In April 1997, David Shapiro was my very first guest on the very first daily business programme to hit South African airwaves. During the decades since, for most of that time we’ve worked together daily. So it’s an understatement to say we’re relaxed in each other’s company. Sometimes too relaxed as you might pick up from our chat on CNBC Africa’s Power Lunch today. We were chatting off air about Sun International expanding its investment into Chile‘s Monticello Casino and when the camera switched back on, simply kept going. That’s why the first minute or so of the video might not make sense. Sorry. David’s always full of ideas, information and fun. He was particularly informative today, drawing on his experience and research to argue that the JSE’s bull market has only just begun. Even though share prices have been on a tear, his logic makes a lot of sense. – AH
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ALEC HOGG: Today, David Shapiro from Sasfin is with us in the studio. David, Sun International…Chileans…we can invest in Chile, but we don’t want them to invest here.
DAVID SHAPIRO: No. In fact, one of the reasons…
ALEC HOGG: Maybe if they had, Brian Joffe would be a happier man today.
DAVID SHAPIRO: You mean if CFR were the investors. I think so. He’s probably cursing what he did, but he’ll get it right. I have no worries about it.
ALEC HOGG: It will take a while.
DAVID SHAPIRO: It will take a while. It has a good name – some good brand names there.
ALEC HOGG: We’re talking Adcock…
DAVID SHAPIRO: We’re talking Adcock Ingram, not Bidvest. In fact, their year ended on June and I’m sure Joffe will deliver another 10 to 15 percent consistently good increase in earnings. It’s very interesting to see Sun International expanding outside. Why I say that… It’s because of that reason that the JSE is at its all-time high, because so many of our companies have expanded beyond our borders and are now…
ALEC HOGG: You’ve done a lot of work on it.
DAVID SHAPIRO: I’ve done a lot of work on it.
ALEC HOGG: What percentage of the JSE would be accounted for?
DAVID SHAPIRO: I looked at the top 50 shares and of that, round about 75 to 80 percent are Dollar earners. In other words, they’re either selling their product to an overseas consumer like the platinum companies, Kumba iron ore. Alternatively, they’re operating outside like Sun International’s Monticello or alternatively, British American Tobacco, SABMiller, and Richmont.
ALEC HOGG: How much of that is earned outside the country, rather than…?
DAVID SHAPIRO: I reckon around 60/70 percent. I’m using the weighting though, of big companies like British American Tobacco. In terms of the number of companies, it’s difficult to gauge.
ALEC HOGG: When Glencore comes into the JSE’s index…
DAVID SHAPIRO: When they come into the index then it’s going to throw that even further. We are an international index and we are benefitting from an investment point of view, from the growth of the turnaround that we’re seeing in the international economy as well. That’s why we’re at a high. Alec, if you look… Yesterday, we had the US, UK, European, and even the Chinese manufacturing indices in positive territory, meaning that people believe they’re in an upswing. The South African one was in a contraction phase.
ALEC HOGG: It’s just as well we don’t have a JSE that only has South African companies, otherwise savings would be under pressure.
DAVID SHAPIRO: We would be under pressure. But what we’re finding is that because those markets are going – the rising tide lifts all – and if you look at South African companies, we’re paying a lot more for earnings now than we did five years ago. In other words, there’s a rating increase. We’re expending/paying a lot more, which is a price earnings multiple. What we’re doing now is… For example, Investec: a few years ago, in 2009 you might have paid ten for R1 of earnings. Now you’re paying 15 or 20 for R1 of earnings.
ALEC HOGG: David, this argument that the JSE – and it has been hitting new records consistently – is overpriced: you don’t buy it?
DAVID SHAPIRO: No, I don’t buy it as a totality – in other words, as whole. I think we’ve got a lot more to go.
In my view, we’re only starting the bull market now – globally.
I think we’re starting to pick up momentum. Yes, it’s always a worry sign when it starts to gather momentum because you know that there’s only a year or two left, and I don’t even think that if it does come down that it’s going to be a dramatic fall because we’re in line for interest rates remaining low for a long time.
ALEC HOGG: We’ve had an enormous run.
DAVID SHAPIRO: In my view, it’s been a relief rally rather than a proper rally. What gives me encouragement is that probably, there are as many bears out there as there are bulls, and I’m sure you’ve had them at the table here – people who are sceptical about the recovery, sceptical amount American debt, sceptical about what (ECB Governor) Draghi is doing, and what (President) Abe is doing in Japan etcetera. There’s still a lot of nervousness (and correctly so) because we are indebted, but I think against those interest rates, will remain low as we unwind the debt over years.
ALEC HOGG: So a bull market – a real bull market – as both of us know that’s when there are only bulls in town. When the bears have run away. There are enough bears now to say ‘hang on. This market can go a lot higher’.
DAVID SHAPIRO: Exactly and when everybody’s bullish around the table – that’s the time we say…
ALEC HOGG: We start to run.
DAVID SHAPIRO: And do it slowly, Alec. Don’t tell everybody you’re going to be doing it.
ALEC HOGG: Exit one at a time. DAWN is a little company that did a deal today. Did you look at it?
