🔒 From Naspers, Tencent and Prosus to Investec, ABSA and Capitec – David Shapiro’s dive into murky market

In what is clearly a difficult and murky period for markets, SA’s favourite market analyst David Shapiro believes that patience will be required in the next few months as the upside will take some time. – Nadya Swart

Welcome to Rational Radio – the webinar edition. A pretty good turnout for our Rational Radio as always, but especially so this week. And, of course, in studio we have David Shapiro. David, I love that picture of you – do you wear the mask pretty much all the time?
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No, I had to do that for a webcast. Somebody wanted to see us in a mask and you’ll see that my hair is a lot shorter than it was there as well, a lot more gray in that picture. I look much older than I really am. So, I’m not proud of that picture. 

It’s quite a nifty mask, ours are pretty much homemade versions. Where did that come from?

My wife went out. She’s a specialist in these kinds of things and looked for one that we have to continually spray and keep and the whole family has got them. There were a number of people that were out over the weekend, it was just quite astonishing – everybody coming out and just airing themselves, walking their children, just walking. You can see what lockup has done to them – they just need some fresh air. And the weather was magnificent. Even today it’s really beautiful. Such a beautiful Highveld autumn.

We’re very privileged to live in this part of the world, certainly weather-wise. There’s lots of debate. I got an email from somebody today who said that there are something like 500,000 people saying ‘end the lockdown’ whereas 5,000 people say ‘keep it going’. That’s something that we’ll be talking about, no doubt, as we go through the program. But let’s start off with the markets generally, David. I’ll bring up in a minute how they are performing at the moment, but how are you reading things this Monday morning? 

We are in a difficult period now. No one can see ahead. No one really knows where we’re heading. We’re in that murky period. The news that’s coming up on the medical side is improving, as we saw from Gilead last week. Also on the vaccine side, there tends to be a belief that with so much money being thrown at the problem – there will be a vaccine by the end of the year. So I think on that side you’re starting to get better news. On the economic side, the numbers that are coming out are very distressing. I’m talking more in a global context now, but I think it’s going to be only by the year end that we’ll start to see better numbers coming through.

There’s still a lot of concern about where global economies will be in the next three months, corporate earnings and so on. It’s a difficult period. We’re also going to have to count the cost. So you can understand why those 500,000 people want to come back to work. They’re frustrated, they’re not earning. We’re seeing a lot of small and medium sized businesses just closing up; hairdressers, spas. So I think globally – it’s a big issue. If you want to stay in the market – just be patient. Over the next month it’s going to be a very, very difficult time to negotiate. The one thing I must say is that the market is actually short. What I mean by that is money managers are accumulating huge amounts of cash, the traders – those who want to be short, are short. So that tends to give some kind of underpin to the market. So, we’re not likely to see any major, major shifts downward, but I think the upside shift is going to take a little longer – it’s going to take some time.

I’m just looking at the screen right now, David, and the bigger movers on today – obviously the penny stocks are dominating there. But as you go down the list you see Sasol – that’s down 11%. EOH, wow – down another 11%. And then you’ve got Tsogo Sun, which somehow picked up 9.5%. But this kind of volatility is something we need to get used to, I presume?

It’s crazy. I’ve never in my life seen moves like this – 10% moves in a day, either up or down. Liquidity is very low as well, meaning that there’s not much of a market out there. The only markets that we’re seeing in a big way are in the top end of the market – Naspers, Prosus, the gold shares, some of the miners – those tend to dominate trade. Trade has been okay. It’s been in the region of about 20 – 23 billion a day. It’s light, but it’s better than we’ve seen at the beginning of the year – so there’s a lot of trade taking place, but it’s not in those lower commodity stocks, not in the smaller numbers as well. So, that’s why we see the kind of volatility that we’re identifying now.

But even there – now I’ve pulled up the most value traded and (as you can see there) – the top 20 are all down today. So it hasn’t been a good day at all so far, with some really big hits being taken on some of the stocks; 8.5% for ABSA, Richemont – 3%, Nedbank – 6.5%, Capitec – 5%. There are really big moves, David. If you’re an investor – presumably, you just sit on the sidelines. 

