🔒 From horses and clouds to quality stocks Prosus, Salesforce and Amazon – David Shapiro goes global

In the volatile global markets, induced by the coronavirus pandemic, SA’s favourite market analyst David Shapiro fields questions about Sasol, Telkom, the popularity of Prosus and companies in the 5G environment. Shapiro himself has taken a bet on Salesforce.com, which for him ticks all the right boxes on 5G, ESG, and the fast transmission and analysing of data. He calls for patience in the next few months as the upside will take some time to show. In this lively Biznews Rational Radio webinar, Shapiro and editor-in-chief Alec Hogg discusses from the depreciation of the rand, offshore investments and tourism to energy and converging tech and health stocks. – Stanley Karombo

This is Biznews Rational Radio coming to you from our virtual studio. David Shapiro, I love the backdrop. Did you paint that? It’s pretty flowers. It makes us realise that you’re not just a pretty face, in fact there is other pretty stuff in your life as well.
___STEADY_PAYWALL___

I’ve been an art collector for 40 or 50 years. But the problem is that, with the rand at these levels those pictures I used to buy maybe 30 years ago, are not affordable today. It’s because the rand is going down. That’s why it becomes more unaffordable. I’ve always enjoyed art.

As far as the rand is concerned we were bumping around quite comfortably at 14 to the dollar before the Covid-19 crisis hit. And we’ve now gone blown out to 18 against the US dollar, 19 maybe 20’s in sight which has caused many South Africans to want to just get their money out and no matter what. What are you telling them when they come with these stories?

It’s a very difficult conundrum. The rand will only improve once the global markets start to improve and you see that all the time. Every time we get a rush in equities –  equity prices offshore – as we saw on Friday where the US markets were a lot stronger, European markets were strong and our markets were stronger, the rand improved away from the 18.80s down to the 18.20s. We see this morning a little bit of weakness in global markets and the opposite starts to happen. The dollar starts to improve as safe haven status takes over and you start to see the rand start to weaken as overseas markets. You’ve got to decide what you’re going to do. If you’re going to take your money offshore, make sure you invest it, don’t leave  it lingering, otherwise you’re going to be caught in the wrong spot. I’m saying, if your intention is to invest overseas, then take your money out but invest, because that’s what’s going to happen. You know it’s a balancing act and it’s very difficult to read. But the rand, if we get out of this, and I know we’re going to get out of it I don’t know where.

What is if David? That’s not Mr Half-glass-full that I’m used to?

When we get out, we’re going to see quite a vast improvement in the rand, with global markets we’re in a tough spot at the moment.

So where are you advising that your clients put their money?

I’m still global, it pays dividends. The Nasdaq. You heard Magda last week. When were chatting to Magda back then, it was a fascinating conversation. She runs a fund called the Fourth Industrial Revolution. If you would have invested in that fund at the beginning of the year, you’re up 20, 25%. If you would have invested in  Nasdaq – actually there’s a Satrix, Mike Brown’s product, a Satrix Tracker Fund which tracks the Nasdaq, you would be up over 45% since the beginning of the year. A lot of that is the rand. But still, we’re living here, and we’re playing in rand –  that’s compared with the local market which is down maybe 14, 15%. If you have gone that route, you would be well rewarded – and you’d be with Naspers and Prosus – two local stocks that have far outperformed the market. But I hate to admit it, the ones that have really knocked the market out are gold shares, both AngloGold and Gold Fields. And you know I ain’t no gold bull, but those are the winners. You could have done well with the right selection of shares, you could have done incredibly well in this market.

Our Biznews portfolio has also really shot the lights out. I think now we getting close to 40% return over the last 5 years and since the crash we’ve been going up so. But you’re right, it depends on what stocks you’re in. Interesting referring to Magda last week. I got a note from Magnus Heystek to say, I won’t go into the specifics of it, but he had a chunk of Oxford University Fund that she spoke about last week. A big chunk, lots of  money, that he could place with his clients. He said it went in three days, from Magnus’ point of view, they got as much money as wanted and Magnus said that he could have placed a heck of a lot more money into that. It just appears as though South Africans are desperate for something with a little bit of spice that’s offshore?

