Anchor Capital: Essential Market Review 2 January

By Anchor Capital

South Africa Market Review

South African markets ended marginally higher on Wednesday, after closing early at noon for New Year’s eve celebrations. Platinum miners, Impala Platinum Holdings, Anglo American Platinum and Lonmin gained 2.2%, 1.7% and 0.4%, respectively. Lonmin in its most recent operational update kept its FY15 sales guidance unchanged and stated that FY15 sales are expected to be back end loaded into 2H15. On the downside, Harmony Gold Mining, Gold Fields and AngloGold Ashanti declined 1.8%, 1.5% and 0.6%, respectively. Telkom SA SOC declined 1.1%, after the company revealed that its previously announced negotiations with MTN South Africa to extend their roaming agreement were still under way. The JSE All Share Index climbed 14.99 points to close at 49,770.60.

UK Market Review

UK markets finished higher on Wednesday, amid a shortened trading session and low trading volumes on the last day of 2014. Housing sector stocks, Taylor Wimpey and Barratt Developments jumped 2.7% and 2.6%, respectively. Tesco rose 1.1% after the company revealed further changes in its management, replacing its Executive pay committee’s Chairman. Bucking the trend, energy sector stocks, BG Group and Royal Dutch Shell fell 0.4% and 0.3%, respectively, amid a steep decline in crude oil prices. Mining sector stocks, Glencore and Antofagasta slipped 0.4% and 0.3%, respectively, as metal prices weakened. The FTSE 100 Index advanced 0.2% to close at 6,566.09.

US Market Review

US markets ended lower on Wednesday, as trading activity remained subdued ahead of the New Year’s day holiday on Thursday. Diamond Offshore Drilling, Noble Corporation and Transocean plummeted 3.6%, 2.8% and 1.9%, respectively, tracking a decline in oil prices. Apple, Cisco Systems and SanDisk Corporation fell 1.9%, 1.9% and 1.8%, respectively. Banking sector stocks, Citigroup, Bank of America and JPMorgan Chase & Company slid 1.3%, 1.3% and 0.9%, respectively. On the upside, homebuilders, DR Horton, Lennar Corporation and PulteGroup climbed 1.4%, 0.8% and 0.7%, respectively. The S&P 500 Index dropped 1.0% to settle at 2,058.90, while the DJIA Index declined 0.9% to close at 17,823.07. The NASDAQ Index fell 0.9% to finish at 4,736.06.

Asia Market Review

Asian markets are trading higher this morning, even as reports indicated that Chinese official manufacturing activity further weakened in December. In Hong Kong, Industrial and Commercial Bank of China and China Construction Bank gained 1.8% and 1.6%, respectively. Poly Property Group, Sunac China Holdings and China Overseas Land & Investment rallied 16.0%, 9.5% and 6.5%, respectively, after hopes rose that the Chinese central bank might continue to induce liquidity into the markets in an attempt to boost growth. In South Korea, index heavyweight, Samsung Electronics advanced 0.3%. Markets in Japan are closed on account of a holiday. Today, the Kospi Index is trading 0.4% higher at 1,923.52 while the Hang Seng Index is trading 0.8% in the green at 23,784.79. On Tuesday, the Nikkei 225 Index closed 1.6% lower to settle at 17,450.77.


At 06:00 SAST today, Brent crude oil rose 2.7% to trade at $57.25/bl. On Wednesday, Brent crude oil fell 0.1% to settle at $55.76/bl. A report released by the Energy Information Administration indicated that crude stockpiles in the US shrank by 1.80mn bls to a total of 385.50mn bls last week. Separately, Iranian Deputy Foreign Minister for Arab and African Affairs, Hossein Amir-Abdollahian, stated yesterday that Saudi Arabia should take some action to address the falling crude global oil prices.

On Wednesday, the Illinois North Central No.2 Yellow corn spot prices fell 2.6% to $3.69/bushel.

At 06:00 SAST today, gold prices advanced 0.3% to trade at $1,185.99/oz. Yesterday, gold declined 0.2% to close at $1,181.98/oz.

On Wednesday, copper declined 0.5% to close at $6,368.00/mt, while Aluminium closed 0.3% lower at $1,825.00/mt.


Yesterday, the South African rand strengthened against the US dollar, in the absence of any crucial economic releases in the US. Meanwhile, the NBS report released yesterday revealed that the pace of manufacturing activity in China slowed for December. Going forward, investors will keep a tab on the ISM manufacturing Purchasing Managers’ Index (PMI) reading in the US today for further direction to the US dollar-South African rand pair.

The yield on benchmark government bonds remained mixed yesterday. The yield on 2015 bond rose to 0.08% while that for the longer-dated 2026 issue declined to 7.95%.

At 06:00 SAST, the US dollar is trading 0.6% higher against the South African rand at R11.6177, while the euro is trading 0.2% higher at R14.0088. At 06:00 SAST, the British pound has gained 0.4% against the South African rand to trade at R18.0690.