DAVID SHAPIRO: No, I didn’t. I like DAWN. I’ve always liked them because they’ve always been a good measure of what’s happening in the construction industry as well. They’re suppliers of goods – I think toiletries, toilets, and those kinds of wares – so it’s always a nice gauge to see how they’re doing. It’s like an E-tail type.
ALEC HOGG: Did you see Naspers hitting a new high again today?
DAVID SHAPIRO: I know. They’re doing a lot of deals.
ALEC HOGG: We’re on the side of the optimists. Certainly, when I came back from Davos, if you recall I said ‘man, this is stock you have to have in your portfolio’. It just kept on going, gone up by 30 percent since January. It’s really run hard.
DAVID SHAPIRO: That, together with your friend Markus Jooste, who I’m finally gaining confidence in (that he’s doing the right thing).
ALEC HOGG: He’s an Afrikaner boytjie. They’re doing okay, aren’t they?
DAVID SHAPIRO: He’s moving his head office from Stellenbosch to Frankfurt. I’m not sure how the other Mafia are going to feel about that.
ALEC HOGG: That’s interesting. The centre of power in South Africa is currently in Stellenbosch.
DAVID SHAPIRO: You’ve got to believe it.
ALEC HOGG: Perhaps if we see Johann Rupert moving to Frankfurt, and then Christo Wiese and Jannie Mouton, from their Stellenbosch headquarters, and GT Ferreira – then you would know Frankfurt is the new headquarters of SA Inc. Wouldn’t that be something?
DAVID SHAPIRO: Emotionally, I think they’re still in Stellenbosch and I still think they move there because Johann is in Zug with Richemont.
ALEC HOGG: How often does he spend in Zug versus Stellenbosch?
DAVID SHAPIRO: No, he’s in Stellenbosch. You saw the deal yesterday. Did you see his brother-in-law at La Motte, supplying wine to the Chinese? They went there for lunch apparently.
ALEC HOGG: Just say this again.
DAVID SHAPIRO: La Motte is the estate. Apparently, this is Johann Rupert’s brother-in-law. Apparently, the Chinese went there for lunch a couple of months ago. They were so impressed that they put in million-Rand orders for the supply of that wine, to them. It’s going to be a great export market for our wines.
ALEC HOGG: It’s not the first. I remember Hein Koegelenberg was on this program, telling us about how he is exporting aggressively to China.
DAVID SHAPIRO: Isn’t he La Motte? Isn’t that the…
ALEC HOGG: David, you know I don’t drink, so what’s the point in asking me about booze? Twenty years ago – maybe. There are these little pockets of excitement. (Note: David was right; Hein Koegelenberg is the CEO of La Motte and is married to its owner, Johann Rupert’s sister Hanneli)
DAVID SHAPIRO: We have an incredible private sector – very innovative – and that’s what keeps us going. We can’t fault our businessmen. They manage to pull out great results regardless of what’s happening in the economy.
ALEC HOGG: But maybe it’s because they are looking elsewhere. Maybe it’s because they’re making that money outside the borders of this country, where it is difficult.
DAVID SHAPIRO: It is, but that’s the innovation and you have to hand it to our companies for doing that.
ALEC HOGG: So where are you putting your money now, Dave?
DAVID SHAPIRO: I’ll tell you what worries me about that (if I can say), while it’s great to be an investor, we’re creating economic value outside. We’re creating jobs, and what comes with those jobs. In other words, we’re using the services outside and that’s what worries me about this move outside. Where am I putting my money in the global economy, in a turnaround global economy, middle class rising in India, middle class rising in China, spending money on wine, and on luxury goods?
ALEC HOGG: A lot of things that we produce.
DAVID SHAPIRO: There’s still great benefit if we can just get the politics right.
ALEC HOGG: So if you were – and I’m sure thousands of people invested in Satrix or one of the index trackers – if you were there… You’re not worrying now. You’re not trying to catch…
DAVID SHAPIRO: No, you stay there. British American Tobacco, Richmont, SABMiller, and Billiton. Remember, Billiton is also restructuring itself. You have Naspers. You have companies like Mondi who are doing brilliantly. You have Markus Jooste, now starting this…
ALEC HOGG: They’re all offshore. They’re all doing their bit outside of South Africa. Who’s doing well in South Africa?
DAVID SHAPIRO: I would say Famous Brands. I like Famous Brands. I think Kevin Hedderwick is a very bright man – and that’s more supply chain. He’s building up outlets and he supplies them with the cheese and the milk etcetera.
ALEC HOGG: So as we get all this money going into the lower income groups through a social net, quite a few people are using that to buy Kentucky Fried Chicken or Hedderwick’s products.
DAVID SHAPIRO: Yes, and they’re also using cell phones. Vodacom…we saw Neotel. I think that’s a great deal. I know the Competition Commission hasn’t approved it yet, but I think Vodacom and Neotel’s going to really turn things upside down. There are very good businesses. I don’t do a lot in small caps and medium caps, but I think if you did below that, you’re going to find some excellent little opportunities.
ALEC HOGG: Well, that’s a nice way to start the program, isn’t it? That was David Shapiro from Sasfin, putting a smile on everyone’s faces. You don’t have to go out there and sell your index trackers. You don’t have to worry about the way the equity market is performing. Mr Shapiro says the bull market is only just beginning.
