WEBINAR: South African politics steals the show

The Biznews Global Share Portfolio is built on Warren Buffett principles, and over the long term the market noise doesn't take away from the fact that all the stocks held, are well run companies. Alec Hogg takes us through the performance and current position of the portfolio, providing a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Barclays, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing. – Stuart Lowman.Stuart Lowman: Welcome to the Biznews portfolio update, I have Alec with me from London, Alec good to have you here..___STEADY_PAYWALL___.Alec Hogg: As always, it's nice to be with you Stuart..Great, as per usual guys and girls, please questions on the right-hand side. We're really keen to have an interactive session and see how it goes. A lot has been happening on the local front..Yes, once again there's no doubt that we're going to have quite a lot of political questions, so let's get those rolling and we only give ourselves half an hour, so if you have a question, stick it in quickly and we can pick up on it. Remember this portfolio was designed to offset the vulnerability that South African investors have to political developments living in a developing country, which is defined by the reality that politics trumps economics. Therefore, even though the economic consequences of decisions sometimes are baffling to the politicians, they go ahead and do it anyway because that is what happens in a developing country. This developing country has just been through a very traumatic 48 hours with first of all the breaking news that Pravin Gordhan was summoned to appear before the Hawks this morning at 11:00..He didn't and the result of all of that was that he drew a line in the sand. You might remember Pravin Gordhan had actually twice before drawn lines in the sand. The first one was when he said that if the head of South African Revenue Services, Tom Moyane was not fired or did not leave, he would resign himself. Well, Pravin didn't resign and Moyane is still there and then we had a similar situation with a proposed reshuffling of the board of South African Airways, which is run by a secondary schoolteacher who also happens to be very close to Jacob Zuma. She is the chairman of the Jacob Zuma Foundation. That didn't happen and Pravin Gordhan still stayed, but this time it appears as though he said "This so far and no further" and this time Jacob Zuma blinked..We've just had an announcement from the presidency to say that Zuma gives his full support to Pravin Gordhan and you can expect that the Rand will recover as a consequence of this. Of course, in the last 48 hours the Rand has taken a big hit. We've gone from around about R13.25 to R14.10 in the currency. The currency did improve a bit after that statement from the presidency came through but it's back now around R14.09, so one of the reasons why we have this portfolio or encourage people to invest offshore is exactly to overcome the developments of the last 48 hours. How has it been going in the portfolio? Well, you can have a look at that. We've been going here since the early December 2014 and the annualised return on the portfolio has been 25 percent..That's not the total return; it's higher than that, but the annualised return, (in other words the amount that has been generated in the 20 months divided by 12 to bring it down to that number). The primary reason for that has been the inspired or we would think fortunate selection of Amazon into our portfolio. It was one of our share tips that we thought was going to do okay. Well, it's done a whole lot better than okay and what was ironic here was that it bumped along for quite some time but it has trebled in value and as a consequence of that, it would be enough to lift any portfolio. The other big winner on the portfolio no doubt has been the Rand, which itself has declined at an annualised rate of 15 percent over the period and Alphabet, which is the old Google, (a company that we believe has a perfect model), that is another big winner..The other four stocks of the eight that we have in the portfolio, we decided to put about a third of our portfolio initially into an index tracker in the United States, the Vanguard Fund. The reason this was selected is, because it's very low cost and it only generates around five basis points in fees, in other words, one twentieth of one percent is what it costs you to participate in the Vanguard Exchange Rated Fund on the S&P 500. That's really just bumped along, it's up marginally over the 20 months..Nova Nordisk, which had a big setback, (we'll talk about that later), to bring it back to the market in line with the market, that's one of our share picks, IBM and Berkshire both of which have lagged for a period but have now come back into line with the portfolio generally and then our two losers were the late inclusions, Apple and Barclays, but both of those had pretty good improvements in the past months, so they're looking a lot healthier. This is just to give you the figures in Rand terms because this is really what matters as far as South African investors are concerned..As you can see we started off with a portfolio of about $200 000, just over R2mn and the annualised return, due in a large part to the Rand's decline began there, you can see R11.27 is what it cost you to buy a Dollar when we started the portfolio and now you will have to be paying R14.15 or certainly that was the price this morning before yet further drama in the whole political issue. Never forget that. We're in a developing country, you have to remember that you're exposed to political vagrants or political turbulence that can affect your currency, and hence you need to invest abroad. The Pound, we brought that in on the 28th of April when we bought into Barclays. It was before Brexit, you will remember and subsequent to Brexit, the Rand in fact depreciated to about R24.00 against the Pound and then appreciated all the way up to its current R18.69..In fact, it was in the R17.00's before the latest turbulence over Pravin Gordhan and to the Hawks to the latest figure, R18.69, so we bought into Barclays at a Rand price of just under R21.00. We're now being affected because of the Rand at R18.69, but what is interesting is Barclays took an awful hiding after Brexit. It went down into in fact, just around from a purchase price on our side of £1.74; it got to around £1.20. It has now improved considerably since then to £1.67, where it is at the moment. You can add one penny to that as a dividend. You'll see also that we have quite a few dividends coming through in this latest month's figures. If you're following us, you'll see some nice cash coming into your account..Prices at opening versus prices today, there they are and it's very easy to see here where the performance has come from in this portfolio. This is the Rand price as against the time of inception and as you can see 190 percent gain in Amazon, 81 percent gain in Alphabet, on the other side, the rest of the portfolio not doing as well. In line with the markets, those three as I mentioned earlier and then Apple and Barclays still not quite in front, but Apple by the way has also improved dramatically in the last couple of months. We have a pretty good reason for that too and that really puts it into perspective. You can see the Rand/Dollar on the far left-hand side on this graph and then the outperformance by your two stocks significantly and then the next four in line, Triple Zero and Barclays still negative at this point..Remember you may ask questions at any time. Stuart will interrupt me and we can address those questions clearly. This portfolio being so affected by the Rand, if there is something that you want inside onto in the latest political developments, I'd be happy to address that as well. A big month for us as far as dividend receipts are concerned, you can see from IBM we got $1.40 per share that was paid and we have 100 shares there, so it's $140.00 that we have into the portfolio from IBM. Novo Nordisk, one of the reasons why the share took an awful hiding in this period was because the dividend from the company was dramatically reduced. As you can see last year in March its intra dividend of 45 cents, and from the last year, it's 76 cents, so we'll see. It has been interpreted negatively by the market but maybe there are no real concerns there..We'll give you some reasons on that later. Vanguard distributed 95 US cents in June, so that wasn't added to this portfolio but you'll see right at the bottom we have a 57 cents dividend from Apple and 1 pence, (you wonder why they bother) from Barclays, which was also in this period. Let's get onto the individual constituents of the portfolio starting off with Vanguard. Remember the intention initially of this portfolio was really to start off on the basis that we would put around about a third of our assets into an exchange-traded fund, then another third into our two big bets, which were Google and Berkshire Hathaway..Berkshire Hathaway also to reflect the market generally and Google was because we think it's a fantastic company, the perfect model and then outside of that there were five stocks that were selected as, well 80 percent of the portfolio and each of them our wildcards as it were. Of those wild cards, Amazon has come home with a bang and most recently, we added Barclays by taking money away from the Vanguard S&P 500 index and putting it into Barclays. We've still been watching Facebook. It looks like the time to buy Facebook is here, but we haven't yet pulled the trigger on that one. We want to be absolutely sure, but as you can see in the past 12 months, it hasn't been too bad for the Vanguard or the S&P 500 Index. It's gained just over 12 percent in US Dollar terms, remember that's in 12 months though and in 12 months our portfolio is up about 15, percent in US Dollar terms..That just shows you that over the 20 months that you've been going you've had some bumps here and there but the S&P 500 Index has been doing pretty well so far in 2016 after starting the year pretty poorly. You might recall that we had the worst start to the year ever on record and there were some saying that would suggest that the S&P would finally burst. Well, it has turned around really nicely since February and in fact, if you had bought it in February and just hung on now you would have