It’s the quality of shares. We can’t get the same quality here. Unless you want to play a turnaround, you want to play a bounce in the market from very low levels which is a very dangerous game. But if you’re looking for businesses that are sustainable – that are going to go up over the next 5 years – and health is an incredibly strong area in all aspects. Not only looking for a vaccine. If you look at oncology, diseases like cancers – it’s increasing just with the population growth.

So, companies that are focused on oncology, finding genetic solutions for Parkinson’s, Alzheimer’s and businesses like that. Even in the medical space, there are huge opportunities. In the mechanical side of it, what’s come out of this crisis as well has been you know where you get advice over the telephone, I think they call it telehealth, so a lot of  areas. We haven’t even gone into technology, where I still think the incumbents are going to dominate. So that’s why that what we’re looking for.

We are interactive. This is for the Biznews Premium community. We can’t actually let the whole of the Biznews community come into this because then the questions just never get answered. As you know last week, only half the questions were answered.  The big topics that we’re going to be discussing today. First up, we’re going to be talking about Phumelela, which went into business rescue. We’ll be talking to two members of the Racing Association. Last I knew, the Racing Association effectively owned about 30% of Phumelela. The two of them will be giving us more details on how the company got to where it was right now. It is a company that’s got lots of assets, very rich in assets. When it was suspended on Friday, market cap R40m. Now if you think of just the betting shops that it got, if you want to buy the betting shop license you probably pay R2m a licence. It has 80 betting shop licences. So just for starters that’s R160m without all of the other assets as well. What is your take on this? Is this just a managerial disaster, or is it the wrong structure, or is it Covid-19?

It has to be Covid-19. There might be structural problems, I don’t know. But there could be issues like that. What concerns me about this whole issue is that, last week we saw Comair, we’re seeing Phumelela, we’ve seen Edcon. It’s not these businesses’ fault, it’s not their fault that we’re in this situation. It was the government’s decision to close the economy. What concerns me is that they actually get to a position like this. I can understand SAA, that was already under pressure before we stopped flying, but for other businesses – can you imagine how many others we’re going to get like this? 

What I can’t work out is why there’s no response from government to say, we can’t allow this to happen. We can’t allow businesses such as Phumelela to go down. I’m keen to hear why, I know you followed it for a long time, and there certainly is a place for them in the market. We know how vibrant that side of the business is, especially the sports betting which is out of commission. Whose fault is it? It’s not their fault.

Professor Michael Levitt at Stanford University. I’m talking to him tomorrow, Tuesday afternoon. So we’ll get his views on his former homeland. I’m sure other people in the business world who would agree. But what’s your take?

The same thing. You know what lockdown was supposed to do – was to flatten the curve. In other words, make sure that we could delay it (Covid-19 ) so that the hospitals could get in order, and testing could get in order. That’s all. I don’t think there was any vision that this was going to take months. I don’t think anybody envisioned what the economic fallout has been and what it’s going to be. So my view is: I’m certainly on his side. I don’t know what the correct balances. How we get back to it. But I certainly think moves are got to be made quite dramatically in order to unlock this economy and to get us back working. The effects are going to be disastrous if we keep going along this way. Globally, those are my views, but I understand some of the complications. 

We’ll be getting more of that in a moment. But let’s get on to the first of our two big focus areas today. Hundred thousand people, Michael says, are (or jobs) at risk here. You want to work that out a little bit more you’re probably talking dependants. We know in South Africa for every person who’s got a job, there’s quite a few dependants as well. It just seems it’s really all not necessary – 65 people – government should start trusting business to not make everybody sick just because they come to work?

That’s the problem. It’s not unique to South Africa. Globally I don’t think anybody had a grip or understanding of the supply chain or the multiplier effect or how businesses are so intricately connected. I don’t think that was thought out to lock down business etc. As I said earlier, the intention was for a very short time, not for as long as we’ve seen it now. The big fear and the big discussion point at the moment is that: the longer this goes on, the more permanent those job losses will be. That’s the big fear. It’s a difficult situation. The sooner we get back to work, the better. Of course, with safety and health conditions attached.