That’s catch up from Friday. Remember we were closed. Friday was a bad day for markets, it was the first of May. So there was a lot of rebalancing in global markets. It’s still a move out of equities into cash. But I think on Friday US markets were down 3%. Also this morning, we’re just playing catch up with where markets are going to go. There’s further downward pressure on global markets. Sasol, the oil price – not looking good again, taking some big hits and they’re coming under a bit of pressure. Abdul Davids wrote something in Business Day this morning (or was interviewed in Business Day this morning) that gives you a good insight into Sasol – just talking about the proposed sale of the Lake Charles project and how he’s broken it up into two areas – where it’s probably going to be the plastic side, not the specialised chemicals, that they’ll sell. But also saying that there are people who want to come in. So, worth a read this morning – first decent insight I’ve seen into Sasol. 

Excellent. Paul Hansen wants to know if anyone has heard of any news about whether the Global Government Bond Index has sold its South African bonds yet. David?

I’m trying to find that out this morning. There’s been no evidence in the pricing. What was interesting though is that the rand, which Thursday morning was 18.03, spiked on Friday roundabout 18.80, 18.90 (is where we took off this morning). We’ve settled down slightly at 18.75, which does suggest a little bit of withdrawal. I sat through a presentation this morning and I don’t think that that is confined to South Africa. I think it’s a general trend that we have seen in markets where there has been rebalancing of pension funds and other investment vehicles, where there’s been still a huge sell off in equities going into bonds or going into cash. So I think if there has been a sell – off that’s probably in line with what we’re seeing in the rest of the market, but there hasn’t been major evidence of offloading of bonds. I think it might have taken place before. And just on the rand as well – that’s been dollar strength as well. It’s not confined to South Africa. I think you’ll find most emerging market currencies have been under pressure. So there is no real evidence.

There’s another question here: as a Naspers fan – would it be better to buy Tencent on the NASDAQ than to buy Naspers on the JSE?

 I don’t think it really makes a difference. I think there’s quite a discount and Naspers is still trading at quite a big discount to the underlying investments. Also with Naspers, you’re getting another array of investments. I like Tencent, I like Alibaba – I still think that’s the area to be. So, if the money’s trapped here – no problem with buying Naspers. But if it’s overseas – well, you can buy Tencent. But I don’t think there’s a definitive answer to that. They are both the same thing. I hope Bob van Dijk does something, and I think that’s why we buy Naspers – the hope that there’ll be other areas, particularly in this kind of market, that do open up. And you know me – I’m a massive, massive tech fan. I still think that there’s so much that is going to happen in the next five years, so I remain committed to that area and certainly to things like Naspers and Prosus. 

Tencent is around 400 Hong Kong dollars year to date. It’s been very volatile, but still up at a pretty good rating. If we take Naspers against it, you can see that it’s in fact outperformed. Naspers has outperformed so far this year and that’s probably because of the buyback by about 18% or so.

The rand as well. I think we forget to understand that the rand – at the beginning of January – was 14-ish. Now, we are closer to 19. So, in that Naspers price has been a massive rand devaluation as well. So anybody who is even – has been exposed to offshore markets in rand terms – has really scored. I know you’re going to be talking to Magda, but if you talk to her about some of the funds that she has there has been massive outperformance as well – largely driven by some of the gains that we’ve seen in tech shares and also by weakness in the rand.

Indeed. I’m very glad that Rob Reamers has asked this question: How does Discovery’s 25% ownership of Ping An Health affect its valuation? Well, I got all excited about this last week in this program – as you remember David – because Ping An Health (which I didn’t know was listed) – is indeed listed. So I scuttled off to Discovery and said, ‘If you own 25% of this company – as you can see there, it has a market cap of 114 billion. If you work this out on the Hong Kong market cap, convert it into rands – suddenly you’ve got a 25% share of this company which is worth the same as Discovery’s total listing on the JSE’. And I was all excited and ready to tell everybody that Discovery has to be almost like another Naspers. Unfortunately, this company’s got nothing to do with Ping An Health, believe it or not, in which Discovery has its 25% shareholding. I checked it with the company – they explained to me that Ping An is quite a complex organisation and that this is something called Good Doctor. It’s got nothing to do with Ping An Health, which is 25% owned by Discovery. So although Ping An Health in China is a valuable business, it is not listed – as we initially suspected – and it has got nothing to do with another company – number 1833 – listed in Hong Kong, called Ping An Healthcare.

