πŸ”’ From ESG to Sasol to why people like to buy into Elon Musk – David Shapiro

The Covid-19 pandemic has taken many victims, but there are also winners, and market analyst David Shapiro is certainly upbeat about the markets at the moment. Looking among others at Sasol’s performance this week, Shapiro admits that you really can’t explain markets, and although bouncing from very oversold positions, he is still not convinced to buy into the company. What will matter hugely going forward is how companies behaved in this Covid-19 era and Environmental, Social and Governance (ESG) issues will continue to feature strongly in forcing companies to be responsible. In this inaugural Biznews Rational Radio webinar Shapiro and editor-in-chief Alec Hogg discuss from retailers to listed property to energy, and from a listener even converging tech and health stocks. – Nadya Swart

I’m Alec Hogg. Well, let me talk to David Shapiro who is our virtual studio guest. David, I just wanted to start with you and we can pick up on the markets. Let’s look at the JSE first. The way that the JSE has been performing today – I’ve taken the stocks there from our partners at Standard Bank. The stocks that are the most heavily traded and as you can see a really good session for Sasol again, for MTN, for Woolies, Absa, Nedbank – up nearly 7% – so it’s a strange old world that we’re living in at the moment.

Alec, I was just looking at the market before I checked in. We started the downfall around January 20th – that’s when the dangers of the virus became known. And from that time to late March we dropped about 34%. Subsequent to that, we’ve recovered about 30% and we continue our recovery. So, we’re still down on the year – maybe 13% or 14% – but the recovery has been quite intriguing and not everybody believes it. There are still a lot of sceptics out there. There are far more bears out there than there are bulls, but I’m still trying to position myself. And what we’re seeing now is that – either there’s short covering or the belief that we are going to get over this a lot sooner than everyone expected. In other words, slowly good news has started to come through – more so than the very bad news that we’ve had and that’s a good sign. I’m not going out there and telling everybody to just rush out and buy this and this… But, once the good news starts to come out it’s always a good sign; Europe opening up, likewise the US starting to open up and life trying to get back to normal. So, understand that this is perhaps the beginning of normality returning. I’m thrilled about where we are in markets at the moment.

Dave, we looked a moment ago at the Sasol share price which is now back over R70. Let’s go on to the Brent futures because they’ve been under pressure. It’s $22 at the moment and if we go back to year to date it came from $66, so it’s dropped by two thirds. So, why would that happen (and then), Sasol’s share price actually going up from its worst levels?

You can’t explain markets. One of the reasons, even if we look at Sasol at these current prices, it’s still probably 70% down. So, this is really a bounce from very, very oversold positions and the company came out with a statement last week reducing executive salaries and also setting out a plan which they hope to implement in order to buffer up their finances and get them through this very difficult period. But if you look through it – the balance sheet is still under pressure and there’s still a lot of issues that lie ahead, particularly the low oil price and low chemical prices. So, I’m a bit cautious about the company and I’m still cautious about where they’re going. But if you read analyst reports – they’ve got target prices in the low 100’s – 120, 130, thereabouts – and maybe there are a lot of brave souls out there buying shares. But for me – it’s still a little too dangerous to get in at the moment.

Well it’s interesting, we’ve got the price graph of Sasol and even at R70 (or R69.75 – where it’s trading right now) – it’s still down 85% in the past year from over R430.

Let’s talk about the informal markets. We did have that discussion over the weekend that we’re going from Level 5 to Level 4 (from Ebrahim Patel – the Economic Affairs Minister). What was interesting was that he was talking quite a lot about the informal sector. David, given what happened over the weekend about the higher spend that many unemployed or social benefit seekers are going to receive – are there any benefits here for investors to look at? Parts of the market that might be worth examining?

We can go into this in a global sense but certainly the winners are winning. Those companies that are still trading at full capacity or certainly 80% or over 50% are winners globally. We’re seeing tech companies, we’re seeing pharmaceutical companies and in South Africa – other than Naspers and Prosus – I think the retailers that are picking up are either the fruit producers or, alternatively, the Shoprites, the Pick n Pay’s, the Spars and other companies like that – where you have seen an increase in activity. The only danger with some of those is that (and I think we’ve mentioned this last week as well) is that other aspects of their offerings are not there, which are a slightly higher margin – the clothing side, tools, all other issues like that. And that’s where they’re missing out on Builder’s Warehouse and things like that. But still, from a pure point of view of merchandise of food – of course, we’ve reportedly seen increases in demand and we’re seeing it happen in the fast food outlets as well. Once the announcement was made, you’ve seen Famous Brands and Spur’s and other companies like that also attracting attention.

