🔒 WEBINAR: Earnings seesaw – Global portfolio maintains 28% annualised growth

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JOHANNESBURG — As global quarterly company earnings start to stream in one of the most interesting movements to monitor is those stocks that are bought on rumour and sold on fact, and vice versa. It’s an interesting but nervous time for investors as the street calls are hit or missed, with some buying opportunities on hand. Alec Hogg takes viewers through the Biznews Global portfolio, which held on to its 28% annualised growth, assessing the monthly performance of each stock held. – Stuart Lowman

Well, that means that it’s time for the end of April Global Share Portfolio update. Hello there, I’m Alec Hogg, coming to you from London, just to show you that I do exist and I’m not a recording or a cardboard cut-out, let’s just put on the video screen there you go. I home you can see me, and hear me loud and clear (that’s more radio like) but anyway, there I am. It’s nice to be with you. We’re coming to you today to update our portfolio for the month of April. You might remember that we were, a little bit earlier in the month, we were a little late in March, due to my travel arrangements, and then we started the first week of April, and now toward the end of April we can give you an update of exactly what’s been going on. But getting back to having a look at the main screen, it shouldn’t be a minute and we’ll get that for you, my apologies – a little bit of technology getting sorted out here.
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Alec, I’ve got a question from this side, if you want, while you work on that. It’s from Benjamin Pretorius.

Do you want to just check, Stu? Sorry, that’s Stuart Lowman, he’s in Johannesburg, he’s the managing editor of BizNews.com and let’s just check if everything coming through all right?

Yes, Alec. The sound is coming through clear. We’re on the first page of the portfolio so, I think we’re ready to get cracking as soon as you’re ready.

Perfect, and I think, as Stuart usually does, if we could just ask everybody to give us the thumbs up, give us a little wave of the hands if you can hear us loud and clear so that we can then just double check that everything is working, Stuart?

Yes, they’re coming through. We’ve got lots of high-five there, Alec, that’s great, and obviously, to keep it conversational. Sorry, we’re a bit back-to-front today. There’s a little questions bar there on the control panel – just pop them in there and I’ll pass them onto Alec and we’ll try and keep the conversation flowing.

You said there was a question, should we start with that?

Yes, I’ve got a question from Benjamin Pretorius, he says, on Bloomberg today they reported that tech shares are suffering. Tencent has dropped below the $200 moving average, it’s the first time since 2016. This also affects Naspers – will you please discuss?

Definitely, thanks Ben, and that’s a very good question and it actually, talks to our portfolio structure and to our discussion that we’re going to be having today. Tech shares have been under pressure. That is primarily due to an incredible run that they’ve had recently, and they were priced for perfection. Now, they are being reconsidered whether perfection is the right pricing level for them or not. We’re quite comfortable with the underlying fundamentals of all of the stocks that are in our portfolio, and there’s some very good reasons for being positive on them. But I think it’s a great question, but let’s try and deal with that when we get to the individual stocks because to talk about tech shares as a whole, is really putting or being unfair to some of them and overly fair to others. We need to be looking at the individuals because just like any other share listed on any stock market, you cannot describe a whole sector, if you’re a stock picker, you should be looking at the individual shares or the individual stocks themselves. So, we will be doing that.

Just to have a look at our portfolio, which is not up on the screen with you. As you can see, we’ve had a fantastic run with Amazon, which is now 22% of the portfolio, as a consequence of that share price appreciation of almost fivefold. In the last month, as we’ll see in a moment, it went back above $1,500 a share, but it did quite well, from our previous portfolio. Those of you who were with us on the 4th April, will recall that at that stage the Trump war with China or promised war with China, was hitting kind of epidemic proportions. The stock market was fairly nervous. There were quite a few people who were selling-off shares and Amazon got down, at that stage, it was at $1,300.72. It’s subsequently recovered to over $1,500 a share, and it’s now sitting at $1,460 .

Sorry, Alec, I just need to jump in here. I’m getting a lot of people who can’t see the screen. I see it’s not updating on my side. It’s still on the front page so, I’m not sure.

Well, then why don’t we do this and see if that helps at all?

Perfect, yes.

Wonderful, okay. That’s for that, Stu. Just to give you a little bit of an insight on, and overall what happened with the portfolio in the last month. We were supported by improvements in the share prices of Amazon, Alphabet, a small increase in the Vanguard price – that went from $236.50 to $242 , as you can see there. Microsoft was up about $4 . Then on the other side, very small declines for Apple. Tencent came under a lot of pressure – that was down from (Hong Kong Dollars) HKD406 to HKD383 . Relatively speaking, it’s quite a lot, it’s about 5%. Then we had Alibaba, which actually served us quite well because Alibaba, you might recall, we had started buying it last month. We bought our first tranche $177 a share. We’ve bought our second tranche at $170 a share so, Alibaba helping us to average out, as you can see there, at just under $174 a share.

The strategy in this portfolio is to make your purchases over three-months so, the first month’s purchase of Alibaba has now been followed by this month’s purchase, and we will buy the final 4%, I think it is, of Alibaba next month. To take it up to a 12% shareholding. It’s a fantastic company, and we’ll talk about that in just a little while. But overall, you can see the portfolio was assisted by those three and it rose quite nicely in value, as a consequence. We did, however, increase the shareholding in Alibaba so, the second purchase at $170.22, which leaves us with $1,300 in cash, which is being held across to do the final purchase of Alibaba next month.

