The world is changing fast and to keep up you need local knowledge with global context.
By Justin Rowe-Roberts, Investment correspondent
There’s never a dull week in the financial markets. Despite several macroeconomic issues unravelling primarily as a result of the pandemic – such as supply-chain disruptions and inflationary pressures caused by unprecedentedly low interest rates that were slashed by central banks to restore the global economy – markets continue to edge higher. Some of the world’s most famous investors such as Michael Burry, made famous by shorting the housing market before the global financial crisis, indicated market speculation had reached dangerous levels and that a correction is near. New York’s hot new electric vehicle stock, Rivian, has earned a valuation of greater than $100bn without having sold a single car.
One of South Africa’s most rational investors, Piet Viljoen, says Rivian’s valuation is a sign of the times. Although making little sense in the financial markets, Piet’s value-orientated investment style has produced stellar returns over the last few years. This has been against a backdrop where ‘growth’ companies, characterised by growing earnings at greater than 20% per annum, have far outperformed their ‘value’ peers. One of the primary reasons for growth’s outperformance has been an era of low inflation, providing cheap borrowing costs thanks to low interest rates. Central bankers’ actions, which were largely forced upon as a result of dire economic conditions created by the pandemic, have led to inflationary pressures not seen in decades. Viljoen notes the predicted higher interest rate environment will be a net-positive for value companies, owing to their earnings being more transparent than growth stocks whose cash flows are valued for years into the future.
The South African Reserve Bank (SARB) decided to lift rates by 0.25% at Thursday’s Monetary Policy Committee (MPC) meeting. Lesetja Kganyago’s decision to hike rates was largely expected by the market with more rate hikes predicted for 2022. Banking analyst Kokkie Kooyman looks at the banks from an investment angle, with the industry being one of the few beneficiaries of a higher interest rate. As an example, Kooyman points out that all things being equal, Absa’s earnings will increase by 12% annually given a 0.25% interest rate hike. He says the valuations in the banking sector have not yet priced in a higher interest rate environment into which the world is moving in the coming years.
Do the rich get richer? Investec’s financials certainly indicate so. The bank generally services high-end clientele and all the bank’s main performance indicators were well up on the previous corresponding period. Kooyman believes there’s still value in Investec, in spite of its mighty rise in 2021.
Hedge guru Jean Pierre Verster shares his insight on food retailer Shoprite. South Africa’s largest grocery chain is seemingly going from strength to strength … and eating the other retailers’ lunch. Pick n Pay, Woolworths and Spar have all recently released rather uninspiring updates, while Shoprite is achieving near double-digit growth. Jean Pierre also comments on business icon Christo Wiese’s push back on his re-election to the board and explains shareholders are fed up with the related party transaction between Shoprite and Dr Wiese, which tends to benefit Wiese at the expense of minority shareholders.
Lastly, Naspers and Prosus released trading updates that indicate a sharp decline in core earnings. Although more will be revealed when they release results on Monday, the sharp correction in associate Tencent – which was exacerbated by regulatory scrutiny – is likely the reason for the dive in earnings.
Lots to digest. Plenty to ponder. Roll on the new week…
- The week that was: Rivian $100bn valuation, Mining M&A… Santa rally?
- The week that was: MTN, EasyEquities, Moderna, Peloton and Elon’s $25bn Twitter poll
- The week that was: Tesla joins $1trn club, Zuckerberg rebrands Facebook, EOH turnaround and M&A mining mania
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