already made 17% on whatever money you put into the market generally..How far do you think the Rand might recover after the last turmoil and are you concerned at all about political turbulence in the two markets you're invested in – Trump as president and the developments post Brexit?.Starting off with the Rand itself, we have covered a lot of ground, certainly in the last few months. The Rand has improved a great deal on the carry trade really and that means because the Rand is giving a better yield than in most other markets around the world. International traders will put money into, almost park money into Rands but it's hot money and it can leave at any minute. That's why you see these massive moves when there's merely the suggestion that there's some further political turbulence, so it's a game of get the yield but run for the exit, panic first if you like. I think that the carry trade is still very much in the Rand's favour. Interest rates in South Africa are significantly higher than they are elsewhere in the world..You will recall that in the past month, the UK has cut its base interest rate from half a percent to a quarter of a percent. It's almost zero and you do have zero rates, in fact, negative rates in certain parts of the world. Therefore, as long as the carry trade remains, there will be this attraction for global traders to shift hot money into countries where good interest rates are available, but if it gets to a point where that becomes too risky as appeared to be the case in South Africa over the last 48 hours then they run away very quickly, so it is hot money but it is being attracted which of course will help the exchange rate. I know that's a long explanation for the background, but in that kind of light it really depends on what happens. Talking to people here in London, the view is that as long as Pravin Gordhan is in place they will tolerate the level of corruption that is pretty evident in South Africa right now..You would have seen our disclosures also this week about the sale of the strategic oil reserve landing insiders between $100mn and $150mn and that was a story unpacked for us out of all the complexities by a global oil trader who said, "Well they all know what happened, here it is". That kind of corruption, unfortunately, from a global perspective is now just being taken as well that's the way it is, that's how life is in South Africa, that if Pravin Gordhan who is there to put the cheques and balances in place at least is perceived to be doing that, if he is gotten rid of, then all better off". The fact that this time Jacob Zuma blinked is very good news for the Gordhan Camp, if you like. It means that Zuma hasn't gone completely into the crash and burn kind of philosophy that many feared was the case when we saw Nenegate in December..This time he has said that he has full confidence in the Finance Minister and this will be interpreted by international markets as the status quo continuing. In other words, you have these two camps, the one camp that pushes to try to plunder more, the Tenderpreneur Camp, as Peter Montalto so brilliantly puts it from Nomura. Then you have on the other hand the Gordhan Camp which tries to hold them back and as long as that's relatively in balance international investors will be comfortable with it, so you could see the Rand appreciating on global issues rather than on South African relevant issues in the next little while..How far can it go? Well, it nearly broke R13.00, it was nearly in the R12.00's again and it's not inconceivable that if, as the heat gets out of the market as the antagonism between the Zuma Camp and Gordhan leaves the scene, that it could return to that level. I certainly wouldn't be betting on the Rand at this point in time to weaken further or to strengthen further because it really all depends on what goes on in the presidency. It appears, for the moment though that the presidency has now retracted its current antagonism towards the Finance Minister. The Hawks don't have a case, everybody knows that, and once that gets off the table we might see things moving again..Going across to the United States of America, I would like to defer to Warren Buffett, who is infinitely better at reading these things and certainly I am and most people on earth and he says that the American economy will survive a Trump presidency. Will Trump become president? That's still possible. The polls certainly don't suggest so, the polls suggest that despite his early running in the campaign, he's shot himself a few too many times in the foot, but it's a long time between now and November and politics has a strange way of doing the unexpected..What is interesting about Trump though and it is something to remember when we see the new public protector being announced is that once people get given responsibility, they tend to act in a different way to what they did beforehand and this is a wonderful quote that I remember 1993 when I had the privilege of interviewing the late Dr Anton Rupert. He said that "When a foot soldier becomes a horseman, he starts thinking like an officer" and if you put that into your scenario you think of Trump in the White House and the scary projections