Then the portfolio in (Rand) ZAR has appreciated from R3.9m, on 4th April, to the current figure, as you can see there, about R4.15m. That is after starting off with this portfolio, of $200k, which at the time, was about just over R2m. So, it’s done very well since the beginning of the portfolio, on the 5th December. The annualised return there, 28%. That’s up from an annualised return of 26% last month, primarily due to a fall in the ZAR. You can see the ZAR there has eased back from R11.83, at the beginning of April, to R12.40, where it is at the moment.

You might recall, when we spoke last month, I was suggesting that the ZAR strength that although justified, by the change in direction of the economy, with our new president who actually understands economic policy and the correct policies to be implemented. That was justified, but as always happens in these things, it was probably overdone at that 20% gain that we saw in the ZAR, when Ramaphosa was elected, and it’s now starting to stabilise around the R12.50 level against the U.S. Dollar (USD). The main point of investing in a portfolio like this is to give yourself Rand hedge qualities offsetting the turbulence that will happen in the ZAR or in the currency, by having some of your money offshore.

If you have a look at it from a global perspective, SA is only 0.5% of the global economy so, you should have a significant portion of your assets offshore to reduce the exposure to the turbulence that one would see anyway, in a developing country, but also, you don’t want to put all of your eggs into a basket that’s only 0.5% of the world. That’s one of the main reasons why we started this portfolio and indeed, why we think it’s a very good place to be, having a sizeable chunk of your investments.

You can see there the sole loser for us here is Metro Bank, I’ll talk a little bit more about that in a moment, or rather later in the discussion, but outside of that we’ve had Amazon and Alphabet who have been our superstars. Well, Amazon the superstar, and Alphabet a star. A good performance by Berkshire Hathaway. The market, generally, in the U.S. that’s reflected by the Vanguard S&P 500 Index, which is up 40%. Tencent holding only came in, in May 2017, and although the price has pulled back in the past month, it’s still showing us, in ZAR, a very healthy return of 19%, significantly outperforming the market. Similarly, with Microsoft, which only came in on the 31st August, and that’s also outperformed the market, generally. Metro Bank – a disappointment, and Alibaba has just been added to the portfolio. So, generally speaking, you don’t get a return of 28% if you aren’t having some good fortune in your stock selections.

The ZAR, of course, is all important when it comes to this portfolio, and as you can see, going back to mid-November, when it became apparent that Ramaphosa could win or break the Zuma-dynasty, then the ZAR has appreciated. Just go back there to September 2017, which is quite easy to pick up on the chart, where the ZAR was just below R13 to the USD. It depreciated from R13 to the USD up to R14.47 and during that period, there was almost unanimity amongst the investors that Zuma’s wife would be elected as the next president of SA and there would be a continuation of a situation, which had seen SA’s GDP, in global terms, fall every year, since 2011. In fact, if you put it into USD terms the SA GDP has fallen from around $450bn in 2011, and by the end of 2016, it was below $300bn. That is a significant contraction and one that was perceived to be continuing if the Zuma-dynasty had continued.

However, around about late November, the feeling came into the marketplace that just maybe the country would change course. Just maybe there would be more sensible economic policies adopted by someone other than Zuma, and indeed, that’s what happened. You can see the appreciation of the ZAR until mid-December, it was quite strong. It went from R14.50 all the way down to R13.75, and then when Ramaphosa’s election actually happened, because only 90 people out of 4,700 in the ANC elective conference gave him the nod. You saw the strong appreciation of the ZAR getting to, comfortably below R12 at one stage. It seems to now be settling around about the R12.50 level, after the Ramaphoria is, I guess, as one might expect, you cannot anticipate that it would indefinitely continue that people would get terribly excited.

We saw yesterday, though that a reflection of how the consumers in SA believe, was the Consumer Confidence Index in SA rose by the greatest number ever, the index has been going since 1982, and it got to an all-time new record level, and that’s been reflected in the performance of the ZAR against the USD. You can probably expect that the Consumer Confidence Index would stabilise or even ease a little from the record levels that it was at, after the first quarter of 2018, and that’s what we’re seeing in the value of the ZAR as well.

Alec, just quickly on the Dollar, Ejay, (that’s who I see the question coming from), he says, ‘what’s your view on the USD weakening against other currencies? Could another currency be better to have offshore?’

Ejay, at the moment, the Dollar is the Global Reserve currency, even the Chinese, who would be the next in line, if you like, or perhaps even the Euros. They buy a lot of Dollars. They buy a lot of Dollar bonds. The U.S. is running a big trade deficit with other parts of the world, and that’s what got the Donald Trump all upset, but instead of saying, ‘Americans need to start saving more,’ he is treating the symptom rather than the cause and trying to stop imports or make imports more expensive. So, he’s forcing Americans to buy their own products but the problem is nothing to do with that. It’s all to do with savings – if you don’t save, if the country doesn’t save, if the country spends more than it earns then it needs to sell bonds to people from outside of the country. At the moment though, the U.S. has the benefit of being the world’s Reserve Currency, it could change if we had another four-years or six-years of Donald Trump. Who knows what could happen at that point with the economic lunacy that is being implemented at the moment. But for the moment, it’s almost like what Warren Buffet says, that America has survived bad presidents in the past, and it will survive Donald Trump. Until we see a switch in the Dollar, as being the Reserve Currency, until we see American companies themselves, losing confidence in their own currency, I think it would be very premature to start making those calls.

Thanks, Alec.

