Following a shaky start to the week, Meryl Pick discusses what currently has markets spooked, including rising tensions in Europe and plunging prices for Tencent, Naspers and Prosus driven by renewed fears around Chinese regulations.
Bruce Whitfield 00:01
Meryl Pick, a Portfolio Manager at the Old Mutual Investment Group. A down day across the globe today, Meryl Pick, and I don't know if it's cyclical, I don't know if it's all to blame on Vladimir Putin. What's your perspective on the sort of ups and downs and twists and turns and roundabouts of markets at the moment?
Meryl Pick 00:25
Ja, good evening, Bruce, and good evening to your listeners. I think - what I always say, you know, we look at two elements in our process, the one being scene and the one being price. I think, for a long time, we've been seeing the price elements of markets being quite elevated. And what that means, is whenever there are jitters like, as you say, Putin and geopolitics and the risk of an invasion increasing, it doesn't take much to spook the market when prices are already elevated, because those high prices imply great expectations of global growth.
So, something like rising tensions in Europe stand to threaten, you know, global growth, and that would obviously depress company profits. And those prices are no longer than justified in a scenario like that. So, I think that could be it. I think within our markets, there being some specific things like Tencent's move affecting Naspers, for example.
Bruce Whitfield 01:33
Explain Tencent, please. Because Naspers and Prosus, which were companies you could not be without, are not companies you want to be with, and certainly not for the last 12 months. They've actually be massively negative for the overall market. And it's all to do with Chinese regulators getting a bit antsy in the way in which Tencent operates almost with - who has operated like many other Chinese tech companies, almost with free rein in what is usually quite a tightly regulated economy and society.
Meryl Pick 02:03
Exactly. Exactly right, Bruce. And I think... um, so what we've seen today, Naspers, Prosus, both down around 8%. Tencent being the biggest underlying asset, down 5% in Hong Kong. And we've seen an onslaught of tightening regulation over the last... probably more than 12 months, more like 18 to 24 months. So, we've had regulation on - first as a risk a few years ago, and then as a team, as we started to see tightening across, for example, at one stage, the content of gains was regulated to be more patriotic, or to reflect contents that the Chinese government would rather have the population engaging in, relief as those games were throttled. We then saw regulation moving into payments, into education, into healthcare. Some of these effect Tencent, some of them don't.
Last week, the bigger news was not a crackdown yet, but an announcement, a warning, that anyone who was thinking of investing or funding new business ventures in the metaverse space, you know, within the tech space, so your virtual reality space, should proceed with caution. So, that has been viewed as a warning shot that that is the next area within tech that will face regulation, regulatory scrutiny. And it is also an area which all tech companies globally are expanding into and is expected to be the new growth area, to the point where Facebook has literally renamed itself Meta because this is expected to be the big next driver of growth within tech, the metaverse and the expansion of the metaverse.
But the Chinese government seems to be signaling that it does not necessarily want to see growth in the metaverse. And there's all sorts of reasons for that, as you mentioned, the monopolistic behaviour of tech is one thing. But I think also just the type of tech that China seems to want to encourage is a move away from entertainment-based, such as gaming, AI, towards the more hard tech, semiconductors, you know, electric vehicles, that's where it wants spend to go.
Bruce Whitfield 04:28
And, I mean, real technology, not just fun and games, and that's the sort of business of course, that Anglo American Platinum is in, supplying metals into that hard technology sector. And just look at the huge dividend payment that was made by Anglo American Platinum today. There's a very nice theme there for them to be trading on, I suppose, as China looks to transform that economy and there's demand for these platinum group metals. Certainly, it doesn't look like it's going to abate anytime soon.
Meryl Pick 04:57
It doesn't. I think a lot of it in the short term depends on the recovery of global automotive production. We've seen shortages in or halting of car production as a result of semiconductor shortages. And then at the same time, we were seeing a lot of investment in semiconductor capacity. So, we expect that to be a short-term problem. And once global car production normalises. there's a pent up demand for vehicles.
I think the longer-term outlook will depend on how, for example, the hydrogen economy evolves. If the hydrogen economy becomes a very key part of the decarbonisation journey, which China's definitely trying to lead globally. That will bode well in particular for platinum demand. The risk is that electric vehicles, you know, proceed at a faster rate than the hydrogen economy develops, which would then curtail demand.
But yes, some of our analysis shows that the minerals required for that will also prove to be a bottleneck in the - so, in the short term, the prospect for our platinum producers is great. And they have a lot of control over their destiny at this point, because they are choosing to be disciplined with supply and not flood the market with new answers, which is actually supporting very elevated prices. The risk was... at any time when prices are this high, they are quite elevated relative to history. So, you'd look at that long-term perspective and think the risk here is that at some point, prices revert, but certainly in the very short term, they do have more time to start - to continue delivering back to shareholders the way that they have.
Bruce Whitfield 06:49
And a quick thought on the results today out of Sasol, I find them... I mean, operationally, I think quite strong but still not paying out a dividend. Some worries there.
Meryl Pick 07:00
Yes, so, first share price is down 3% today, I think probably a fair amount of investors were expecting a dividend, given the high oil prices and record high chemical prices in profits, for example in the US space, chemical prices, or plastic prices basically, are very high. I think there are two reasons for some of the disappointments.
One, because of the balance sheet fragility over the last few years. While they were still finishing off the Lake Charles Project, a lot of debt on the balance sheet, the decision was taken to hedge the oil price, meaning that they are not realising the full benefits of oil being at 80/90 dollars. They've capped that off somewhere around $70. So, there's some of that cash flow which they've effectively forgone for the safety and security of what if oil falls back to 40/45/50, and then we cannot meet our debt repayment. So, they took that decision to forego some of the upside on oil in order to just ensure that they can remain solvent. You know, right or wrong decision, easy in hindsight to say that it was the wrong decision, given where oil is now, but at the time, one can say that was a prudent decision. But that means it's not flowing through into cash flow as automatically as one might think.
The other issue is some production reliability issues in the local mining business, which of course, is a cost advantage and feeds Secunda and allows them to be profitable. So, there, they're not as profitable as they should have been. Because they've had to go and buy in external oil at a higher price than what they can mine it under normal circumstances. So, those coal supply issues are a negative theme. However, I do expect that to be a rather short-lived theme and they've outlined how they expect to address that. So, I think Sasol is still attractive at this current price given where the oil price is.
Bruce Whitfield 09:03
Thank you, Meryl Pick, Portfolio Manager at the Old Mutual Investment Group.