Do you have a final question for Mr Kingston?

Not a question, but rather a proposal. But I’ll put it in the way of a question. I’m reading a Churchill book at the moment called The Splendid and the Vile, which looks at his life and conduct put together by Erik Larson during the Blitz. What comes across is how important leadership is. How absolutely important he was to the spirit of the British people during that time. I’m not comparing the times,  I’m merely looking at is leadership and (want to) ask Martin on a global level, What has disturbed me throughout this entire period is that, there isn’t one leader that has stood out, perhaps Jacinda Kate (Ardern) of New Zealand, even (Scott) Morrison of Australia, even Angela Merkel of Germany. Donald Trump is completely absent and America is completely absent from a global point of view. We always relied on some nation to take global control of issues like this and it is imperative that we have some kind of global view on how to address not only the pandemic itself, but also the economic lockdown. How are we going to get through this? It seems to be a total total mess. 

I’m just asking Martin how he feels from that side. We’re alone in South Africa. We’re trying to do it alone. A small little country at the bottom with people as Martin has described – who don’t adhere to social conventions – and behave the way we should in a situation like this. But I’m just interested in his perspectives on the global side of the issues.

The issues to deal with today. The first one, with Phumelela where Mike de Kock says 100,000 people; Phumelele says it’s 60,000 direct jobs. That’s a chunk of the economy and it just seems a little bit like the cigarette story. Really, if you’re selling cigarettes, is it really that much of a problem? Like we’ve learnt in prohibition with Al Capone etc. in the 30s in the US, if you ban something, the criminals will just move in and clearly seem to be doing that. So that’s the Phumelela story and then moving on to the other story, which is the lockdown issue. Martin (Kingston of B4SA, who is also on the show), I suppose is in a bit of a tricky situation, given that he engages with government and he surely can’t be too confrontational with them. That is a challenge to try and get that turned around?

But he does set out a programme. The programme is just behaving responsibly. I know Boris Johnson have changed their logo now, to stay alert, not to stay isolated. I don’t know what it was before, but now stay alert. I wonder how we do that in a country like South Africa, where you’ve got people who are living in areas where they are in such close proximity. They haven’t got the room that we have, they haven’t got the houses, they haven’t got the social areas that we do have to live our lives. We’re quite comfortable here and I feel very sorry for them. But I still think we have to introduce the protocols. He said something very important, the mines have always done it. As a country we did it for  HIV – how we went out and we tested – we went to businesses, we tested and we continued to test in an effort to try and get on top of it. 

You have to congratulate the country for being well ahead in that instance. We’ve done it before, we have to use the same kind of approach to overcome this. Yes, it means washing your hands, putting masks on and behaving yourself properly. Hopefully, there is something we can get out of it. What is absolutely imperative is to actually get people back in the offices and try and get the economy going and the multiplier effects of that economy. 

Let’s get to your questions from your vast fan club, and it is vast, David. Starting with the first one here comes from Peter Salter. He wants to know about Sasol. Is Sasol a buy at these levels, Mr. Shapiro? 

It’s such a difficult question. We’ve recovered so much there, but they still have issues. They have balance sheet issues. They have the volatility of the oil price, which is up 5% one day, down 10% the next day. We don’t know where oil is going, but they’ve got to manage themselves through it. Do you buy it at these levels? You know from my own personal point of view of trading, if the markets keep going up which they seem to want to be doing, you’re going to get Sasol going up as well. But you mustn’t ignore the issues that are surrounding (Sasol). Do your homework on it, just don’t be blind and buy it. Know what you’re buying.