So, let’s carry-on and have a look at the individual performance of the shares in the portfolio. As you can see there, when we began this portfolio in December 2014, the ZAR was R11.27. It’s depreciated by 10%, which in four-years, is really not bad but primarily the reason for that is because of the election of Cyril Ramaphosa. If you look at that in context and try and understand a little better, you could see or you could make a case for further ZAR depreciation in the short-term. I know the sceptic, or the cynics rather, have been saying that we should be ignoring the Ramaphosa-euphoria and we should believe that everything is going to go back to the way it was. I disagree with that entirely and for so many reasons, but there is also, the reality, that in the last decade of the Zuma rule, SA’s economy has been really, badly affected.

You can put it almost like… It’s like having a party and the bad kids were there and they trashed the place, but they finally have been ejected and as a consequence of this R12.47, it has to be seen in context with R14.47, where it was just four-months ago. So, it is still a significant appreciation in the SA share price, which is, I guess what you would call the currency of a country.

Clearly, this shows us where the performance has come from, Amazon, Alphabet, Berkshire, the overall index in the U.S.A., Apple has been not that great. A little disappointing and it has been in fact, recently, as you’ll see in a minute, by the decline or the concerns of Apple iPhone sales but overall, as mentioned before, both Tencent and Microsoft have outperformed the market in the short time that we’ve had them in the portfolio.

There’s the reflection, as you can see, Metro Bank – we convert this all to ZAR because the bulk of investors in this portfolio are ZAR based. Remember, that’s why Standard Bank introduced Webtrader in the first place, was to give SA investors an opportunity to diversify their portfolios. You can do so, up to R1m there’s no questions asked, in fact. You have to purchase the Dollars and once you’ve purchased the Dollars, which you can do up to R1m. You then make these investments in the same allocation but it is interesting to look back at the ZAR/USD and you can see that the depreciation of the ZAR/USD has been fairly modest over the last four-years, as we mentioned a minute ago.

Stu, anything exciting to talk about or questions?

Nothing through yet, Alec. The only noise I’ve got is tree-cutters outside so, other than that, very quiet, but we do encourage questions to come through. So, as soon as something pops up just drop it into the questions-bar along the control panel, and I’ll pass it on as soon as it comes through.

Well, if there are tree-cutters it does tell us that the system is working.

I was going to say that, for sure, Alec, for sure.

Well, that’s Johannesburg. Onto Amazon.com and as always, we start with this stock. As you can see it got comfortably over $1,500 . It’s now eased back in the last little while, and we are now sitting at a price in the mid-$1,400 range, to $1,400.60. Amazon’s financial results for the quarter to the end of March come out this evening, after markets close so, we’ll have a story for you in BizNews tomorrow morning. The big news from the company, was in the annual shareholder or letters to shareholders, that Jeff Bezos, the founder, and chairman, penned. It’s one of those that you’ve really got to read as a master class in business. He had some pretty interesting things to say this time about service excellence and how you meet the growing expectations of your customer-base. Those are the kinds of things that we can take onboard for whatever business or whatever career we have followed. Bezos is now the richest man in the world, and he has created his fortune from nothing and from really implementing very good business ideas.

As far as investors are concerned, the big story to come out of the shareholder’s letter, from Bezos, was that Amazon Prime has cracked 100-million users. Now, that gives the company an enormous kicker into the future because Amazon Prime members spend something like three-times as much as the average customer of Amazon would spend. So, if you’re getting 100-million of them, and the reason why one becomes a member of Amazon Prime, as I am, is you get free delivery, you get access to Amazon Music, you get access to videos, or to movies. You really don’t need to have a cable network anymore and Amazon Prime costs you under $10 or £10 a month so, you’re getting fantastic value for money and it’s that old, network effect – the more people you have in the system, then the more value you can add to them, and as a consequence, the greater benefits everybody gets.

We’ve done this, by the way, in BizNews Premium, by keeping the prices low, at only £5 a month. The intention there is offer this to as many people as possible. If you consider just The Wall Street Journal, as that subscription, which is a fantastic benefit for anybody who has signed-up for BizNews Premium. Clearly, if you were to go directly it would be a different kettle of fish. But as part of the BizNews Premium package you get that, and that’s exactly what Amazon Prime is all about. It’s about creating this network, creating a group who together, have massive buying power and as a consequence, because there are many of you, you can also get to share and pay far less for a lot of the services that are offered.

So, Amazon Music, which has been kickstarted, and is doing very well. I access it all the time. Alexa, the artificial intelligence vehicle, and then of course, the other things that come with Amazon Prime, like free deliveries, are all giving us lots of benefits. That was Alexa in the background – I don’t know if you heard her, but I shouldn’t say it too loud because the minute you do, she comes to life. Anyway, Amazon will be giving us the financial results later today/tonight. The expectation is that the revenues for the first quarter will have gone up from $35bn, in the same quarter last year, to $50bn in this quarter this year. That’s what the street is expecting and that’s the number to look at because they reinvest virtually all of their profits at Amazon – it is one of those stories that just keeps growing and keeps growing incredibly rapidly.

Nothing more to say about Amazon in fact, except that if you own the shares, do the Koos Bekker story and don’t sell. That’s what Bekker has done with Naspers’ investment with Tencent for years and years. Naspers came under pressure from shareholders who said, ‘sell the shares,’ or, ‘get out of Tencent,’ or ‘it’s too high,’ or ‘it’s overvalued. Bekker has resisted that. Recently they sold 2% of their holding, they took it down from 33% to 31%, and promised they won’t sell another share for the next three-years. Then they took that money, about $10bn, which they’re going to reinvest into some of the other very exciting things that Naspers is doing. But it’s a similar story, when you look at Amazon, and you start getting tempted by cashing in your chips, because it’s up by 300-odd percent. Just remember what happened with Tencent and Naspers, and you’ll realise why we’ve also resisted the temptation to take profits on this one.

