In this BizNews interview, market expert David Shapiro breaks down the latest market trends, highlighting the surprising challenges faced by the telecommunications sector and the ongoing strength of luxury brands like Richemont. Shapiro shares key insights on why telecoms are struggling to maintain profits amid intense competition, while luxury goods continue to thrive despite economic turbulence. Discover what this means for investors and the future of these industries.
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Highlights from the Interview
In this insightful interview with Bronwyn Nielsen, market analyst David Shapiro discusses a range of topics, from the education sector to the challenges in telecommunications and the ongoing strength of luxury brands like Richemont. He notes that education is a priority for many families, who are willing to sacrifice for their children’s schooling. Shapiro highlights companies like Curro and Stadium, which have consistently delivered strong results, despite the need for further capital expenditure.
Shapiro shifts to telecommunications, explaining the industry’s struggle with high capital demands due to evolving technology, such as 5G, and consumers’ reluctance to pay for data. He observes that in markets like the U.S. and South Africa, only a few dominant players can thrive, such as MTN and Vodacom, while smaller competitors are pushed out.
Lastly, Shapiro reflects on Richemont, praising its performance in the luxury jewelry sector, particularly with brands like Cartier. He notes that while the watch sector has seen a decline, driven in part by a slowdown in China, Richemont remains a strong investment. Shapiro advises investors to stay focused on long-term opportunities and not to be swayed by short-term market noise.
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Edited transcript of the Interview
00:00:14:03 – 00:00:41:18
Bronwyn Nielsen
David Shapiro, it is the first week of September, and we’re looking at the markets. What’s happening on the local front? We’ve had some big corporate news flow over executive scandals—talk about absurd, talk about MTN. We don’t know the validity of any of those stories, but it must be interesting times for you as a key holder of stocks in this space.
00:00:41:20 – 00:01:02:06
David Shapiro
You know, I watch the market with great interest, even though most of my investments are offshore. I always emphasize that I don’t ignore the South African market. What I do is try to find the best companies. And that doesn’t mean I’m disconnected from South Africa. You know, I know the market.
00:01:02:06 – 00:01:24:07
David Shapiro
I’ve been in it for a long time, so I try religiously to go through companies to see if there’s anything I can add to the portfolio. I never block it out. You know, there are some really good businesses, like Bidco and even Bidvest. There are some superbly well-run small businesses, and that’s what I like to do.
00:01:24:07 – 00:01:44:13
David Shapiro
I like to keep in touch with what’s happening on the scene. So yes, we’ve always got things to go through. We’re never short of stories, particularly when we go offshore—sorry, I mean outside of our borders. I don’t want to say offshore because that implies crossing oceans.
00:01:44:13 – 00:01:58:22
David Shapiro
But even when we look into Africa, there are always going to be issues that we need to follow up on. It’s not an easy continent to understand. With 50 countries, it’s not just one other country.
00:01:59:00 – 00:02:13:17
Bronwyn Nielsen
Exactly. So let’s talk a bit about the South African universe because, as you say, you know what’s going on around the table. Give me the lay of the land and where you see opportunities at the moment.
00:02:13:23 – 00:02:38:07
David Shapiro
I think the opportunities will come from global markets. Even though it’s September, we’re having a little bit of a blip. For what reason, I can’t understand. I never get why on September 1st, or even September 2nd, markets go tilt and go all over the place, as we saw last night. On Friday, US markets were close to all-time highs.
00:02:38:07 – 00:02:59:09
David Shapiro
We wake up on Tuesday morning, after Labor Day, and everything’s just falling apart. What will happen? Things are okay. When I say things are okay, I mean inflation is under control, rates are going to come down, and we’re going back to growth. That’s going to help us and open up opportunities.
00:02:59:11 – 00:03:26:01
David Shapiro
The one area that worries me is the commodity market, and I follow it carefully. I say that because China is turning out to be very disappointing. Even now, we are seeing downgrades of Chinese growth. Why it matters is because it’s very much aligned with the demand for our commodities.
00:03:26:03 – 00:03:47:14
David Shapiro
They dictate the price of iron ore, and they can dictate the price of other commodities like copper, coal, and even oil. So that worries me. We need to see some kind of turnaround, particularly in platinum.
00:03:47:16 – 00:04:10:06
Bronwyn Nielsen
Does that change your view on mining companies and your play toward mining stocks in South Africa? You mentioned platinum, and I’m sure you’re going to elaborate on the stocks in that space, but perhaps the rest of the sector has also been disappointing. How does that relate to your investment thesis in mining and metals?