Because they can at least now go back into making deliveries again after that period.

I’ve got the Growthpoint table in front of us here, Dave, and if you go back to Growthpoint – which is our biggest property stock by far. Over the last year, it’s down 45%. You were talking before we came on air of some discussion that’s going on between the property owners like Growthpoint and the retailers. Can you enlighten us?

I haven’t gone through the full details – I really glanced over it. But what’s happened, the Property Owners Association and The Reeds are trying to come to some kind of terms with the tenants. In other words, giving concessions for April, maybe giving a 70% discount (I can’t remember the numbers exactly) – but trying to reach some kind of agreement over what rent they should pay. Who’s objecting completely are the clothing associations – they don’t want to pay anything – which would be the Foschini’s, the Truworths, Mr Price’s (I would assume) – companies like that. They’re saying no – this is a force majeure, we’ve been forced to close down completely – we don’t want to pay anything. So, there is a bit of a spat going on – how it’s going to be sorted out, I’m not sure. Property companies have taken an almighty pounding since the beginning of the year. And of course, if you look at it year-on-year – Growthpoint over the year is down about 45%. But in general, property companies are down anywhere up to 60, 70% as rentals are reduced (as companies find problems). Also, the issue is not only rentals but also concerns about vacancies and concerns about where this is all leading. So, a sector that led us up in 2017 and 2018 has really come under pressure.

Stuart, have we got any questions?

There’s one for David and yourself. What about the converging techs like Ping An Health and Alibaba health stocks?

Alibaba – this crisis was made for them. They are expanding rapidly or trying to expand rapidly into other areas outside of China. I think the two sectors one has to look at is obviously the healthcare side and the tech side – both of those have come out very, very strongly from this. They’ve accelerated what was already in motion. It’s not that this is new, but public health and pharmaceutical companies – I think there’s going to be a new light shone on these particular sectors. We can expand on this a little later, start to talk about individual companies, but it’s all aspects of that – including (I would imagine) the meditech, in other words, companies like Philips and other businesses, like Medtronic who are making medical devices. I think those sectors are going to stand out and I don’t know enough about Ping An to really comment in a professional way, but I’m absolutely sure that companies like that will start to prosper.

Ping An Insurance – this is the company that owns Ping An Health. I don’t think it’s separately listed – it’s 25% owned by Discovery, 75% owned by Ping An Insurance. And Discovery, in their latest set of results (I think it was their interims), Adrian Gore (the Chief Executive) was explaining how Ping An Health was going just gangbusters. The last premium income there was R25bn, now they’re looking at R250bn. It’s just extraordinary what these companies are doing. If you look back through at the opportunity that Ping An Insurance must be presenting, I think that the person who posed the question has really found something very, very interesting for the rest of us to go and investigate, not least the Discovery shareholders who will be looking at this with quite a lot of interest – given it could be your equivalent of the Naspers-Tencent story.

The one thing that I’ve been talking about as well we’ve got oil now almost at zero or heading towards zero, which – in a way – is starting to challenge clean energy. And the big question is; what happens globally now where oil is so cheap? Do we start ignoring renewables? Absolutely not. I don’t think the world is going to go backwards in that respect and I still think that ESG – which is Environmental, Social and Governance – are going to be very, very big issues and continue to be so. As we went into the new year, that was one of the big subjects, so I think that we are not going to let businesses like Eskom get away with it. I still think that renewables and the whole question of a clean environment is still going to be a very topical question, despite the fact that energy prices – whether it’s coal or whether it’s oil – are so low at the moment. So, don’t just brush it aside.

Well, the Wall Street Journal agrees with you David. Dysfunction in the oil market intensified on Tuesday – sending the most popularly traded US oil price to its lowest levels since at least 1986, and the WTI futures price is sitting just over $10 a barrel. Well, if that’s the case David – Eskom is not the only one who’s been polluting… for years. Sasol has been doing the same thing. Are we nuts by being invested in Sasol?