Thanks, Alec, just a few comments on Amazon. Gareth says, you sound like a good salesperson for Amazon. That’s just a comment.

I love the business. I’m a shareholder, and I think they have great products so, yes, I guess I am a good salesperson.

Then Daniel has just got a question, he asks, are you aware of any further developments regarding Amazon’s ambitions to expand the logistics arm or the possible acquisition, and may they come under pressure from the Trump corner regarding their supposed abuse of the U.S. Postal Service?

Yes, Donald Trump. If you’re listening to this, you obviously are a BizNews Premium subscriber so, that’s why I wasn’t trying to sell BizNews Premium, but just to explain how we’re thinking about these things. But I did a Rational Perspective podcast, which will be up on the site in the next half-hour or so, I know Felicity is busy working on the transcript right now. I urge you to go and listen to the interview that’s in there. It’s with a guy called Larry Kudlow, who is now the economic star in America. He’s like a mini-me of Donald Trump, and he says all the stuff that Donald Trump has said, he’s a mouthpiece. Trump got rid of Gary Cohn, an ex-investment banker from Goldman Sachs, who accompanied him to Davos.

You might remember that when Trump went to Davos, people heard his speech and said, ‘hey, that’s quite impressive.’ Well, the reason was because Gary Cohn wrote the thing, but Cohn has gone, as seems to happen to a lot of their good people who did volunteer to work with Trump. Then you’ve got this Larry Kudlow, who is actually a TV star. He doesn’t have education in anything on economics. In fact, he’s got no higher education whatsoever, and he is now mouthing the same kind of things that Trump would mouth on economics. Trump has tried his best to attack Amazon. The reason he does that is because Jeff Bezos owns The Washington Post, which is the most outspoken critic of Donald Trump, and if you recall that The Washington Post was also the most outspoken critic, in fact, the only one at the time, of Richard Nixon, over Watergate. Were it not for The Washington Post, Nixon would have continued as president of that country. It has a proud reputation of taking on and beating politicians, and in this case, Donald Trump is trying to find something to attack Amazon with. The market is telling us that they don’t really put much credence to it. Happy, Stu?

Thanks Alec, yes, I’ve got a question from Willem. It’s not really on a stock, but he says, ‘he’s sitting with R100k and he’s ready to invest in the portfolios, and how do you recommend he shares it between SA Champs and Global?’

That’s a very good question. My sense is that you probably… Yes, that’s a good question and I really don’t know. I would say though, as a philosophy, you should not invest it all at once. You could invest it over a period of three-months, try and do that, and that takes out the risk of having the prices move against you, and I guess, a 50:50 split would probably give you a good balance between the two. When I look at it from that perspective, that would probably be the most sensible thing to do.

Thanks, Alec, and a question from Tim. He said, ‘with the increased focus on Chinese equities, is there an increased risk in terms of a trade war between China and the U.S.?’

Yes, there is, and again, I’d urge you to go and listen to that Larry Kudlow interview. Apart from finding or hearing the emotion that is clearly dominating the thinking in the White House, and you get it very clearly from that podcast. Kudlow says that there’s no trade way. ‘We’re not even thinking about a trade war’ – these are proposals, these are suggestions that we need to bring China to the table to do things more fairly, and the sense that one gets from all of this, is that Donald Trump, and if you read Donald Trump’s book it’s all about his negotiating approach. He’s always been outrageous in the beginning, and then rollback your demands to a point that everybody agrees with. Whether the way you negotiate for purchasing a property, is the same way as you negotiate when you’re on a bilateral discussion with the Chinese. Whether that’s successful is way open to debate, but this morning Trump has sent a delegation to China or said, he will be sending a delegation to China in the next week to have discussions.

If you look at it rationally, certainly China has been the one that has managed this whole thing far better, so far, and it appears as though the Chinese approach towards this, ‘trade war,’ has been a lot more measured, a lot more sensible, and a lot smarter. I would just urge you to have a look at the detail of this. Whereas Trump goes in and tries to use a sabre – the Chinese would use a scalpel on the basis for instance that on the list is cranberries. You ask, ‘why cranberries?’ Well, cranberries come from the State of Wisconsin, where the Speaker of the House, Paul Ryan, comes from. So, biting cranberries you are going to be given Paul Ryan a comeuppance, and one of Trump’s allies, although Ryan said he’s not going to stand again for election, but at the time, he was in the mix.

They did the same thing with bourbon, and you’re saying, ‘why bourbon?’ Well, bourbon comes from Kentucky and Kentucky is the State where the Head of the U.S. Senate, McConnell, comes from, who’s also a Republican. So, it’s been a far more measured response from China hitting, if you like, or using the democratic system in the U.S.A., to attack the Congressmen in their heartlands, which of course, is going to make it very difficult for them to be re-elected. It’s very complex but to jump to the conclusion that there’s going to be a ‘trade war’ when these are proposals and you have a property developer in the White House, who’s using those kinds of tactics to make his point – I guess, it’s something that we need to be a little cautious of.