00:04:10:08 – 00:04:34:01
David Shapiro
Well, I’m very careful. I think we’re close to the bottom, and I keep saying the downside is less than the upside—that’s a nice way to get out of it, but I mean it. In other words, I’m constantly looking for signs that things are bottoming and waiting to see if we can get a turnaround.
00:04:34:07 – 00:04:54:09
David Shapiro
I always look at iron ore. When iron ore falls below $100, it goes down to $90, and people start talking it down, but it never gets to the $80s. Then it starts to pick up again. The thing about our iron ore producers is that they still generate big profits—I’m talking about Kumba in particular.
00:04:54:09 – 00:05:16:20
David Shapiro
They still have big margins. It doesn’t mean they’re going away; it just means profits are lower. The worry is that lower profits translate into lower tax receipts. That’s the same thing with platinum. Lower platinum prices mean less revenue for the fiscus, and we need that revenue.
00:05:16:22 – 00:05:38:09
David Shapiro
I was listening to Stimson this morning, talking from Beijing about a bilateral deal they’ve done with China regarding commodities and agriculture. He said we need growth, and that’s exactly the challenge we’re facing now.”
00:05:38:09 – 00:06:05:21
David Shapiro
You know, we’ve got to work towards growth because it’s the only way we’re going to get out of this. So that, to me, is something I’m watching very, very carefully. The rest of the market, you know, it’ll come right as we start to see rates coming down. We’ve had a set of rather disturbing upward results, but it’s more historical, you know—it’s about what happened a year ago rather than what’s happening at the moment.
Read more: David Shapiro forecasts resource revival and bond market surge
00:06:05:23 – 00:06:20:06
Bronwyn Nielsen
And David, again, just coming back to what you mentioned about platinum. Let’s talk a bit about how you should be exposed to platinum in your portfolio as a South African investor with key stocks.
00:06:20:08 – 00:06:48:08
David Shapiro
And I say this with care. What disturbs me—and we’re all looking at this very precious metal, which is a big contributor to our growth and mining—is that, Bronwyn, you know, when you look at mining, it’s not only about the mines. It’s the ancillary industries around them that are very important because mines are ecosystems. They support factories within their vicinity.
00:06:48:10 – 00:07:12:06
David Shapiro
They employ a huge number of people. And those factories also employ others. Whole towns depend on the betterment of the mining sector. In his report, he said he’s downgrading the palladium price, meaning his outlook for palladium. That, to me, was a bit of a worry. But, we’re sanguine.
00:07:12:08 – 00:07:32:14
David Shapiro
We have good miners here. We know that whoever runs the mines will tailor them accordingly to whatever they can produce. We’ve had 100-plus years of mining experience. So from that point of view, you know, we will get through it.
00:07:32:16 – 00:07:37:07
Bronwyn Nielsen
And your exposure to mining stocks in South Africa?
00:07:37:09 – 00:08:01:04
David Shapiro
The only one I have exposure to would be Billiton, mainly because of the copper and iron ore side of the business. From that point of view, I still think that those mines are cheap. Let me put it this way: if you’ve got courage, I think you can take shares like Kumba Iron Ore at these kinds of levels. You can take Billiton’s or Anglo Plats. But be patient—you can’t expect instant gratification. They will get through this.
00:08:01:04 – 00:08:15:07
Bronwyn Nielsen
You mentioned Billiton…
00:08:18:16 – 00:08:46:22
David Shapiro
Yes, at present. It doesn’t mean I won’t hold it. As a firm, in our model, we’ve included Kumba. We’ve got quite a few shares—we’ve got some Anglos. But I think that, at this stage, from a private investor’s point of view, Billiton seems to be the only one. It’s a good business, really a good business. But, you have to be careful. When I say careful, I mean mindful of what’s happening. But if you’ve got courage and want to build a long-term portfolio, you’re not far off from commodity shares.
00:09:07:22 – 00:09:20:18
Bronwyn Nielsen
Let’s move away from the mining industry and talk about some of the other sectors you are pursuing at the moment. We’re always looking for those opportunities from you, Mr. Shapiro.
00:09:20:20 – 00:09:43:06
David Shapiro
Yeah, I’ve been going through the retail sector. Unfortunately, some of the results have been a little disappointing, but I think it’s more about where we are. Again, I say this is historical. That’s why you’ve got to start looking forward. We have some very good retailers.
00:09:43:11 – 00:10:03:21
David Shapiro
I think Shoprite is a superb retailer. It’s come under a bit of pressure over the last couple of days—share prices have come down. That’s because they had a very good year last year, really a good year. They’re not going to repeat the revenue increases they got from buying Massmart businesses.