If you look at the big players; whether it’s Facebook, whether it’s Amazon, Apple, and so on – all that it’s done has made them stronger and brought this trend forward. And I think it’s going to continue. We’ve spoken before on the webcast about healthcare and health products and big developments there. Those are still going to be trends that are going to take place. Alec, I picked up another one – there’s a very good article in the FT, over the weekend by Satya Nadella, who’s the CEO of Microsoft, who mentioned at one stage that they reached 2.7 billion meeting minutes on Teams, which is their program. Before, their record was 900 million. So I think he’s just played into this ongoing benefit of technology. The one thing that we’re ignoring is that there’s vast differences in the population. There’s a huge group of people who do not have access to broadband or to this kind of technology – and that’s the poorer people. And this is a global thing as well; by closing down schools and going this way – we’re actually ignoring the education of a vast amount of people. We’re going to continue to fall behind the rich. So I think when we go into these areas, when we start to develop on a technological path – you’ve got to include those people who can’t afford it or haven’t got access to it as well. So it’s a very, very important aspect or element of the so-called move focused path forward.

I’ve got Microsoft on the screen. I know that around mid-March, my pal Alan Knott-Craig (who writes for us from time to time and who actually has done a huge amount in getting Wi-Fi to informal communities) – he said he will be buying Microsoft Teams shares and the shares – my goodness – they’ve gone from around  $140 to $275. So, that was quite a good call. 

In most households, you’ve only got one laptop. You don’t have three laptops. So, if you’ve got three kids there, who have to be educated – even if they are remote – you haven’t got the equipment. And I think it’s absolutely imperative. I’m big on health in this respect as well (this is the social side of me coming through) – these areas are areas that have to be addressed first. Number one – access to health, good health and also access to this kind of technology, if we are going to uplift and address the glaring differences that we have in this economy. And I suppose it works globally as well. These are areas that we have to focus on in a big way.

Well, we do have a president who in the State of the Nation address last year said he is going to put a tablet in the hands of every schoolchild. I guess there’s no better time than to resuscitate their dream now. David, what is the sentiment now on active versus passive investment strategies? 

I’ve always been active and while the downturn was across the board, I think the upturn is going to be very much more focused. You can’t just buy passive investment – you’re going to have to be very careful where you put your money. So, you’ve got to be much more conscious of where the business is going and what its product is and what its balance sheet looks like. And therefore, a lot more selective about where you put your money. From an active point of view – do your homework and do the reading.

Is the money going back to active, because presumably good fund managers would be buying Sasol at 20 bucks?

Yes, I think it’s happening. So, as institutions go into cash – what’s been driving the market up has been the private investor. Much more retail investors are coming in and looking for opportunities. So, the trend is much more towards active. Passive, going cash, getting out of the market, taking protection – I think the retail investors are a lot more bold and looking as to where we’re going to be in a few years time when we come out of this. 

When you have a look at Sasol’s graph today – I keep mentioning it because so many of us bought it in the 20s and you can see there – it’s a big bounce from where it was just after 12:00 today to (since we’ve been talking) 81 bucks from 76.50. David, there are quite a few questions here. Would you buy both ASML and the chip makers and semiconductors?

I’m taking a view of this so-called digital economy, which I think is just starting now. I think it’s going to get a lot bigger than it is at the moment and ASML is well-placed and it’s got progressive technology. I can’t explain it in technical terms because I have to have it in front of me, but it’s a very, very high tech company. Remember Buffett went into Israel and he bought this high tech business Iscar. Well, I always think of Iscar when I think of ASML – it’s just one of those businesses which is just so way ahead of its competition. There is competition, of course, in South Korea and other places that do make this kind of machinery, but a superbly run business and it pays dividends. So it is very, very well-placed for the expansion that we’re going to see in the digital economy. 

Another question David: How do you get exposure to Tencent – is it via Naspers or Prosus? Actually, it’s by both. But he says as a follow up – can you explain the holding between Tencent, Naspers and Prosus? Do you want to give that a go, David? 

Prosus holds Tencent and Naspers holds Prosus. So I haven’t got all the formula and all the different cross holdings here, but effectively – if you do your work and if you set up a model, you will find gaps that emerge that make one cheaper than the other. But there certainly are gaps between Tencent and Prosus and then Naspers and Prosus as well.

But if you’re an amateur investor, you do know that there are experts like David Shapiro who are taking advantage of that arbitrage situation. So just buy and hold for the long term. I would suggest that you buy Naspers in South Africa – you live in South Africa, you get it at a huge discount – all the way through you’re getting a big discount on Tencent. There’s so many questions I’d like to really just jump into them and perhaps get quick answers from you Dave. Where do you see the rand going in the next few weeks?

