The JSE has run very hard over the last two years. And now, as the prospects for many companies dim slightly in the face of rising interest rates, slowing consumer spending, a challenging exchange rate and various other obstacles, it seems possible that the market may be, in a word, frothy. If earnings don’t continue to rise as rapidly as they have been (and as this interview makes clear, that’s really fast), the JSE may start to look downright expensive.
So what’s an investor to do? Well, simply put – look elsewhere. There are any number of offshore ETFs and ETNs available on the JSE, allowing you to get wide exposure to stocks in Europe, the United States, and elsewhere. By investing offshore, you’ll help hedge your risk, and since markets in Europe and the US are currently looking reasonably priced (according to this interview, at least), you could stand to see some decent returns too. – FD
ALEC HOGG: Well, in company news out today EOH recorded a 34 percent increase in first half headline earnings per share. We’ve gotten used to that, haven’t we? Thirty percent per year, and that’s why the share price is so strong. NetOne and the Blackstar Group have both been improving in their share prices lately. We’ll find out more right now from Mohammed Nalla. He’s with Nedbank Capital. On the order queue, I see there’s a big long title that you have.
MOHAMMED NALLA: It’s too long. ‘From Nedbank Capital’ is fine.
ALEC HOGG: Have you been promoted?
MOHAMMED NALLA: No, it’s the same thing. I’ve been doing this for a while. Obviously, you have not spoken to me in a long time and hence the nickname Bright Spark. I won’t take it as a dig. I thought it was the shiny head again.
ALEC HOGG: No, you just doubled it, but I mean…the tie – only bright sparks wear that.
MOHAMMED NALLA: If you follow, Bruce Whitfield has abused me for my ties. I’ve given him some of my fashion sense.
ALEC HOGG: Yes, but Bruce needs it. Certainly, Gugu doesn’t.
MOHAMMED NALLA: I’ll leave this until after the show and then I’ll ask you to wear it.
ALEC HOGG: All right, talk about NetOne. It is embroiled in a battle with Absa, to do with apparent corruption and allegations of corruption regarding the payments of social pensions in South Africa. It seems to have been put to bed because NetOne’s share price has been hopping the last two days. It is listed on NASDAQ as well.
MOHAMMED NALLA: NetOne…I don’t watch the stock very closely, but the fact that some of that might be being put to bed takes the cloud away from the horizon. I think investors like some degree of certainty and so potentially, that’s coming to the fore and you’re seeing that share price. I don’t how much it’s up because as I say, it will certainly be an interesting one for me. By and large, if we look at that payment of social grants and the rest, what’s happening in that space is that they’re moving it all onto a Smart Card type of system. I think that in the longer term, that certainly is the way to go. We saw a pilot project, even in Nigeria, doing a similar thing and that would certainly go a long way in terms of rooting out corruption and fraud along those social gridlines. Bear in mind, it’s something that we saw as a theme in the National Budget Speech as well.
ALEC HOGG: The problem with NetOne is that they’re being accused of fraud and corruption, but the share price has doubled in the last year and it’s up 35 percent in the last three months. Clearly, whatever the court actions are, they’re not being taken terribly seriously by investors. Well, investors are taking it seriously. In the Times Media…a big rebound yesterday: Blackstar, which owns a big chunk of it – up strongly today.
MOHAMMED NALLA: There’s been quite a bit of news around Times Media recently and they went through this period with lots of consolidation and focusing on getting the costs right within the group. Let’s not fool ourselves. If you look at – just generally – media business, there are in a tough space. Let’s take Naspers out of the equation there. They’ve done really well. Along Times Media, we saw Blackstar effectively cementing their control over the group and potentially, really sending the signal to the market that management…they back management’s plan. This is a good solid strategy, and you have to look through the cycle – longer term – that’s potentially what investors are saying, maybe with a little bit of confidence coming through on that particular stock in. In fact, on both of them, I would say.
GUGULETHU MFUPHI: Another company on our radar is EOH. Its interim results were out today – impressive numbers – and it’s also been a solid performer when it comes to its share price, though.
MOHAMMED NALLA: Yes, the share price, if you looked at it on the day, was pretty much doing nothing. It has kind of gone sideways. That’s because, as Alec said in the intro, market has gotten used to it and they’ve priced in these very handsome – let’s call it gains – in terms of revenue and in terms of earnings that have come through. It was north of 30 percent, but the fact that the share hasn’t really reacted tells me much of that was probably discounted and I think it’s an important trend. If you look at it, what many of the markets are doing right now is that they’re saying, ‘we’ve priced in a good run-up in terms of earnings. Our market was looking expensive. It probably still is, on an historic earnings basis, and as a result, the outlook in terms of earnings going forward becomes critical’. I have no doubt that’s certainly, what investors will also be looking for in terms of EOH.
ALEC HOGG: Chinese love the number eight. EOH is up 88.08 percent in the last year. Now, there’s a tip for you if you happen to be in China, but if you’re in South Africa…it’s a big move in a year.