I’m in no-man’s land at the moment. I must say, I missed that massive 300% gain, but it comes back to the Phumelela situation – it was an interesting conversation to listen to Charles and Mike, particularly Charles going to the background of it, saying look, this was an industry in decline, that needed to be relooked, and all that happened is this pandemic has just taken it over the edge. Maybe Sasol, as a business, also has had to relook itself. It went into Lake Charles blind, obviously there wasn’t much control over it, and they found themselves under huge pressure, heavily indebted, not realizing that you’re going to have pressure on from the oil price. I don’t think that formed part of their discussions when they looked at the projects. So you’ve got to look back and say: OK, where do we go to from here. Can we swing ourselves out of this at the moment? It’s gonna be a long process upwards. So that’s why I’m staying out of it, but from a trading point of view who knows?

Just looking at Phumelela on the screen, David you can see the volume at the bottom and there are some big volumes on the 30th of April at 80 cents. It’s now 40 cents. One and three quarter million shares. Not good, hey?

It’s not good, in the sense of whether someone was getting out – who was getting out. I’m not looking at who got it. I’m saying who got out.

Look at that. Is there’s just suddenly as the demise began you could see that volume traded on that side. And I guess if you were to look at Sasol as well from a similar situation it also gives you that kind of picture of a very high volume trading period. I’m going to just take you to that graph on the Wall Street Journal as we talk and you can see Dave from what date this was, around about 6 March?

See what’s happened, that is why Charles is smiling, because people can’t get to the horse races, they can’t bet on the sport and they’re now starting to bet on the stock exchange and many of them coming to bet in big volumes. A huge number of people taking a punt, and they were right. If they got it at those low levels, these retail punters who came in actually got it right and they’re going to be able to brag about this for a long time. The question is : Where do we go from here? Can we continue that upward trend? That’s the debate. That’s a difficult question. But at those very low levels, they managed to call the bottom, so you can see that’s all punting.  

There’s a question here from Rick Louw who says, how does David view companies in the 5G environment?

It’s a big big area. There’s so much attached to and around 5G that is going to be a game changer. We’re  already in that area. So the Cloud, 5G security,  5G programming, all of those companies are going to benefit. Personally, I’ve gone for Salesforce which is a programmer. As we are doing now, you’re storing it in the cloud. And it’s the companies who are going to be able to access that information and analyse it. Artificial Intelligence are all going to be the beneficiaries of 5G. It is nothing more than the fast transmission of data, which makes what we are doing now a lot easier. Any tech around that area, I think is well worth looking at. 

Salesforce $125 a share mid-March, $175  a share today, David and the technical analysts would tell you it’s broken up above the simple moving average.

What’s very interesting is that, we’ve been looking at ESG. It’s a subject now which is going to grow in importance. In other words, behaving yourself and it’s not that you can find specific companies that are in that kind of area. What happens is, every company is going to be assessed on ESG. We’ve been looking at that quite carefully and Salesforce is one that fits the bill, that does come through ticking the right boxes. Every time we look at a company we don’t want those listeners challenging us on climate change and the governance issues, as poor old Charles had to handle with Markus Jooste. You know you don’t want those questions anymore when you select a share. Salesforce fits the bill, as does Accenture, as does another company called Splunk. 

Marc Benioff, I thought that was the man, 49,000 employees as you can see there and a very sizeable business already – Salesforce $158 billion in market cap. Mike du Toit wants to know David, taking money offshore now, but hedging against the rand strengthening? How do you do that as a private investor? 

I said that in the early part of the program. If you are going to take money offshore, make sure you invest because it’s a difficult time, it’s so difficult to read the rand at the moment. As we get global markets or as we come out or when we come out and global markets pick up, the rand’s going to improve quite dramatically. But you want to make sure that you’re not exposed – you could lose money on the rand but you could make it up by going into the offshore market. That’s the conundrum. If you are going offshore, invest it. Otherwise you can wait here and see what happens.

If you’re buying the rand surely, you’re taking a bet on the way the government is managing this Covid-19 crisis and if you don’t think they’re managing it well, then that 18 and a quarter might be a bargain when you look into the future.