It’s so difficult. It’s so difficult to call and as I mentioned on Thursday – the rand was 18.03, it’s close to 18.60, 18.70 now – it’ll all depend. Besides cash flows in and out of South African investments and that, it’s also going to depend on where the global economy goes. I’m a great believer that we’ll get back to 15, 16 in the second half of the year when the global economy starts to pick up a bit of momentum – maybe not that fast. But I still see us on that course as things start to improve and as we start to get news of vaccines and other cures and better treatments for Covid-19. So, it’s hard to be negative on the rand with these kinds of levels – short of a further catastrophe.

So what you’re looking at there is going back to where it traded pretty much up until February this year – before it blew out above 14 (as you say, between 14 and 15) and you’d see that as a more normal range for the South African rand. Then there’s another question here: Can offshore funds invest in the Sygnia product? 

Sure, they’ve got ETFs here. There are a lot of ETFs. I must say; where we can’t get money offshore and where we are forced to stay here (particularly for regulation 28 businesses) or when people do not want to keep their money here – one can go into the ETFs. There is a Fourth Industrial Revolution. There are other products – I think the S&P 500. There are a whole host of different ETFs that you can go into (that are exchange traded funds which are listed on the JSE that you can buy literally through an ordinary stockbroking account.

Peter Saltzer says he missed our discussion on Sasol – surely it will go up after lockdown?

That’s a hard one. Sasol is such an emotional issue at the moment. You’re calling the oil price which could come under further pressure which is not really picking up off these levels, you’re calling the rand, you’re calling the deal to sell part of the Lake Charles product. There’s so many unknowns about the company. For me, it’s dangerous territory – not because I’m anti-Sasol, it’s just one of those companies which, at the moment, it’s very, very difficult to call, because there’s so many moving parts. So, you’re taking a big risk by buying Sasol at this point – simply because of those issues. The oil price, the rand, demand for chemicals, the Lake Charles issue. So many of those things that you have to put together and if you read their statement that came out last week – it did highlight the issues that they’re facing and they’re going in and cutting their salaries, cutting staff salaries, cutting management salaries – in an effort to conserve as much cash as they can. So, when a company is in that kind of situation – it is a danger sign and you have to recognise it.

The Brent oil price – it’s now got to around $26. We had a really good interview with Justus van der Spuy a couple of weeks ago – an oil trader based in London who was explaining why the WTI index went negative; it was really certain traders who were caught on the wrong side of it. They had to pay people to take the contracts away from them. But this is the one that we watch in South Africa and, as you can see, it did lift up a little bit in the past few days from around $22 to around $26. If there was one bank that you could be in – which one would it be and if there was the last banking stock that you’d recommend and why? 

I’ve always regarded the banks with great respect. I think they’ve always run very close to each other and have always been well-run. To identify one, you’d have to ask an extremely good bank analyst to pick out one that stands above everyone else. From my point of view I’ve always been in both FirstRand and Standard Bank and I think that’s just historical. But which one I wouldn’t be in – I don’t know. Capitec has done incredibly well. Probably very, very vulnerable although very vulnerable in this kind of climate – where smaller and medium sized businesses are feeling a lot more pressure than the top end. 

But isn’t this an interesting graph? Look at it on your screen now, David. I’ve taken FirstRand and Capitec, and one always assumes that Capitec is the stock that’s growing faster – it’s going to outperform – and actually, they are dead in line from the beginning of this year. They are very, very closely correlated now, whereas – of course – if you go back five years or so it would have been less correlated and you can look at that there – you can see how Capitec has outperformed FirstRand quite significantly on a five year basis. So, maybe Capitec is becoming a big bank and its stock trading like a big bank?

It’s so hard to work your way through where we are at the moment. I think a lot of banks are under quite a bit of pressure. They’re going to have to put huge amounts aside to cover write-offs, bad debts. You’re not going to see an increase in trading activity at the moment. So, I think they’re all going to feel the pressure and again have to withhold dividends in order to conserve cash, which has been a recommendation from the regulator. So I think most banks are going to find themselves in very tough conditions now, and that would include even finance companies that are listed on the market, which I would assume includes our own business – Sasfin. It’s a very, very difficult time. I think they’ll all come out – I do not think any of our banks are vulnerable. They’ve been incredibly well-run and very well regulated and very well capitalised. But you can’t ignore the kind of economy that we’re in at the moment, so just be cautious on the segment. If you’re looking for growth and if you’re looking for shares to go, looking for survival – they’re okay.