that have been made are unlikely to be fulfilled, certainly sanity will prevail. If you follow his announcements carefully of late you'll also see that he understands a lot of the things that he's expressed that he'd like to do, is just not going to be possible..There are many cheques and balances in the United States, a president can't be, is not as powerful as say for instance in a country like South Africa. As far as Brexit is concerned, living here, as I do in the United Kingdom, you can see that the scare tactics, the fear mongering is now dissipating, the economy is continuing to do quite well. Europe has come to its senses. It needs the UK just as much as the UK needs Europe. This was a political decision to remove itself from the EU, not a decision based on any economics and certainly neither party, once the heat is out of that argument, is going to want to make it negative from an economic perspective and we're already seeing quite a few gives and takes on both sides. Of course, the negotiations were supposedly, the EU wanted the negotiations to be undertaken quickly..Theresa May, who is shaping up as an excellent Prime Minister by the way, was reluctant be forced into anything and she is dragging it out. She says, "Well they'll probably only be looking at doing the final arrangements in a couple of years' time". Therefore, it is like many of these events, the initial issues do scare us, we overreact, but the longer-term, the decision by the UK must still remain pretty confident that it is going to be in the interest of this economy, so no I wouldn't be leaving Barclays. The other idea about Barclays and what makes it good is it has two particularly good issues there. The one is it has a fantastic retail franchise in the UK. People in Britain do not change bank accounts very often. The turnover is about one percent a year in bank accounts..Can you imagine what a Capitec could do here, for instance, but anyway that's the reality of the market that they're in and they will be hiving their business into two; into an investment and a retail bank come second quarter 2018. That was announced in the results and at that point in time the retail bank of Barclays is going to be extremely valuable indeed, so the other issue that you can put on top of that is that it does appear that there is more interest in buying Barclays Africa than it had initially been thought by the Barclays team and that process is going ahead at a good rate. That will be very positive to Barclays as well, so very happy with the Barclays investment, which is our only UK investment. It's more of a global bank still at the moment and the US; I think that as Buffett says, "It will survive Donald Trump"..Berkshire itself released financial results in the past month. They were better than forecast. The improvement primarily was generated by the insurance operations where the premiums at GEICO were up by seven percent year on year. Insurance operations brought and underwriting profit at $337mn for the quarter as against $38mn in the same time the previous year, so that was what lifted Berkshire. It offset a decline from the Railroad side, which has been struggling lately. They have unique issues that are affecting railroads in the United States..BNSF is a big railroad subsidiary of the company. Book value year on year was up by seven percent and the Berkshire share as a consequence recovered quite nicely. Onto the next of our portfolio, Alphabet, (the old Google as it used to be called), as you can see there in the past year Google has had a pretty good run outperforming its benchmark, the Nasdaq Index by double, 22 percent as against 11 percent in the past 12 months. Alphabet is doing some interesting things in the United States. It has a company within Google, a company called Google Fiber and this should be of interest to South Africans..Google Fiber is moving away from fiber into wireless, so they've realised that over the last six years they've been trying to put fiber into American cities and it's taken six years to do it in only six cities so they have now, in the process of, not abandoning what they've put in, because once you have fiber in, it's in a good place, but they're in the process of actually switching this to wireless. Two of the cities that are on the targets, Portland in Oregon and San Hose, which is in Silicon Valley, have been switched from fiber into wireless. They are now going more aggressively into the broadband/wireless phase which is interesting if you have a look at the potential future for cell phone companies around the worlds and particularly in Africa where they do dominate in the broadband/wireless space..To emphasise this, Google made an acquisition in the past little while of a company called Webpass in June, which is going to accelerate their ability to move into broadband/wireless. There was a little bit of a jolt for Google in Russia where the competition authorities there levied a fine against android but it was only $7mn, which in Google's context is pretty small and a very interesting piece of news was the tie-up between one of Alphabet's venture capital arms and GSK, Glaxo Smith Kline in the bioelectronics field. We did cover