Yesterday, the euro and the British pound weakened against the South African rand. Moving ahead, investors will eye the revised manufacturing PMI readings across key European nations and the UK later today for further direction to risk appetite.

At 06:00 SAST, the euro slipped 0.3% against the US dollar to trade at $1.2059, while it has weakened 0.2% against the British pound to trade at GBP0.7751.

Economic Updates

On an annual basis, in November, the private sector credit registered a rise of 9.1% in South Africa, compared with an advance of 9.1% in the prior month. Market anticipations were for the private sector credit to rise 8.8%.

The South African Reserve Bank has reported that, in November, M3 money supply recorded a rise of 8.3% in South Africa on an annual basis, higher than market expectations for an advance of 8.0%. In the prior month, M3 money supply had risen by a revised 8.0%.

Hellenic Statistical Authority has indicated that retail sales (at constant prices) recorded a rise of 3.7% in Greece on an annual basis, in October. Retail sales (at constant prices) had climbed 2.2% in the prior month.

The seasonally adjusted initial jobless claims climbed to 298.00K in the US, in the week ended 27 December 2014, higher than market expectations of an advance to 287.00K. Initial jobless claims had recorded a revised reading of 281.00 K in the prior week.

The pending home sales in the US rose 0.8% on a monthly basis in November, more than market expectations for an advance of 0.5%. The pending home sales had fallen by a revised 1.2% in the prior month.

The NBS manufacturing PMI registered a drop to 50.10 in December, in China, compared with market expectations of a fall to 50.00. In the prior month, the NBS manufacturing PMI had recorded a level of 50.30.

Corporate Updates

South Africa

Telkom SA SOC Limited: The company stated that it remained in talks with MTN South Africa to extend their roaming agreement to include the outsourcing of its radio access network.

Lonmin Plc: The platinum miner, in its operational update, stated that it has safely stopped its Number Two furnace after it detected electrode breaks in the furnace which were creating an unstable and high temperature operating environment. The stoppage is expected to last for maximum 21 days. Separately, the company kept its sales guidance for FY15 unchanged and indicated that FY15 sales are expected to be back end loaded into 2H15 and there will be an increased build-up of concentrate stocks, which is likely to unwind by year end.

Kumba battles sinking prices and rising costs: Kumba Iron Ore, SA’s biggest producer of the mineral used in steel and a mainstay of Anglo American Group’s earnings, has faced a double whammy of sinking iron ore prices and rising costs at its ageing Sishen mine in the past two years.

SA must not miss out on e-commerce tax revenue, says Davis committee: South Africa’s tax authorities need to beef up the country’s tax laws and regulations to ensure it derives its rightful dues from the digital economy and e-commerce, the Davis committee says.

Tribunal puts complaint against SAMA on ice: A competition complaint against the South African Medical Association (SAMA) and two professional associations about the way in which certain medical tariffs are determined has been put on hold by the Competition Tribunal.

FY14 was not business as usual – MTN SA CEO: MTN SA CEO, Ahmad Farroukh, says that it was definitely not business as usual in the South African telecommunications market in FY14.He added that the telecoms industry underwent a “massive transformation at a fast pace”.

Water, energy infrastructure upgrades must continue – Zuma: Improvements to water and energy infrastructure must continue in the new year, President, Jacob Zuma, said on Wednesday. “[In FY14], we celebrated the milestone of 11.00mn connections to electricity since FY94,” he said in his new year’s statement. This successful programme has brought into sharp focus the need to speed up the upgrading and expansion of the energy infrastructure, which had been designed to serve just a few and a smaller economy before FY94.” Zuma said that similarly “on-going work to expand and upgrade water infrastructure” was needed.

UK and US

Apple Inc.: Media reports revealed that the company is being sued with a class action lawsuit over the amount of space its iOS 8 software takes up on its mobile devices and as the company did not properly inform its users about exactly how much space the software would take up on the gadgets.

Walgreen: The company revealed that it completed Step 2 of the strategic partnership with Alliance Boots GmbH to form Walgreens Boots Alliance. Walgreen is now a subsidiary of the Walgreens Boots Alliance. The shares of Walgreen stock have converted to Walgreens Boots Alliance shares on a one-for-one basis and the latter’s shares will trade on the Nasdaq under the ticker symbol WBA.

Tesla Motors: The CEO, Elon Musk, indicated that the company was working on a robotic charger that would automatically extend from the wall and attach to the electric vehicle.

MiMedx Group: The regenerative medicine company announced it has filed a federal lawsuit against Organogenesis, the maker of Apligraf and Dermagraft, two skin substitute products that compete with MiMedx’s EpiFix allograft. Separately, the company revealed that it has received a subpoena from the Office of Inspector General of the Department of Health and Human Services in connection with a civil investigation into matters related to its sales and marketing activities.

Pacific Ethanol: The company announced that it has entered into a definitive merger agreement with Aventine Renewable Energy Holdings, wherein it would acquire all outstanding shares of the latter in a stock-for-stock merger transaction worth approximately $190.00mn.

NephroGenex Inc.: The company revealed that its lead drug, pyridorin, for the treatment of patients with diabetic nephropathy, was found to be safe in a cardiac safety study.