My suggestion on this is let’s just see when something happens to be promulgated. Of course, you’ve also got to put into the mix that there are mid-term elections in November, and the way things are going, there was another election yesterday in the U.S., and the way things went in that election – it appears as though the Democrats need something like a 4% swing from the votes that there were achieved by Donald Trump. If they get the swings in, if you like, the bi-elections that we’ve had up to now, have been far greater than that. There’ve been 15% to 20% swings so that suggests that the Democrats could come in, which of course, then hamstrings any suggestions of ‘trade wars,’ because all that will happen is Trump will suggest something, and the guys in Congress will say, ‘no.’ It’s that simple so, I wouldn’t start jumping to conclusions that we’re going to see tariffs coming in any time terribly soon. Let’s just see what does happen.

Thanks, Alec. A quick one from Ivor, he asks, ‘are you still happy that you’ve exited Tesla?’

Very happy. Tesla is a company that I liked a lot. I was and I am very excited about Elon Musk’s entrepreneurial abilities but he’s also reflecting some high levels of arrogance and that’s not the kind of business that you want to be involved or invested in. If you contrast the way that Musk promises and doesn’t deliver, with the way that Bezos doesn’t promise and over delivers. You’ve got the difference there and I would urge you again, if you have questions about this, read Good to Great, probably the best business book or the book on corporations to have ever been written by Jim Collins, and you’ll see that the top-performing companies, for investors, over an extended period of time, are run by CEOs who are a very low-profile. They certainly don’t Tweet, well I suppose a lot of them didn’t have Twitter at the time, but they don’t reflect any arrogance whatsoever. They have their feet on the ground, they’re humble, and humility is one of the great assets for any CEO or for any human being in the Fourth Industrial Revolution (4IR) that we’re going through now, because it doesn’t matter how smart you are, you haven’t got all the answers. I just get the sense from Elon Musk that he’s forgotten that very important role.

Excellent, thanks, Alec.

Moving onto Alphabet, their financial results came out in the last couple of days. The numbers were good. They were better than anticipated, but you can see, or certainly that had been projected by the street, but you can see there’s been some selling pressure on Alphabet. It’s almost like there was an anticipation that the results were going to be good, when you look at that right towards the end. The share price going up towards $1,100 a share, but then when then when the numbers came out, it was ‘buy on rumour – sell on fact.’ The share price came back to that level, of just over $1,000 a share. It’s treated us well. We’re well into the profits. Alphabet is starting to see some resistance but the numbers are good, and it continues to produce excellent ad revenues.

It also shows the difficulty that exists in trying to run a media business, if you’re not Alphabet or Facebook right now, ad revenue for Alphabet, which is Google, was up 24% in the first quarter, that’s year-on-year, and the paid clicks were up 59% but the cost per click, i.e., the cost that advertisers were paying to get their message out there, fell 19%. So, what Alphabet is doing or Google is doing is that they growing their market share of the online advertising revenue. Cutting down on the costs, a little bit like what Amazon is doing in the retail market, they’re cutting down the costs to advertisers but by a definition it’s having a dreadful impact on the old model, the old ‘free to air’ model that is still perpetrated by quite a lot of media companies. Again, you need to start charging for your content, as we’re doing at BizNews, and as The Wall Street Journal does, and many other esteemed publications. But there are good numbers coming out of Alphabet, the company whose biggest subsidiary is Google.

Moving onto Apple, and you can see the share price has come down here. This is ‘sell on rumour.’ Let’s hope that there’s a little bit of ‘buy on fact’ here because Apple’s results are coming out on Tuesday. The information that’s coming through in the market place, from the component suppliers in China and Taiwan, is that Apple’s sales of their iPhones have been worse than projected and worse than anticipated because the component suppliers are saying that the sales they are making to Apple, to put these phones together, have been lower than what the market was anticipating.

So, here we’ve seen the share price, which nearly got back to its all time high, of over $180 in the past week or so, coming down towards $160. But remember, our investment is for the long-term. Our view on Apple is very much to do with the ecosystem that will continue to grow, again, the network effect at play here, and the benefit that Apple gets from the reduction or in Trump’s reduction in tax rates and his view that American companies can bring their money back to the U.S., and only pay a very small tax on it. Whereas, in the past the tax would have been… Well, it was a disincentive to bring that cash back. Those are two very big things for Apple, which will benefit the stock, longer-term. In the short-term though, as you can see, the volatility has returned to the market. We know that shares on the American stock market are now moving or whipsawing quite significantly. The view here would be if you don’t own any Apple shares it’s been at least a year since you’ve been able to buy them at this price. Well, not at least a year but it’s been almost a year since you’ve been able to buy them at this price so, it would be a good bet into the future.

Tencent Holdings and given the questions that we had a little earlier, let’s spend a little bit of time on this. The share price of Tencent has come down, I guess with sentiment on the one hand. Tencent, by the way, is listed on the Hong Kong Stock Exchange. There are ADRs in America but they’re very low-volume so, the investment here through Webtrader, would be directly onto the Hong Kong Stock Market. The share price of Tencent, as you can see, around about HKD450 to below HKD400. It started off, the decline, when Naspers said it would be selling 2% points of it’s 33% holding and it seems to have continued to be affected by the impact of all the talk going on from the White House.

But in essence, something very relevant that one needs to look at here is that Tencent’s relationship with the Chinese Government is very different to the relationship that the Silicon Valley giants have with the American Government. China, is a country where the ruling political party, well the only political party is aligned with the Tencent dream and ideal. It’s also positioned Tencent, as well as Alibaba, who we’ll talk about in a moment, as a national champion and it’s also focussing, is Beijing, on promoting technology. If you put all of that together, and Pony Ma, the CEO and founder of Tencent Holdings, was actually at the National Peoples’ Congress as a delegate and he was highly celebrated there – a national hero for what he has done.

