Old Mutual Investment Group

Portfolio Manager, Arthur Karas, talks latest market developments with The Money Show’s Bruce Whitfield

March 08, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Portfolio Manager, Arthur Karas, talks latest market developments with The Money Show’s Bruce Whitfield
Show Notes Transcript Chapter Markers

Arthur Karas unpacks latest market performance, driven by solid commodity prices and a strong rand, which puts local markets in a better position than that of global markets currently.

Bruce Whitfield  00:00

Ja, the Foschini Group, owners of the Tapestry Group. The Money Show, the markets. Arthur Karas, Portfolio Manager at the Old Mutual Investment Group, our market commentator this evening. And I don't know if there's a safe place to hide anywhere in the world at the moment, Arthur Karas, unless you're in producing commodities as, fortunately for us, South Africa does.

Arthur Karas  00:23

It's perhaps worthwhile reminding investors in the South African stock market that in dollar terms this year, um, the JSE I think is up nearly 10% in total return turns against a minus 9% from the S&P 500. So, yes indeed, commodity economies are the place to hide at the moment.

Bruce Whitfield  00:43

Ja, and we are a good place to hide. It's also been incredibly good for our currency. And while there's a huge amount of uncertainty in the euro, at the moment, particularly weak, the dollar has also taken quite a lot of strain.

Arthur Karas  00:55

I think what it's telling us is that we are standing on the other side of a lot of things that the Russians are on. So, we produce coal, we produce palladium, we have a fair amount of agricultural product that we're having to export, and I think that makes us, it puts us into a relatively good position. 

The other thing to remember is that while we might not always have electricity, it is less of a problem than what Europe faces, where they are quite dependent on Russian gas. You know, gas, and oil is still flowing out of Russia, sanctions hasn't affected that yet. But given that the conflict appears to be escalating, that's something that people are worried about.

Bruce Whitfield  01:38

Most certainly, and we feel it very, very strongly here. Shorter, blunt question to you, Arthur Karas, after looking at the results of Massmart today, what is wrong with Massmart? I'm talking to the CEO, Mitch Slape and they need some amo.

Arthur Karas  01:52

He is trying to do something that's very difficult and that is trying to execute an operational turnaround in a very tough macro environment. So, he came to Massmart about two - some time before Covid - and he articulated what he believed was wrong with the business. An example was the fact that Game did not have a compelling customer value proposition; there wasn't a strong reason to make you keep coming back to Game. And that the company had a whole bunch of costs in the background that was duplicated across its various shop fronts. And he set off on a very clearly articulated strategy to fix those things and to revitalize the business. And no sooner had he began that, then he ran into Covid, which impacted things like liquor sales negatively. Did help Builders Warehouse, a lot of guys being sent to Builders Warehouse to buy DIY stuff to fix their homes. But it also hurt things like liquor sales, it also hurt things like sales from the wholesale business to the entertainment and tourism industry. 

So, all of those businesses hurt quite badly by Covid. And then just as the business was coming out of that, after a relatively good first half of 2021, got hit in a very major way by the civil unrest. And that put a major dent into the second half of 2022. And it's kind of,you kind of need to look through all of that, look through Covid, look through the unrest, and say have they put the right pieces in place for this business to continue growing? Just like Foschini, very focused on online, recognizing that that's where a lot of the market and purchasing things like televisions is going to. So, they're trying to grow that quite hard.

Bruce Whitfield  03:42

Are, when you look at the business of Massmart, then, is it making progress? Or is it going backwards?

Arthur Karas  03:50

I think it is making progress. I think they've made some tough decisions. So, they've accepted that Game can't be the kind of business that it was in the past and simplistically, Game is the kind of business that's going to do well when South Africans are out there buying washing machines and TV sets. And the durables market has been quite tough for a long time. It's just been a difficult place to be because prices keep coming down. A Samsung television set is the same regardless of where you buy it. It's a really, really tough place to be. 

I think that he has done a lot. If you look at the results, they've done a good job of cutting costs, I think they've made some tough decisions. They've gotten out of things like food, that nobody could really understand how Game was going to compete with the likes of Shoprite, Pick n Pay on the food side. So, they've taken those steps. And they've also spent a lot of money. They've revitalized their stores. So, if you don't spend money on your shops, keeping them attractive, you are going to lose relatively to your competitors. So, that work has been done. Whether the customer value proposition at Game can be made sufficiently attractive for that business to grow again, that is going to be a tougher thing that we're going to have to take some time to evaluate.  

Bruce Whitfield  05:00

And then relative to the rest of the retail sector, I appreciate they're not a retailer in the same sense as Shoprite is a retailer, but they do sell goods to customers, and customers make a choice as to where they go to shop. Other retailers seem to have recovered better than Massmart has. 

Arthur Karas  05:16

They have. I think that the top line has been quite disappointing. So, I think that would be the thing. If you're a retailer, you need that top line to keep growing, there's no substitute for more sales. And there's no substitute for growing the sales faster than your competitors. And it's a tough environment in South Africa, the only way generally to grow in quite a few pieces of the retail market is to take those sales away from somebody else by offering them something more compelling. And I think that's what they are going to have to do. They've got a lot of global expertise behind them. The chief executive is from Walmart. He's got an enormous amount of expertise that he can call on. And that's what we expect to see getting deployed in Massmart.

Bruce Whitfield  05:59

Thank you, Arthur Karas, Portfolio Manager at Old Mutual Investment Group. 

Commodities – a safe place in the world today
What the uncertainty of the euro and dollar tell us about South Africa
Discussing the results from Massmart
Is Massmart making progress or going backwards?
Comparing other retailers’ recovery to Massmart