, earnings are going to be up 108 to 118%. So, Bruce, clearly here, there are companies that are recovering and doing well. And there are some that are really struggling and probably Spur fits into the latter.

Bruce Whitfield  07:11

And then finally, I think, Dischem on the day as well, really nice revenue growth coming through, lots more footfall going through malls. And so, lots more spontaneous visits into the pharmacy supermarkets that Dischem runs. 

Siboniso Nxumalo  07:26

Yes, Bruce. I mean, this is also a fantastic business. We love this business. And for the 31 weeks to January, I mean, they said revenue's up 15.3. And it sounds good. But part of that is they bought the Medicare Pharmacies. And so, that acquisition messes up the numbers. But actually, so, the truth is on a like for like basis that you're comparing it from last year to this year on the same number of stores without Medicare, they grew about five and a half percent. 

One of the things that they say, Bruce, which is interesting here, was that they talked about a less severe Omicron variant fourth wave, and therefore people then consumed less preventative healthcare products, so including vitamins and pharmaceuticals in December and January. So, that weakened their performance a little bit. And we saw something similar with Clicks, in that clearly this Omicron, we're getting feedback now that this really wasn't as bad as what had been previously thought. And we saw that in the numbers of a company like Dischem.

Bruce Whitfield  08:23

So, they've come through very, very strongly. Thank you, Siboniso Nxumalo, who is the Portfolio Manager at the Old Mutual Investment Group. 

Steinhoff and the emails written by Markus Jooste
The impact of the worries of war and inflation on the markets
A closer look at inflation in the United States
Discussing Shoprite and their success
Discussing Spur and their continued struggle
Discussing Dischem and their success