Very different to the reception that Jeff Bezos would have, if he walked into the White House, for instance. So, we’ve got to understand that different strokes for different folks. The American investors are concerned about issues on Tencent, but it’s good to realise that Tencent’s market cap, which is nearly $600bn now, is bigger than the GDPs of 183 countries in the world, including SA, which is sitting at just over $300bn so, only around half of what the market cap is of Tencent. Tencent, of course, has lots of influence in SA, given the fact that Naspers owns 31% of the company. What we need to be aware of here, in the latest development, is that it is in the process of spinning-off Tencent Music. It’s looking to have it listed as a separate entity in the U.S.A. in the second-half of this year. That will be the fourth biggest U.S. IPO ever, and it follows the IPO of the Swedish company, Spotify.

Spotify’s market cap was $29bn. Tencent Music, which has got 700-million active users, these are numbers that kind of boggles the mind but China is a big place and it is anticipated that Tencent Music’s market cap would be $25bn so, there’s quite a bit of excitement being generated along that side – not yet being reflected in the share price of Tencent. Tencent, just by way of remind you, also has big slugs of Tesla, Spotify, and Snap. In fact, Tencent Music and Spotify did a deal before Spotify’s listing, which has also benefited Tencent. Something else to think about – $25bn market cap of Tencent Music, would translate into around a third of that, is valued to Naspers. So, whatever benefits or however Tencent grows, and it is on a path, from a business perspective – that is looking extremely appealing. There is a direct relation or correlation that goes back to Naspers.

Thanks, Alec, no questions yet, on Tencent.

Okay, let’s move on to Vanguard S&P 500 Index. This, as a reminder, is an investment in the U.S. market as a whole, the way the S&P 500 Index is compiled is that they would take the market capitalisation of 500 of the biggest on the U.S. stock market and then allocate money in proportionate weighting to those stocks. So, it gives you an overall investment in a basket of the 500 shares and it shows you how the market is going. The cost of the Vanguard S&P 500 is 4 basis points, i.e., 0.04%, as a cost and the reason they can charge so little is the stocks that are owned in the portfolio get lent out to short-sellers. So, those, for instance, who want to believe that Tesla is going to fall in value, will then sell the shares, but they need to borrow the underlying equity from somebody before they can do so, because you can imagine, you sell the shares and the share price goes up and they can’t deliver on those shares – they need to actually have those in their hands so that’s how Vanguard and other ETFs make their money, and then keep down the costs.

It is, however, a good reflection of the way that the stock market has performed and you can see the volatility story, as is well articulated or the Trump-trade, as some people have called it, over the past year it’s been very steady, the U.S. stock market, just going up and up. Until late January, and then we had that sharp sell-off. Then the volatility has come into the market place, which active managers love because it makes share picking so much more difficult. Up to that point all you had to do really, was buy the market and you would outperform. Now, it’s volatile, and you can see that since February, the quite sharp movements up and down in the index, which is reflective of the way that the market overall, has become a lot more volatile.

Microsoft also, results coming out from this company soon. You can see there that Microsoft has had a fantastic run, it’s been one of those pretty immune to the tech sell-off and also, the volumes down at the bottom, they’re very strong. It’s one of those stocks, long-term, that if you don’t have in your portfolio you should be using the opportunity of weakness, to add it to the portfolio. Not least, because the business model is changing from one where it had to sell, like many companies, through retail outlets or through it’s own upgrades To one where its now gone to the automated customer, where most customers, myself included, when you buy Microsoft Office, instead of buying the boxset, if you like, you pay a monthly fee and that monthly fee then gives you the automatic updates. It’s nice for the user because the monthly fee is reasonable, and it’s very good for Microsoft because like, with Amazon Prime, which has got 100-million customers, Microsoft would have many more than that on Microsoft Office, and it just perpetuates. It’s a fantastic model for business. Stu?

Sorry, Alec, it’s still quiet on this side. It’s a bit of silence at the moment and nothing yet to add.

Here’s our concern, Metro Bank PLC. That is the day that I met Vernon Hill, and he is, (just for memory) the guy who started a bank at the age of 26, in the U.S.A. and sold it for $9bn, after building it up from zero branches to hundreds of them. Then took a break for a couple of weeks and then decided that the UK market was just too appealing, and he brought the same model to London, and has been growing in Greater London with Metro Bank. Now, this is a company that is far surpassed any expectations in terms of growth, but on the other hand, when you grow rapidly, as a bank, you also need capital. So, you’ve got this ongoing tension between the bank itself, or through Metro Bank, and those who fund it.

When the results came out towards the end of March, it showed that Metro Bank’s loan book, i.e., the money that it’s lent out had grown by 69% year-on-year. But that is also contracted its capital, and its capital, which was sitting at 18%, the Common Equity Tier 1 (CET1), had gone down to 13.5%. The concern that investors have about Metro Bank is if it continues growing this rapidly it’s going to have to go and borrow money from shareholders through a rights issue, and shareholders are, of course, betting against the bank because if you want to sell more shares they want pay the least possible price. So, the thinking there is, as Metro Bank is going to come and borrow more money from shareholders or sell more shares into the market – why buy the shares today? Rather get in there and when they have this £200m or £300m rights issue you’ll be able to get it cheaper. If they don’t have that rights issue, City Group has estimated that the CET1 percentage would drop from 13.5% to 11.5%, and that would force them to have this cash call because the bank itself, has a target 12%.