this quite strongly on BizNews at the time that it was done..Bioelectronics, if you remember a movie called the Incredible Journey many years ago, it was about a miniaturised space ship that was put into a blood vessel in a human body, and it was very much science fiction back then. Well, it's pretty much science fact today in that the development that Google is doing with its team is making this possible and in fact, a whole new discipline called bioelectronics has been developed around this process of putting machines into our bodies to fix us and heal us and tying up with GSK, was quite a significant move there..Onto Amazon, our superstar continues to outperform. It just shows that when you have a winner don't sell. I'm amazed sometimes when we get people who are betting on a winning stock and then they say, "Well no one ever went bust taking a profit". Imagine if you'd taken a profit on Amazon when it was say at 20 percent above our purchase price, you would have lost virtually the whole of the ride at R9.00 in terms of 190 percent and the same thing in the past year, (in the last 12 months) Amazon up 51 percent as against the Nasdaq's 11 percent. Amazon just continues to get stronger and stronger. Berkshire Hathaway, Warren Buffet's company bought more Apple shares in this past quarter. They have to release or disclose it in the United States, (we'll get to that in a minute), but where the Berkshire Hathaway indication comes in is that they actually sold more of their Walmart shares..This is interesting because Walmart is in a direct competitive position with Amazon. Walmart decided that it was going to try to get into this market more aggressively. It's just a start-up, but it is a start-up with Amazon type expectations. Amazon's market share of ecommerce is mushrooming in the United States in the second quarter. Ecommerce sales were up by 16 percent as a whole. Amazon is up 28 percent and ecommerce is now accounting for 8 percent of total sales in the United States. That gives you an indication of where it's going and with the pressure continuing on Amazon rivals, Barnes & Noble, which is the only bookshop of any substance left in the United States, fired its chief executive less than a year after he had taken over. He wasn't able to make any impact on the Amazon juggernaut..Onto IBM, Big Blue, this hasn't been a month of great import for IBM. As you can see, the share prices are bumbling along, doing okay, and 12 percent in the last 12 months against eight and a half percent. It is a company that offers excellent value and we're quite happy to stick with this one. Novo Nordisk, I need to spend a little bit of time there because as you can see from the graph, the share price is down sharply subsequent to the release of its quarterly results and strangely enough the profit for the quarter, this is for the second quarter of the year to the end of June were actually up by 19 percent, so why did the share price drop like that? Well they indicated that there are going to be harder issues in the United States in the biggest market..Novo Nordisk, remember is one of the world's leading insulin providers. That's one of the reasons we really like it because once you've, as a diabetic had insulin, it's very hard to switch your brand names and if you are the company that produces the insulin, as long as you don't profiteer, as long as you just increase the price of insulin in line with inflation, which is what Novo Nordisk, a Danish company actually does, then you should be able to hold onto your market share, but they're having a tougher time in the United States. They've also signalled that competition there is intensifying and the result of that was a very quick decline in the share price. Also affected there was, (and listen to this), Novo Nordisk projected in the previous quarter that sales this year would be between five to nine percent higher because of what's going on in the US..They say it's now going to be between five to seven percent higher, so the top end, only two percentage points down and that's how the market punished them. Profit growth, they've dropped that from between five and nine percent for the year to between five and 80 percent. It just shows that it's a very tough taskmaster, is Mr Market. Apple, the house that Jobs built, has had a very interesting past month. The increase there in the Berkshire shareholding in Apple, (they took it from $1.1bn to $1.5bn), was positively interpreted. As you can see, Apple in the past year has underperformed Nasdaq, which is not such good news, down by about ten percent below, but it has outperformed Nasdaq quite considerably in the past couple of months, so it is starting to claw back a lot of the gain that it has lost..A lot of the concern in the Apple shares at the moment is what the EU is going to do after the transfer pricing story between Apple and Ireland and what happened there was that when Apple initially did a deal with the Irish government, which is of course part of the EU, it struck a deal with the Irish government where it would have a very low tax rate. It's worked out at something like two and a half percent, is what Apple pays in tax and the EU is saying "Hang on a