You can never get into the mind of investors, it’s always a challenge, but our bonds are doing incredibly well. Why? Because when you’ve got a world where there are negative interest rates or zero interest rates. If you look at our 10-year bonds, 10- 11%  becomes attractive regardless of what you think the economy’s going to be. Martin painted a very bleak picture of where we could be going, yet the market tends to ignore that. So as more money comes into our bond market, the stronger the rand will be, the more inflows will come and that will happen as things improve. So the worst is being probably discounted in our market. Look at Prosus.

Well that’s Benjamin Pretorius’ question: Why is Prosus so popular lately?

It’s tech orientated and have a look at what’s happening in China. They’re increasing their stimulus efforts, they announced another package this morning. But Tencent, perfectly placed where we are, for people who might be isolated in their homes, it offers every element from gaming, communication, to payments, to everything. Don’t ignore Alibaba. Do not ignore Tencent. That’s the underpin. But you do have a Bob van Dijk who’s looking for other opportunities, all of which are going to benefit. If you can get food delivery, that’s going to be another big winner in an e-commerce world. People are getting pretty used to ordering it from home. This has been a great investment and  continues to be the substructure or the foundation of any local portfolio.

But isn’t that interesting when you look at this chart as well. The blue one is Tencent and that’s telling you Benjamin why Prosus has been so popular. This is a rand story, so you take the Tencent price and then you take in the rand depreciation and you’ve literally got the reason for Prosus. Thanks for that David. There’s a question here from Johan Odendaal, who says so a company that has one leg in health and the other in IT should be well positioned, surely?

You know what, Amazon.

Of course, Amazon did that big deal with Berkshire Hathaway.

There’s Berkshire, they’re doing it with JPMorgan and they’re getting their health care product together and they could be big. Have a look at that. Do not underestimate Amazon’s power in going into the health industry. Captivating story.

Warren Buffett says it, Amazon has surpassed all of his expectations and he doesn’t know how you beat it – a little bit like he had that view on Google if you remember a few years ago. So there we go Johan. You’ve got Amazon, which by the way is the biggest share in our global portfolio because it has done so incredibly well over the last 5 years. And you can see there. We bought in around $327 and it’s now sitting at $2,379, it put on $2,000.

You know what’s interesting about Amazon, about American companies is that, they write off their investments in the quarter. They write it off through the income statement, so we saw it in this quarter with Amazon. Don’t be fooled by that. Other businesses capitalised their expenditure and put it into products and put it into intellectual property or into goodwill – not American companies. That’s been the beauty about the business. As he spends he writes it off. So what you see is what you get, it’s very important. Do not be fooled by quarterly or do not be put off by some of these quarterly statements. 

Very important, if you’ve invested there, go and watch the quarterly results, sometimes they don’t actually video cast them, but you can at least listen to them. Paul Jeffrey says, so David won’t be swapping his art for horses anytime soon. He wants to know though, is Telkom attractive at R19 a share?

I don’t know. They’ve tried very hard. It should be an industry that’s doing incredibly well mainly because of its data transmission or sales of data. But they’re doing that at very small margin.

It’s a horrible graph – one year chart, David?

The management are really trying hard, but they’ve got so many legacy issues they’re carrying, particularly on the voice side. They have got a new product here – which is a Telkom phone which is great, my old landline made into a cell phone. You can walk around the whole house and you’ve got all the benefits of a cellphone. They are trying but it’s an industry in which you’re competing in very low margin products and yet the investment that you have to make, your capital investment, is still very high. We were talking about 5G, when these businesses go into 5G, they have to lay out huge amounts of money, and what do we do? We don’t want to pay for the product. We want to go sit in Starbucks and get it for free. They’ve got to change their model.  I know AT&T and Verizon and all other businesses are trying to do by introducing streaming type products. But I don’t have strong views on this.

Well had you bought Vodacom rather than Telkom three years ago you would have outperformed it massively, more than double. In fact that’s the blue line. Vodacom is the blue line. If you have a look in the last year, it’s been a massive outperformer as well, so I don’t know, R19 a share. Perhaps some people would see it as attractive?

Vodacom numbers came out this morning. I’ve got to go through it in greater detail. The results are a little misleading because in the last period they’ve brought in the BEE deal, so it tended to understate profits. Therefore these profits, the increase is a little overstated, but to me – I have to go through it in greater detail, but they seem on the face it, fairly decent – they’re coming through okay.