00:10:03:23 – 00:10:29:02
David Shapiro
But interest rates are still high, and they pay increased finance charges on that. However, their execution is very good. They do what they do well, and it’s certainly a company that I would, even at these lofty prices, keep in my portfolio. The same goes for Foschini. Their results came out today—some negative numbers there, not where we want it. But they are a well-run business.
00:10:29:02 – 00:10:55:18
David Shapiro
As things improve in this economy—and they will improve, because rates are going to come down and we’re slowly picking up from where we were—I think Foschini will also benefit from additional spending. It’s a well-constructed business.
00:10:55:20 – 00:11:19:04
David Shapiro:
I think our banks stand alone. You know, our banks are really, really good banks. They’re very conservative. Maybe they should be lending a little bit more, but they need the right environment. You can’t fault the way they’ve gotten through the last couple of years. They’ve been very careful, and the returns, you know, have unfolded very well.
00:11:19:06 – 00:11:23:22
Bronwyn Nielsen:
Which entry point would you choose on the local banks?
00:11:24:00 – 00:11:44:15
David Shapiro:
You know, I think they’re all good, even at this level, although they’ve led, and I think a lot of it has to do with management. When I say management, I mean they keep changing management. Standard Bank, FirstRand—still very good. Even Investec has come a long way over the last couple of years. So, you can take your pick.
00:11:44:17 – 00:11:51:07
David Shapiro:
I don’t think you can go wrong with banks. You know, it’s a very good segment of the market.
00:11:51:09 – 00:11:55:22
Bronwyn Nielsen:
Would you invest in a couple of the banks rather than selecting just one?
00:11:56:00 – 00:12:28:16
David Shapiro:
Yeah, well, you can. You can take FirstRand or Standard Bank if you really want the top two banks. Oh no, sorry, sorry! I love Capitec, absolutely love Capitec. I know they’re very expensive, and I shouldn’t have ignored them. I apologize for that. I would maybe consider Standard Bank and Capitec because it’s a superbly run business, and the customers love it. You can’t do any better than having customers who really like you.
00:12:28:16 – 00:12:49:02
David Shapiro:
Yes, they might be a little high in terms of their multiples, but they’re going to continue to grow, find new areas, and challenge some of the bigger banks. In market cap, they’re still a very big bank themselves. But I do like Capitec and the way they grow.
00:12:49:04 – 00:13:00:16
Bronwyn Nielsen:
David, is there anything negative, like surprises you weren’t expecting, that have gone against your expectations?
00:13:00:18 – 00:13:26:13
David Shapiro:
I think the one area I’d like to see pick up is the engineering and construction sector. You know, those companies are struggling, and once more, I think they’re battling against industrial policy. There’s very little spending on infrastructure, which we desperately need. I’m hoping with the government of national unity that more focus is placed on it.
00:13:26:13 – 00:13:50:02
David Shapiro:
We’re already seeing some positive outcomes from Transnet and Eskom. The next step is that we’ve got to start spending on improving, maintaining, and developing infrastructure. In that respect, you know, I looked at Cashbuild’s results today. It’s such a good company with such a good history.
00:13:50:04 – 00:14:13:05
David Shapiro:
They’re open, they’re honest about how tough things are. People are not spending, they’re not buying bags of cement, they’re not buying window frames, and that’s because they don’t have the money. I think these are good businesses. Don’t look at their current results as being indicative of their management but rather of the current economy. Once things pick up, they’ve got the management and experience to turn it around quickly.
Read more: David Shapiro predicts strong Rand surge amid global market optimism
00:14:13:05 – 00:14:44:16
David Shapiro:
That’s an area where I’m hoping we start to see more benefits—the whole construction side. And it’s not only that. Oh, I do like Afrimat, and I do like Raubex too. These are two businesses that are well-positioned. One more area, though—education. Super solid companies.
00:14:44:18 – 00:15:00:21
Bronwyn Nielsen:
Let’s go into education. Afrimat and Raubex are certainly long-term sturdy plays. Is Afrimat one for the long term, given the robustness we’ve seen?
00:15:00:23 – 00:15:27:00
David Shapiro:
Yes, you’re banking on management there. They haven’t let us down since they listed, even through the toughest of times. They’ve repositioned the business; now they’re more in contract mining, but that hasn’t taken away from the feel of the business at all. I think Raubex, in its own way, is also commendable for how it has navigated very difficult conditions in South Africa. So, when things pick up, I think both companies will thrive as well.
00:15:27:00 – 00:15:35:01
Bronwyn Nielsen:
And then, let’s talk about education, because you were extremely enthusiastic about the sector just a moment ago.