RedHill Biopharma: The company announced that the UK Medicines and Healthcare Products Regulatory Agency (MHRA) has validated the Marketing Authorisation Application for BEKINDA (ondansetron), a drug for the prevention of chemotherapy and radiotherapy induced nausea and vomiting. The company expects to receive a feedback for the same during 2H15.

IP Group: The developer of intellectual property based businesses indicated that it has completed its first spin-out from the University of Pennsylvania with a $1.00mn investment in Exyn Technologies.

Financial Times

UK supermarkets store up problems with too much space: For the past decade, the big four supermarkets — Tesco, Asda, J Sainsbury and Wm Morrison — have gorged themselves on property, snapping up available supermarket sites and opening an unprecedented number of new stores. But now the big supermarket chains are being forced to enter a new era of self-restraint because demand is tumbling and Britons are choosing to shop online, at smaller convenience stores or at the German discounters Aldi and Lidl.

Annual FT economists’ survey: UK growth forecast to continue: Britain’s recovery is secure and will continue at a good pace in FY15 even if growth is likely to be a bit weaker than last year*, economists said in one of their most optimistic assessments since the financial crisis.

Supermarket property write-downs loom: The City is bracing itself for billions of British pounds of write-offs from British supermarkets as the downturn in the grocery market takes its toll on the value of their property assets.

Ministers launch delayed loan guarantee scheme for housebuilding: Ministers have belatedly launched a multibillion-British pound loan guarantee scheme for housebuilding, more than two years after it was first announced.

M&A bid battles face scrutiny in run-up to UK general election: The UK general election in May looms large over all British deals this year, with dealmakers braced for heightened political sensitivity and scrutiny of bid battles in the run-up to the vote.

Goldman top bankers lead UK pay league with GBP3.00mn packages: Top bankers at Goldman Sachs were the best-paid among their peers in Britain in FY13, according to new regulatory filings. The US investment bank paid 121 top UK-based staff an average of GBP3.00mn each in FY13, of which 85.0% came from bonuses, the filings disclosed.

UK music downloads fall prey to streaming services: Music download sales in the UK fell for the first time last year as consumers moved away from traditional ways of buying songs and adopted streaming services such as Spotify.

Financial stocks help FTSE recover poise: The FTSE 100 inched higher on Wednesday, but remained ended the year with overall losses as resource stocks took a toll on the main London index.

Miners: Miners were among the biggest losers over the day, with the sector under pressure after further signs of a slowdown in China’s manufacturing industries, the main market for metals produced by the sector. The December HSBC/Markit purchasing managers’ report showed its first contraction in seven months. Glencore, the miner and commodities trader, led the way down for base metals stocks, down 0.4% to GBP2.99.


Bank shares: a story of lost trust: Higher interest rates: a delicious prospect for US banks and their investors. Whenever they come (as they must at some point), banks can look forward to higher net interest margins, combined with the higher loan volumes that a recovering economy should generate. The health warning that comes attached is that the valuations of the banks’ bond portfolios will probably fall. Banks, as companies geared to recovery, should outperform on the way up. That they have not — and that they still trade at a discount to pre-crisis valuations — perhaps tells a story of lost trust. Have regulators finalised the capital rules? Have the banks finished paying fines? And if they have, will they return excess capital to shareholders (rather than frittering it away on grandiose growth plans)? Only if you are convinced that the answer to those questions is yes are bank shares a buy in FY15.

Bank M&A: small is beautiful: This year’s bonus letters have barely been printed but merger and acquisition bankers will already be thinking about next year’s payouts. And where better to start than their own sector? Cross border M&A is likely to be thin. The shadows cast by failed deals from the boom years (ABN Amro, anyone?) are long. There will be pockets of dealmaking though. In-country consolidation will be one source. It is a must in Italy and is also possible among the smaller German banks. There may also be more deals in Spain, where last year Caixabank bought much of Barclays’ local business for EUR800.00mn. And the UK’s challenger banks need scale if they are going to take on the big boys. Elsewhere, expect infill deals as banks add skills. This month Spain’s BBVA bought Madiva Soluciones, a “big data” specialist. Focused, small deals of this sort, which add capital light businesses or specific skills, should please shareholders, even if they won’t have advisers reaching for the champagne next December.

Bank resolution: marriage before divorce: Regulators in the US, Britain and the EU have each come up with their own banking resolution plans to protect taxpayers in the advent of a new crisis. A pact would force them to work together in good and bad times. Greater transparency would help all parties take better decisions. In FY08, then UK chancellor, Alistair Darling, could not allow Barclays to buy Lehman — and calm the escalating financial crisis — because he lacked sufficient information to take the decision. A treaty that obliges regulators to share data real time would empower officials across the Atlantic. There are major obstacles to a deal. The US completely rules out using taxpayer money to save a bank. Europe and Britain do not. A marriage-like agreement could include a special cause to address this. It would make divorcing that much easier.

*Published with special permission by Anchor Capital (ACG)

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