Remember they’ve also had that massive surge in volumes through lockdown. So they’re probably well positioned for the future and they’re spending more money on it and you seeing the way that the bandwidth, we’re all getting used to faster bandwidth now. They’re actually feeding us a little bit like addicts in a way, we are just being fed with faster bandwidth and we don’t want it to be taken away.

Two last questions: Has South Africa fallen off the fiscal cliff, says Ivor Fletcher, and if so, how do we get out of it?

With great difficulty. It’s gonna be a hard, hard path. I think Martin was great. It was wonderful to listen to him. He laid out in very articulate terms where we are and what needs to be done and the path afterwards. What troubles me more than anything else is not the mining side, it’s not getting back to business, it’s the tourist side. It’s so important for us. I keep thinking about what becomes of a Cape Town and what becomes of a KZN in December if we don’t get the tourists. How does a city like that cope that relies so heavily on tourism and that includes our game parks and businesses like that. And that concerns me dramatically. It’s always been one of the important points that we focused on when it comes to development plans and our future. I just hope that we get people coming back. Anecdotally, things are happening – we saw Disney in Shanghai, people were there, in droves, putting on masks, washing their hands, but they got the numbers back. Also in Europe, Airbnbs are now starting to pick up. Hopefully, we get back to travel and tourism – even if it’s slow.

Massive challenges and a business-first approach is the only thing I think that’s gonna get us out of all of this. And I’m not sure that we’ve got that mindset instilled yet in those making the big decisions. And just to close off with Anthony Ruitenbach wants to know is a wrapper fund the best way to invest offshore?

I’m a simple accountant. I don’t like complications. I pay the tax. I know there are a lot of benefits on that, but I’m a simple person. I like to be flexible. I don’t like to be having to account to anybody else and phone them up or having to do trust accounts and all things like that. So my own approach is: pay that bloody tax. But I bet again,  if you’re going to speak to 10 people you’re going to get 20 different opinions.

Buy Amazon, and don’t worry about anything. Just buy the best quality companies you can get in the market. Let their brilliance take care of the growth thereafter. It’s a little bit like when, I remember when I started Moneyweb in 1997, I had this conversation with someone the other day, the internet at that stage was a land grab, Dave. You might remember, the dot com boom and everything was going only one way and you had to spend yourself to riches. So the bigger your losses the better the market liked your story. And at the end of that, because this was the only little business I had, I just couldn’t understand it and didn’t buy into it. I remember our little company was of twelve listings on the stock market in the Internet field, in this local stock market, was the only one that was around a year later and you just let the growth take care of itself. And that was the view we had, just survive and let the growth take care of itself. And I got a feeling that South African equities are a bit like that at the moment. If you can invest in something that can survive, that can see through Covid-19, the growth will take care of itself because the market will be shaken out. I want you to have a look  at the final graph that I wanted you to give us some thoughts on, Dave. Comair, first of all, there’s quite a lot of volume – it was traded before it went into business rescue. Again, not casting any aspersions, but if you look at that bottom chart there on the volume, those are big volumes for that stock. Secondly, this was a company that had been making profits for more than 70 years and Covid-19 has presumably wiped it out or has it?

I don’t think so. I think it’ll come back. I think we need a solution fast.  The longer we drag this out, the more difficult it will be for them to come back.  They’ve got the structure. They’ve got the system, they’ve got the aircraft. It’s just a matter of getting through the next few months. I would hate to see the end of Comair. I followed them for many, many years and knew the Novick family. His dad was there as one of the pillars of this business. It will be very sad if we see the end of this. SAA was in a different position. It was weak before we started (lockdown). I know that they’re trying to get it back up on its feet again. I hope we see them both coming back. I know that it’s a very political and difficult point to discuss but, I would hate to see the end of SAA. I would hate to see the end of us having a choice to go across, otherwise air travel fares are just going to go through the roof. It will  be very difficult for us to travel overseas and hugely expensive.