On the other hand, the CEO, Craig Donaldson, has said, ‘they’re not going to be raising any more money this year,’ so he might have to have a climb down, or the investors might have to have a climb down. But the problem is with this rapidly growing bank, which is really chewing up market share, and again, I’m a customer and I’ve seen how these guys operate, a bit like the way that customers are the best ambassadors for any bank – Metro Bank is a fine operation and you can understand why they are growing so rapidly, because High Street banks in the UK are not really that well-managed. Remember, they’ve been paying big fines, they haven’t been increasing the salaries of staff, and the staff seem to be pretty demotivated everywhere you look at other banks. Whereas this one, Metro Bank, you get greeted at the door. It’s a fine bank as far as a retail customer is concerned and also, for small businesses. As a consequence of that, it’s not surprising to see the massive growth that they’re experiencing in their customer numbers.

That’s exactly what Vernon Hill was trying to achieve, and in this year, they’ll be opening another 12 new branches, taking their total to 55. But investors are saying, ‘you’ve got to pay for this somehow and you need the money from us, and we don’t want to give you top-Dollar.’ So, that’s really what’s happened. That’s the story of Metro Bank, it’s a bit of a sleeper but when you look at this share price movement – all was pretty modest, I guess, up until early March. Then the share price shot up on a couple of really, good deals that Metro Bank did in acquiring books from other banks. What’s been happening is because of EU rules some of the big banks in the UK have had to hive off their equity that they own or their loan books. In fact, there’s another one coming up just now with the Royal Bank of Scotland (RBS), which is having to sell-off a big chunk of its small business book to align it more and more with what the regulator’s rules are, and some pretty good deals that Metro Bank did, saw the share price shooting up, and then suddenly, because of this concern about capital, it’s come all the way back from £40 a share down to £32.50 at the moment. So, it’s lowest level, in fact, it got to £31.50 – it’s lowest level since it listed, and big volumes.

It looks to me, if you interpret this that a shareholder somewhere decided that they wanted out of Metro Bank, and you can see the decline in the share price. Why are we holding onto it? It’s a sleeper. It’s one of those that you can see the underlying business is really expanding and growing incredibly well. A very good business – stick with it. We don’t know when things are doing to turn around but on this one, it’s well worth being patient, until the fundamentals change, and it’s a good investment opportunity right now. I hope that explains why I remain confident about Metro Bank.

Thanks Alec, a question from Duncan on Apple. He said, surely, with Nokia’s new range selling for less than half, it will affect Apple, going forward. That’s from Duncan Simpson.

Duncan, I’m sure you’re right. You’re probably more of an expert, and I didn’t even realise that Nokia were back in the business in a serious manner. Of course, there would be challenges all over the place. But the story of Apple is not really, although that’s where they get their income from at the moment, is the sale of iPhones. It’s not really an iPhone story. It’s much more a story of a strong, underlying base of cash, over $200bn in cash, which is 35% of their share price. Then the ecosystem, which is more than a billion of there products are out in the market place. It’s a little like Tencent, who’ve got all those users of their software.

When you’re an Apple user you tend to stick with Apple. I guess there will be those who would be tempted away onto other operating platforms or onto the android platform, but why people are with Apple is it’s just ease of use across the whole ecosystem, whether it’s Apple iTunes, the apps, which are being the inventors of smartphones. Apple has got a huge advantage over everybody else there, whether it’s your desktop, and your laptop. If I sit with my laptop somewhere and write a story or produce some input, I don’t have to worry about sharing it anywhere because when I close the laptop it’s automatically on my desktop. Now, those kinds of integrations, that kind of smart integration that Apple has, and the continuation of Apple’s investment into research and development – they’ve got bigger budgets than everybody else because they are bigger. Those are the benefits that come to play.

It’s not simply a question of ‘there’s a cheaper alterative so, let’s go and buy a cheaper phone.’ It’s more a question of, ‘what am I getting from the ecosystem,’ and to me, that’s the exciting part of Apple. Something that we haven’t really seen yet, being reflected in the share price and continuously Wall Street looks at, ‘what is Apple’s revenues through the sale of it’s iPhones?’ It doesn’t look back into the real value of this company because that’s something that will keep it going for many years into the future, and that was the genius of Steve Jobs. His genius was, ‘let’s build an ecosystem where people will be happy and comfortable,’ and not be exposed to some of the dangers that one has in a network, like the internet where you have various fellows who try to breakthrough and if you have an open source system it’s a lot easier to plant a few viruses here and there than it is through the Apple system. I hope that kind of explains it better.

Thanks, Alec.

Moving onto Mr Warren Buffett, who is as usual, going to be having his annual general meeting in the very near future. That’s always in that first weekend in May, and here he has a share price that at the moment, has been bouncing around the $200 a share level. It is interesting to me that Berkshire Hathaway has outperformed the S&P 500 Index so, when we have a look at the period that we’ve held the stock from or when we began in December 2014. So, that’s really what the purpose of it was in the first place, was to have a big chunk in the S&P 500 Index and a big chunk in Berkshire Hathaway, and then to have share selections or share picks elsewhere.

It is a company that we’re going to be hearing a whole lot more from, in the next couple of weeks, as the AGM is held in Omaha, and I’m confident that Mr Buffett will not be disappointing again. The funny thing about this stock as well is that around the AGM it always ticks up. Now, I don’t know if this is because when the faithful or when the pilgrims get together in Omaha, they get so enthused that they go out and either buy the shares beforehand or by the shares afterwards. But it will be very interesting, this AGM, to see if that pattern is repeated, and indeed, to hear what Warren Buffett has to say about Mr Trump, who is not somebody of whom he’s particularly fond of.