00:15:41:19 – 00:16:09:00
David Shapiro
Absolutely. Advertising. It just shows you people will pay for education. They will give up a lot for education. You know, people in South Africa, everything they give up, they’d rather have airtime than bread. But I think they would also rather educate their children than buy new shoes or clothes or spend on other areas. So, I do like it. I think the results came out of that.
00:16:09:02 – 00:16:35:14
David Shapiro
Very good. And don’t underrate Curro or Stadium as well. At one stage, they were very highly priced, but they’ve delivered on what they promised. Both those companies, I think, still have some CapEx. I’m talking nostalgically, you know, they’ve still got some money to spend on improving their schools, but once more, they’ve come through really very strongly.
00:16:35:14 – 00:16:43:18
David Shapiro
And you can add them, even though you might feel they’re expensive. I should say, that side of the market is very strong.
00:16:43:19 – 00:16:54:04
Bronwyn Nielsen
We’ve spoken about pretty much every sector except telecommunications. I mean, if I can lump them together, is there anything on that side?
00:16:54:06 – 00:17:24:08
David Shapiro
Difficult. It’s, you know what? I always say tongue in cheek, it’s because people want to use their product, but they don’t want to pay for it. People don’t want to pay for data. And the problem is that it eats capital because you’re constantly keeping up with improving technology: 2G, 3G, 4G, 5G, and so on.
00:17:24:10 – 00:17:47:02
David Shapiro
You’re expanding, you’re going into new areas, and the problem is that people are always looking for bargains and don’t want to pay. So, I think it’s become a difficult area. If you look around the world, there’s only enough room for two gorillas in the room. That’s it. You know, I can’t remember the third American company.
00:17:47:02 – 00:18:11:04
David Shapiro
There’s Verizon, AT&T, and T-Mobile. That’s it. That’s all you get in America, and that’s a massive country. There are very few small operators. It’s the same here. There’s only enough room for MTN and Vodacom. And I think the smaller players have got it tough. And if the big gorillas really want to stomp on you, they will.
00:18:11:10 – 00:18:30:07
David Shapiro
And if you get too cheeky, they’ll just push you out of the way. So, even those companies are not doing as brilliantly as we think. They’re all going into fintech now, looking for other areas, but it’s one area I just stand back from. It’s not an attack on management; it’s just very, very competitive. And, you know, with that much competition, you don’t make the margins.
00:18:30:07 – 00:18:39:15
Bronwyn Nielsen
And then, David, I don’t think any markets conversation would be complete without us talking about Richemont, which is a stalwart in all of your conversations.
00:18:39:17 – 00:18:51:23
David Shapiro
I still very much favor luxury. It will come back. Richemont has been a superb performer, especially on the jewelry side, with Cartier. Not on the watch side. For some reason, watches have been under pressure, and all the major luxury businesses have reported falling sales on watches.
00:18:52:01 – 00:19:16:20
David Shapiro
I think a lot of it has to do with China slowing down. Watches were very much a status symbol, also a gift. People would gift you very good watches and so on. Even previously used, I don’t know what the last word is, those collectible watches…
00:19:16:20 – 00:19:33:07
David Shapiro
Yes, collectible watches, like the Birkin bags and other luxury items. Even those prices have come down. But just as a company, don’t ignore Richemont. Sell it at your peril, because it’s an incredible business with an incredible product.
00:19:33:07 – 00:19:57:15
David Shapiro
And why I say incredible product, you’re never going to replace those watchmakers or the product that they make. There’ll always be demand for those, particularly for specific timepieces. So, great company.
00:19:57:15 – 00:20:10:20
Bronwyn Nielsen
As a final question, first week of September, looking ahead, as you said, there is some turbulence in the market at the moment. Anything else we should take into consideration as we look at our portfolios?
00:20:10:22 – 00:20:44:07
David Shapiro
I think just ignore the noise at the moment. We’re going into a period of lower interest rates. Rates will come down, progressively. There’s enough room to do it. America is not going into a deep dive or a recession. It’s still a very robust economy. Themes are still very much relevant; these companies are still strong. So, don’t be put off by the noise.
00:20:44:09 – 00:21:16:05
David Shapiro
As the global economy starts to pick up after four years of turbulence, starting with Covid, we are only coming out of that now. As Jay Powell said at Jackson Hole, he gave an assessment of where we are and how difficult it’s been. I think we’re going into a much broader theatre as September comes down.
00:21:16:05 – 00:21:25:23
David Shapiro
I don’t know why we have this issue with September. I’ve got to look into that. Why does September not work in heaven?
00:21:26:01 – 00:21:35:17
Bronwyn Nielsen
Glad to hear that you are relying on AI for those things. David Shapiro, always a pleasure. Sasfin Securities, thank you for your time.
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