I’m going to be a little more specific than David – he’s hedging his bets there. I would say get out of ABSA – that would be my worst bank to be invested in. As you can see here, it’s the golden line on the chart. Capitec outperformed FirstRand in the middle there with the black line and then ABSA underperformed and I’ll tell you one of the main reasons for this. I had a chat last night with Bryan Biehler, who’s the MD and part owner of Huizemark – which is one of the big estate agencies. He reckons they have been doing a few deals during lockdown and the prices of houses that are changing hands are dropping dramatically. He reckons that house prices, when we come out of lockdown, when estate agents can start trading again, are going to be anywhere between 10% at the lower end and 20% lower than the already depressed prices they were at before we went into lockdown. Now just extrapolate that; which is the bank that has got the most exposure to mortgages? ABSA by a country mile. So a consequence of that would be, for me – I would say probably Capitec, probably FirstRand at these levels, because Capitec is now going to be operating pretty much like FirstRand. And we know the incredible job that Michael Jordaan and his colleagues did at FirstRand in positioning them technology wise for the new world. And so they will benefit from the changes. But on the other hand, the one that has to be most vulnerable must be ABSA. 

David, I really wanted to finish off these questions because you’ve got to go. But what is your most contrarian investment idea currently not held by your peers in the industry?

I think the fact that I’m bullish… probably. That I continue to be an investor. And I actually mentioned that this morning – we’re very negative on air travel. We’re exceptionally negative on the whole industry. Buffet sold out of his airlines. I’ve been a long follower of Airbus, and it’s a very solid company with about 10 years of orders. The problem is it’s under a lot of cash flow issues at the moment, and therefore has been sold down. It’s when things change – and they will change – I think you’re going to find them incredibly cheap at this kind of price. So that’s my contrarian, but I’m saying that at these kinds of levels – at 54 euros a share – you’re actually buying an option. There’s very little downside. I think you’re buying an option for the upside, so don’t expect any returns in the next few months. But I think after that – when things normalise – this thing can get back to where it was in the 130, 140 area and that’s my contrarian choice at the moment. But just be patient and don’t look for any immediate returns. 

Well, there you can see it – 136 euros before Covid-19 started cracking us there, mid-February – 138 euros, current price – one of 54 euros and I suppose on top of that, David, with all the money that’s being thrown at the problem by central banks – the assets have to appreciate in relative terms or versus the money that you’re talking about.

Okay. Two last questions. Investec Bank – what about that one?

Investec worries me in a sense of well, what does it do? Where’s it going to position itself in a situation now that it’s lost the asset management side? Where does it make money? What speciality has it got that it’s going to outperform the other banks? I’ve got a lot of respect for Stephen Koseff from the management etc., but I’m still battling to know where it’s going to make its money going forward in this kind of economy. Certainly not in the UK, it’s going to have troubles here as well. So I’m indifferent about the company and that’s no reflection on management. It just doesn’t excite me.

Well, you have a look at this long-term growth going back to 1996 and you can see there that we’re at share prices today that we were at 12 years ago and, in the run up, even 14 years ago. And yet, it’s such a good business David. As a client of Investec Bank, I think Discovery is a fantastic business and they’re probably going to be chewing away at the Investec client base. But unless there’s a culture change at Investec, it’s going to be very hard to shift those clients across anywhere. And yet – look at this share price and they’re big in London – they’re a big operation there and very successful. Who knows? 

The final question here is: a big risk is the car finance market – big losses coming, especially with those balloon payments and I guess there, when you talk about FirstRand – you’ve got to look at WesBank, of course – ABSA, you look at BankFin. So, lots of questions that exist there. I’ve changed my mind, by the way, on the best bank that I’d go with – Capitec haven’t got an exposure to home loans or an exposure to car finance, so maybe that’s the one to be looking at. 

Dave, we’ve indulged you for longer than usual today. Apologies for that and for keeping you here, but it was a particularly good episode of our podcast-come-webinar. Thanks for sharing, as you always do, your wisdom so freely and so generously with us and we look forward to being back again – same place next week.