I think closing off our portfolio is with Jack Ma. I like this picture. It was taken from a recent address that he gave at a university – look at him, he’s got a tracksuit top on, with a t-shirt, talking to university students, in his element, Jack Ma, and Alibaba is a stock that like Tencent, has been influenced by the noise coming out of the White House, but I will just remind you that Alibaba conducts more transactions than eBay and Amazon combined. It’s also got a listing of a new company coming up, the biggest new IPO, even bigger, much bigger in fact, than Tencent Music. It’s a company called Ant Financial, which has got a little bit of a controversial birth.

I know Sean Peche, who wrote a particularly good story from his perspective, where he was critical of the structure of the ownership of Chinese companies. As a consequence, he was concerned about Naspers. Well, that’s what make a market talking to the people who’ve invested in China for a long time. The feedback that they were giving me was that this is just a standard practice and in fact, the Naspers team said, ‘their investment is alongside Pony Ma’s investment.’ But why this became an issue was because when Alibaba put together its financial services company, Ant Financial, Jack Ma had a separate investment there, as an entrepreneur, and not with the company. Now, he explains that it was because of Chinese regulations that Chinese financial companies may not be owned by foreigners, but there is still scepticism around that.

Be that as it may, Ant Financial is getting itself ready for an IPO, which will make the other IPOs look tiny. It’s valuation, given the latest round of funding, was $150bn. They are going to be listing on the American stock markets. They however, have had a little setback in the U.S. with the proposed acquisition, it’s just over $1bn of a company in America called MoneyGram, which was blocked by the U.S. authorities. So, this interaction, or this engagement, or this unhappiness between China and America is not likely to go away any time soon, and it will have an impact, like in this instance. But if you consider the size of Alibaba’s operation, and particularly now because of the listing in the next few months or early next year of Ant Financial. Its Taobao brand has got 550-million active users, and that’s more than the entire population of the U.S. also, total mobile payments around the world last year, that’s everything on mobile, was $11.5tr – 54% of that, over half of that, was done by Ant Financial, the Alibaba subsidiary, just to give you an understanding of the scale and the size of this business.

The other big thing here, particularly in the wake of Facebook is that in the Western world there’s a lot of concern about privacy issues, and about anti—trust. In China, the Chinese consumer, actually doesn’t mind, or certainly the Chinese Government is not implementing any regulations to limit the way that Alibaba, Tencent, and the other member, of what they call the BATs, Baidu, can harvest data from its users, and you can imagine if you have the free option to harvest all of this data, you could then use that, in a financial sense, to produce really, tailored made packages, as Ant Financial has done. Hence, it’s massive dominance in the Chinese market and elsewhere, where it is expanding.

It’s an incredible story. The share price has come down a little. I love the Chinese tech stocks, Alibaba and Tencent, because relatively speaking, they still offer superb value, compared with Silicon Valley. If they were American companies with this kind of a reach, the share prices would be significantly higher than what they are at the moment. As one has a look at the difference between the growth rates of China versus America, the sizes of the populations in China versus America, you have to believe, well mostly, the strategy of the Chinese Government to create national champions versus America, where it’s a confrontational relationship. You have to believe that these would be the horses to be on the back of, in the time going ahead.

And that, Stuart, brings us to the end of today’s presentation. There’s our portfolio in ZAR, as a reminder, it’s up 93%, since its beginning on the 5th December 2014, which is an annualised return of 28%. Helped along by the ZAR, of that 28, well it would only be a few percentage points in fact, that the ZAR has assisted. But the big winner there was Amazon.com, with Alphabet being the second biggest one, and some nice contributions from some of the recent additions.

Thanks, Alec. Just quickly before we run-off. Guy says he’s got R50,000 – would you by Amazon, Alibaba, or Tencent?’ He’s already got a bit of Amazon.

I’d split it between the three. I wouldn’t know which of the three were going to be the big winners in the future. Amazon is just a phenomenal company, and having being exposed to it, being in the Western World, you can be quite comfortable that that bulldozer ain’t going to be stopping any time soon. But both Tencent and Alibaba are operating in a far, more populous area, in an area where the economies are growing faster, and where they have the support of their Government. So, my sense on that would be, why bet on one, take a portfolio, as we have here.

Excellent, thanks, Alec. That’s it from my side.

Well thanks, Stu, and thanks to everybody for joining us today. I hope that you found the update useful and it helps to guide you in your own investment decisions as we go ahead. You’ll see there’s a combination in the portfolio of stocks that have really done well for us. Stocks that are sleepers, and we’re comfortable with the positioning in the longer-term, and stocks that well, there are battles going on there but who knows when those battles will be one way or the other? I guess you could put our technology stocks and Metro Bank into that category as well, but as always, you need a spread of investments. There’s no certainty that each one of them are going to be winners, but we are doing our very best to keep you updated on it. So, it helps you also, to make your decisions, but my goodness, we could do with some more Amazons, couldn’t we? I think anybody could.

With a 28% return annualised, since we began in December 2014, and that is an unrealistically high return on investment for any portfolio. When internationally, if you can get well, the 100-year record is 7% so, we’ve been fortunate and we need to bear that in mind as well, and remain humble, and continue to try and find the outperformers into the long-term. The way this portfolio is structured is positioned for 4IR, positioned with an understanding, or a belief that there are seismic shifts in the world and let’s go with the companies that will benefit from that, rather than those that would be exposed to it.

Thanks very much, as ever, from Alec Hogg, here in London. Until the next time, cheerio.

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