minute, we actually want to claw back some of that". Therefore, the question that is on everyone's minds (and the American government has become involved in this as well) is how much is Apple standing to lose if the EU levies the taxes on them? Remember that Apple now, 70 percent of its turnover has come from the iPhone and of course, Europe is a very important market for its iPhone sales..How all of this plays out in Ireland is also interesting but the worst-case scenario for Apple is that it would lose or it would have to pay US $19bn in unpaid taxes or taxes that might be claimed by the EU. That's a huge amount of money for anybody but when you're sitting, (as Apple does) with $232bn in cash, it certainly is manageable for them. Of course, they're fighting all the way. The American government is fighting, they're calling it unprecedented, there are disturbing precedents that have been created by the EU, or being proposed by the EU, antibusiness sentiments. I guess the Brits are probably looking at this and saying, "Just as well we left the European Union", but it is part of a politics versus business fight that's going on currently and Apple is right in the middle of it. That is weighing on the share price..If the final number that comes out from the EU is anything less than that $19bn in unpaid taxes, which seems to have been built into the Apple rating at the moment, you'll probably find that Apple shares indeed will go higher and there we have the summary for you, prices at the opening versus prices today. We like to end of with this because it gives you an indication of how the portfolio has performed, also on an annualised basis..Barclays is looking a little bit sick, down by 14 percent annualised, although it's now nearly to where we bought it in Pound terms after Brexit. The Rand depreciating against the Pound means that it is 14 percent lower. We have only had it for a few months, so it's the annualised number, looking really ugly, but on the other end, you have some very good improvements there on an annualised basis by Amazon and Alphabet also pretty solid despite its recent setback from Novo Nordisk. The portfolio as a whole at 25 percent, yes Stu?.It's not really a question, it is more a statement, and I think it is questioning the bank fees. You mentioned Barclays and Capitec earlier, he says he pays zero fees in his US account, so won't they come under pressure, as they move towards the first world type approach?.It is interesting. Capitec, the reason I quipped that I felt Capitec is absent from the UK market and hence the competition is not that great, on the retail level, if you walk into banks here, you will get an understanding of how demoralised the staff are. Remember Barclays just in this past quarter had to pay another, or have provisioned another 400mn for miss selling of insurance and in the past quarter they also paid another $100mn in the United States for that Libor scandal. So it's almost if you're a bank and you were ever looking at coming into a geography in the retail market and that's where the opportunity exists, it's not that they don't charge that much, it's not that you don't get free banking. It does exist in certain areas..Where Capitec would be able to probably really get a foothold in this market very quickly is because of the superior service that they deliver as well as working off a low cost model as well as having a very disruptive model. Would Capitec be able to drop its charges to zero? I don't think that's realistic. They have charged very little as well. We have Capitec bank accounts, Jeanette and I and we know that it costs you very little to bank with Capitec and certainly a fraction of what you're charged elsewhere, so it's one of those good opportunities, but then again you get what you pay for..I suppose if you are in a higher income bracket, you need more services etcetera and Capitec just offers the very basics. If you want basic banking, and I'm sure there are many people in the UK who would go for the basic banking idea, but it's interesting being South African and having a look at what goes on in the UK market, in banking in particular where the South African banks are really a long way ahead and maybe they should be looking at stretching their muscles a little, particularly the opportunity right now in the UK must be huge in the retail area. On the other hand, the Brits tend not to move their bank accounts, so you're taking a gamble either way..Thanks Alec..Is that us for today then Stuart? Thanks everybody for joining us. It has been a pleasure as always. As you can see, the portfolio continues to perform well. We continue to look out for opportunities. I've flagged Facebook for a long time now and the possibility there would be to switch some of the ETF money or the money that is in Vanguard into Facebook but we're waiting to see when the opportunity is ripe. One of the things you have to do in this world is just to be patient. Thank you for joining us today and if you missed any of this or if you came in late, it will be transcribed and it will appear on the BizNews website.

WEBINAR: South African politics steals the show

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