SA’s favourite market commentator David Shapiro applies half a century of experience to interpreting the current stock market turbulence. And in this podcast, drawn from the latest episode of Rational Radio, he likens the fight against Covid-19 to a 90 day war: surmising that the market has absorbed the shock and will now be looking for the greenshoots of recovery. – Alec Hogg
As always, it’s a warm welcome to David Shapiro as we kick off the show with a market that’s down about 6% today.
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At the moment the All Share Index is down about 5%. But metals down 9-10% and industrials as well. So it’s been a widespread sell off. You know I watch 88 shares which are the largest caps carefully. I watch those on a spreadsheet and all 88 are down at the moment. So it’s that kind of day. It’s very difficult.
And did you see the trading statement that came out from Famous Brands? There’s so much on SENS about the different companies that are implementing different issues.
Yes, I see it now, it just came out.
What they’re saying is they’re going to look after their food delivery. They’re going to practice social distancing and so on. But when we spoke with the Cronje’s in China, they said when they wanted to go out to eat they had to sit at different tables. I don’t think we’ve quite got to that point in South Africa yet.
Not at all. I was in Melrose Arch over the weekend – just to go buy supplies – I looked in at the restaurants and there was the odd table where people were dining and most of the restaurants were open but very few people around. I went into Woolworths, which was strangely enough well stocked. But there was no more than a handful of people at the tills. Normally there are a lot more, certainly on a weekend. So people are avoiding each other and not wanting to go out. So I think the message is getting through.
Okay. Mr. Shapiro, we’ve seen that the markets struggled a little bit this morning, getting back to that war analogy, if it’s a 90 day war you would look at things differently. If this war continues for longer than 90 days then one has to maybe conserve cash at all costs. Why do you think that 90 days could be the term?
Maybe I’m too optimistic or maybe I’ve been around too long but the one thing about markets is that once they begin to discount the bad news people start to look differently at a share’s price or at life. I think we’ve seen the worst in the news. In other words it’s no more shock value. I call it shock value in that we know it’s around. We know we go into lockdown. We know all of that. When Goldman Sachs comes out and says oh the US economy is going to be 30% down, we know that we’ve closed the world down. So what do you expect. So that kind of news is not really forcing us out anymore. It’s only the marginal players that are saying ‘Okay let’s get out now’. So I would imagine we’re going to start seeing the signs of a bottoming of the market. It’s not going to feel like that to you but that’s why I say we’re probably closer to the end than the beginning. Also after a few weeks of this, people start saying I can’t stay holed up, I’m gonna get out, I’m going to start doing things. They look at ways in which to get their life back to normal so they will start to go to Grace’s restaurant or start to Uber, start spending and trying to improve the lifestyle that they’re leading. And I’ll come to other things as we talk as well. So I’m saying hold on a sec, don’t position yourself for disaster, rather try and position yourself for what things are going to look like when this ends.
Isn’t the right thing to do now is not to try and catch any falling knives and not to throw good money potentially after bad but just to sit on the sidelines – as you’ve been advising over the last couple of weeks – and just wait for things to settle?
Exactly and look for opportunities, start thinking about your portfolio and where you want to be and what will the world look like. I don’t think it’s going to change. I think we’re going back to where we are, although when I say go back to where we are, I still think the same economy will prevail. I’ve been a big believer in the tech economy. Alec, I see you in your studio sitting there doing very good radio but you’re handling everything. Remember the old days we had Sunshine and you had a whole production team.
Monique and Janine and everyone in the back end organising.
So just think about that, think about how conditions have changed and how we’re embracing the so-called data economy. It’s going to prevail and I think that the big tech companies are still going to forge ahead. They’ve got plenty of money. They’re going to continue with their research and development looking for new products. I think we’re going to see massive changes in health and healthcare and pharmaceuticals. So I’m saying hold on. There’s going to be plenty of opportunity for us to make up the kind of losses that we have at the moment.
Now here’s a theory, one that I have to ascribe to Hendrik du Toit who by the way his company “Ninety One“, can you believe the bad luck about their listing. Today it’s down 17%, again.
Hendrick has worked so hard to get this company off the ground. He’s worked so hard in the Investec stable etc. For him and for his staff who wanted to go alone – that’s been their strategy, they felt that they should be a part from the bank – so to see their shares tumble like this and the business so difficult to pick up, is very disheartening, but Hendrik’s been through a few himself. He started in 1991 so I can name at least 6 or 7 downturns that he’s already experienced. So he’s hardened and will pick up from where he is at the moment.
The point he made though was in a war economy, Governments don’t care about restraining their spending because they shouldn’t. What’s the point in restraining your spending when the Germans have actually taken over the country, are you talking German in a year’s time. And we have germs – not Germans this time – if you don’t spend, if you don’t fight back against it – in a war economy – you’re going to capitulate to a different enemy. Is that – in the long term – not sowing seeds for inflation, for escalation in asset prices, simply because they’ll be just be so much more money around.
I hope so. I’m not scared about it. Once we do get inflation – if we do – remember we said the same thing in 2007, 2008 and 2009, we were dead scared that these policies that Bernanke was increasing would send inflation through the roof. We haven’t seen it in 10 years and we’re probably not going to see it. I don’t understand it. I don’t think economists understand it. So I don’t think at this point inflation is an issue. You know what the big point is? When you listen to Grace, the point is that we’ve got to make sure that her business survives. That’s what the point of government is, to make sure that these businesses remain intact, that you continue to maintain your productive capacity and that you don’t throw away workers who’ve got skills and whom you’ve trained. That’s where government has got to come in and do whatever they can. They’ve got to get cash to places like Grace’s company. They’ve got to say to her, what do you need to survive over the next three months so that you don’t go down the tubes, that we don’t lose your business. The UK is trying to do that, Europe’s trying to do that and the US is trying to do. When we were talking earlier I said that the shock value is out of the market and markets will start to look ahead. That’s why you have to position yourself for where you’re going to be in the next two, three years. And it’s absolutely essential that you get the kind of businesses that are going to survive and prosper during these times. In my view, we don’t have to get the turnaround stocks, you don’t have to look at Sasol and say, “is it a gamble, is it going to come out of this downswing”? Personally that’s exactly what I’m doing, trying to work out where we should be placing our clients money. I see another aspect of it. I’m very big into tech as we were talking about earlier. I still think that tech companies have got so much cash on their balance sheets and therefore can sustain research and development and can sustain CapEx without even selling a product. The other story is there’s going to be a big swing towards health. In the same way as in 2008 and 2009, we did stress testing on banks, we are now going to start doing stress testing on health care systems. Whether hospitals can cope – because that’s what’s behind the whole Covid-19, is the worry that hospitals will be overwhelmed. This is an area we’ve ignored, there’s been so much pressure on pharmaceutical companies to cut back because of their overpricing. I think all of those issues are now going to subside and a lot more liberal attitude will be taken towards that. So plenty of places to look for in the next couple of years.
Well David we’ve been talking a theme – if you like – over the last few weeks about this switch, this transition to tech and the way that if you are going to be investing, do look for those companies that can take advantage of the 4th industrial revolution – the new world – because if nothing else Covid-19 is probably going to push us in that direction.
I think even more so. We were already moving towards that data economy and if anything I think what we’ve learned through Covid-19 – from people staying at home, from people learning at home, from people doing business at home, we can’t completely isolate ourselves but I think things are going to change dramatically in favour of businesses that are positioning themselves correctly.