MOHAMMED NALLA: Look, it is. Naturally, whenever you see those massive moves – and I think we’ve seen many of those. As I say, you can mention a whole litany of stocks out there that have really had these phenomenal runs over the last while. The rally – if we look along the larger caps – it’s been quite narrow. A lot of the index hasn’t participated in that, but I just get a sense – and again, it’s probably true today specifically – the market’s getting a bit frothy. If you look at it again on an historic earnings basis, we’ve been expensive for some time and for investors that have the ability to invest in offshore markets, many of those offshore counters are looking much more attractive, just on an earnings basis and on a growth basis, as well. It depends on your view on whether emerging markets are going to actually correct or if they’re actually going to resume their growth rates, and also in terms of companies’ exposure to the rest of the African continent. I think that’s – kind of – a saving grace for many South African companies, that we do have that silver lining with regard to the growth outlook on Africa.
ALEC HOGG: We’re going to be talking in a little while to yet another new listing, and it just appears that in the last few years, South Africans have been given many more options on where to invest in the world. The new listings today are exchange-traded notes, which I think you’re going to explain to us how they’re different to exchange traded funds, but they’re on four different areas: the world, U.S., Europe, and Asia, so you can actually take a punt now as an investor on all of those. Take us through two. Firstly, what’s the difference between ETF’s and ETN’s and secondly, where would you be putting your bets?
MOHAMMED NALLA: Normally, I defer to my colleague Nerina Visser. She’s the resident expert on this. Very simplistically, when you look at exchange notes there’s an issuer, so the issuing bank organisation effectively writes the note and they can offer you a pay-off profile. However, the risk as an investor is towards the issuer. There’s a degree of embedded credit risk in the exchange credit note, which is very different to an exchange-traded fund. In this country, that would be governed by the collective Investment Schemes Act – very similar to a unit trust – and the main difference is that, specifically globally, if you look at the exchange-traded notes the returns in those can by synthesised. That’s why the credit risk becomes quite important. In the exchange credit fund, the fund is ring-fenced and it has to hold the underlying assets and that for me, is the fundamental difference between the two. In South Africa, ETF’s or funds are usually open-ended, whereas exchange-traded notes would have a certain maturity. However, what would happen is you’ll find the issuer rolling these into extended maturities on a regular basis, so those are the key differences between the two.
ALEC HOGG: So where would you go, Asia, Europe, U.S., or the whole world?
MOHAMMED NALLA: It depends on long-term versus timing. I think on a timing basis, you’re probably going to get a better end-feed point across most of those jurisdictions. That being said, the U.S., once we strip out the weather I’m still quite bullish on the U.S. I think there are some signs of a recovery coming through there. If you’re going to be talking about shale gas and that particular industry, that for me is a game-changer – longer term for the U.S. Asia, I still think more stimulus from the Bank of Japan, so I’m bullish on that. I’m not one of those early movers on Europe. I think they have many big issues and that’s obviously assuming that emerging markets like South Africa are going to be coming under a little bit of relative pressure.
GUGULETHU MFUPHI: You mentioned the shale gas issue in the U.S. and we know that Sasol also has another venture there regarding ethane cracker, which is supposed to be this game-changer. Is that also another stock you’re looking at?
MOHAMMED NALLA: Yes, Sasol’s been one of those stocks on an absolute tear. Its run up…it’s close to almost R600.00. If you look at Sasol, it’s an energy business, but it’s also a technology business. Sasol was very much one of the first companies globally with regard to ‘coal to liquid’. That has been a key underpin. Shale gas: where would I play this? I would probably not play in the actual energy producers, but in the associated industries because there’s a lot of investment that’s going to go into that. If more supply comes on the market, you could potentially get energy price convergence. There might be a bit of excess supply, bringing the energy prices lower, so you’d be looking associated industries around that. The U.S. government is incentivising much of the supplementary industry around that, particularly the shale gas and the energy sector, so that’s where I’d be looking.
ALEC HOGG: Isn’t it interesting the way that Sasol used to…? When you talk about coal to liquid, they had a big punt in China. I think they lost one billion Rand in what they were putting together there and eventually, they removed themselves and they’ve picked up on the whole shale gas revolution. As Gugu said, she spoke to David Constable earlier this week. They’re now making the biggest foreign investment into Louisiana right in the middle of the shale gas belt
MOHAMMED NALLA: Yes, they have a competitive edge there. They know the markets they operate in. As I say, it’s a technological company in some respects. What they’ve been very good at is adding shareholder value over a longer period of time. They did have to write down those Canadian assets recently, but if you look at that, the market’s taking it in its stride and the stock’s still looking decent. On an earnings multiple basis, it’s not expensive. It’s around ten times. If you look at global energy companies, Sasol’s very much trading in line with that, so I think its nice exposure for investors looking to get some exposure in that energy sector, specifically.