I think companies like this are going to have to clean up their act – regardless of the low price of oil. So, I won’t say we’re mad in looking at Sasol, but certainly we have to keep an eye on their emission standards. We can’t just ignore it. And Alec – we’re going into a different world. What’s so interesting about this is that when we come out of this – not only is it going to be emissions but we’re going to have to judge how businesses behaved during this era. It’s not something new. It’s something that’s going to be discussed. How did you perform during this Covid-19 era? Did you look after your staff? Did you look after your product? A lot of questions are going to come up so I think we’re going into a slightly different society than the one that we left.

Isn’t that just the reality? But this whole story and the point you’ve raised about ESG – Environmental, Social and Governance – they’re so aligned, because even though we were in load-shedding in December one of the government departments (the environmental department of Barbara Creecy) was prepared to close down twelve hundred megawatts of Eskom power because they continuously broke the law – effectively, by pushing pollution into the air. Now, that’s unusual for any country, but maybe in the world we’re going into – are those the trade-offs you have to make?

We’re not going to tolerate it. No one’s going to tolerate it. I think fines or jail – whatever it is – will be the order of the day. So, I’m glad she didn’t close down in December and I hope she doesn’t do it at the moment, but I think we have to be conscious of it because it brings other kind of viruses or brings out the kind of illnesses. There’s satellite pictures of what the world looks like now compared with a few months ago and what pollution does. So, we are very conscious of the images. So, I’m very strong on this – I’m very passionate about it as well. You don’t want to leave this to your children. You don’t want to leave a polluted environment to your grandchildren. I don’t think this is something we can just brush aside – even with oil at virtually zero.

I wonder if the president was 25; how different things would be, but I want you to give us some ESG investments to consider or to start looking at – maybe the non-Sasol’s, obviously Eskom isn’t listed – but the non-Eskom’s. But first, Stuart – have you got any feedback from the dozens of people I see who are on this webinar today?

Thanks Alec. There’s a question on this new clean energy concept: is Elon Musk not on the money and shouldn’t we be watching this news – this whole shift – and investing in things like Tesla?

Yes, absolutely. And I think people want to be associated with Elon Musk, regardless. They’ll do anything to buy his motor car. His share price – from the beginning of the year – is up something like 78%. Whether it’s justified in terms of how we look at the market on a historical basis, on whatever basis you want to look at it – probably not. But I think people buy it because you just want to identify with what they represent – ‘Look what I’m doing to save the environment, to have clean air as well’. So, it’s a very strong subject. We saw it with Beyond Meat, where you’ve got plant-based meat coming through as well (although, I see it’s finding a lot of competition), but it’s a movement that people want to be identified with. There’s one company we’re looking at very, very carefully and that we’re putting clients into simply because it’s generating cash. It’s down in Florida, in the US; it’s called NextEra Energy. That’s one that we’ve identified, but I’m sure you can find others that will fit into the same category.

And what was it about the NextEra that you liked so much?

Simply because of its wind and solar and it’s a very profitable business that is developing into that arena as well. It’s worth taking a much closer look at. It’s clean energy and what’s interesting is that they’re turning it into a profitable business, they are generating cash. And of course, reinvesting in the same region.

While we are doing this, I wanted to look at Beyond Meat as well, because I love their burgers. The graph doesn’t look too concerning – over $200, now at $100?

I like what they represent. I like the fact that they reckon that farming is quite destructive, so the whole argument is against farming animals and rather eating plants – which they deem is much healthier and what they’re trying to do is to show you that it is quite tasty. It’s double the cost of a burger, but it doesn’t matter – it’s plant-based and you can get virtually any kind of food. For the Jewish crowd that can’t eat milk and meat – for the first time, the rabbis can have a cheeseburger.

Fantastic. Oh, that’s a marketing slogan (at least). David Shapiro, as always giving us the latest on what’s going on in the investment world – not just today, but looking into the future. ESG – he’s been banging that drum for a while now. And we’re banging a drum for creativity! I hope you’ve enjoyed our Rational Radio today coming to you in lockdown. Thanks again, David. Your wisdom and support and very kind sharing to the public of South Africa is just so appreciated. From me, Alec Hogg, and all of our guests today. Thank you for joining us.

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