Finweek 27 August 2020

ECONOMY

MILLIONS OF TECH JOBS TO BE GAINED

SIMON BROWN

THE DANGER OF PRICE BIAS

SHARE VIEWS ON:

DISTELL RICHEMONT LAS VEGAS SANDS FIND US AT: fin24.com/finweek

ENGLISH EDITION

27 August - 9 September 2020

EVERY TWO WEEKS

THE WINNERS AND LOSERS IN THE SUSTAINABILITY RACE

MINING FOR A GREENER FUTURE WHICH METALS AND MINERS WILL SHINE BRIGHTEST?

+

SA: R 32.00 (incl. VAT) NAMIBIA: N$ 32.00

THE WINNERS AND LOSERS IN THE SUSTAINABILITY RACE

VELDSKOEN: AN ICONIC SOUTH AFRICAN SHOE’S GLOBAL FOOTPRINT

Sources: FastMarkets, ICE Benchmark Administration, Thomson Reuters, World Gold Council

2020 COVID-19 PANDEMIC

2015 STOCK MARKET SELL OFF

2015 YEMEN CIVIL WAR

2014 IRAQI CIVIL WAR

2011 SYRIAN CIVIL WAR

2009 BOKO HARAM INSURGENCY

2007 GREAT RECESSION

2006 FATAH - HAMAS CONFLICT

2003 IRAQ WAR

2002 TALIBAN INSURGENCY

2002 Y2K DOT COM BUBBLE

2001 9/11

1998 AL QAEDA IN YEMEN

1997 ASIAN FINANCIAL CRISIS

1996 CIVIL WAR IN AFGHANISTAN

1991 SIERRA LEONE CIVIL WAR

1991 SOMALI CIVIL WAR

1991 JAPANESE ASSET PRICE BUBBLE

1990 GULF WAR

1987 MARKET CRASH

1983 SRI LANKAN CIVIL WAR

1980 IRAN - IRAQ WAR

1979 SOVIET - AFGHANISTAN WAR

1977 MOZAMBIQUE CIVIL WAR

1975 LEBANESE CIVIL WAR

1975 ANGOLAN CIVIL WAR

1973 OIL CRISIS

R10 000 WORTH OF GOLD IN 1967, WOULD BE WORTH R11 MILLION TODAY. DURING TIMES OF CRISIS, THERE IS ALWAYS A GOLDEN LINING.

www.scoinshop.com | 011 784 8551 | T’s&C’s Apply

contents

from the editor JANA JACOBS

ood news is hard to come by these days. Even as we finally enter lockdown level 2, celebrating is premature. While it of course provides a lifeline to many businesses that were hanging by a thread, it’s too late for scores of others. And then there is the fact that Covid-19 isn’t going anywhere soon, which means we will remain subject to the possibility of reinstated restrictions. Not to mention the reality that lives will continue to be lost. Over and above the uncertainty of how long the world will remain exposed to this virus – for South Africans, the past five months of the unsynchronous approach by government in combatting the pandemic has left us despondent. Furthermore, once we do finally emerge on the “other side”, the economic hardship our country will face is, frankly, immeasurable. Given all of this, it’s no surprise that the general mood remains sombre and it is difficult to seek out positivity – much less hope. But as we compiled this edition of finweek, I was reminded of some of the incredible talent and gumption of South Africans. Their resourcefulness offering that much-needed positivity. Zande Africa, featured on p.8, is the product of two bankers who decided to start a financial services company in order to provide credit solutions to spaza shop owners, who have to battle the issue of cash constraints. But they realised the bigger challenge for these businesses was the logistics of sourcing merchandise. Using their own funds to start up, Siya Ntutela and Mdu Thabethe have grown their platform to currently serve 1 200 spaza shop owners. In so doing, they are providing a way of improving the efficiencies in the informal market – which boasts an annual revenue of R40bn, according to Ntutela. It goes without saying how important innovations and initiatives like this will be as we attempt to restart our economy. Veldskoen, a local footwear brand that has re-imagined the traditional “velskoen”, has built a business that is internationally recognised. A goal co-founder and CEO Nic Dreyer says has been in place since starting the venture. (You can read their story on p.42.) Granted, Zande Africa serves as an example of how private citizens are creating solutions for a part of the economy that is not being properly served by current policy. In the quest to rebuild our broken and battered economy, initiatives like this could become increasingly difficult to get off the ground. Especially if many government policies continue to remain uncertain across sectors and industries. (Also see p.10 and 38.) And while Veldskoen’s success should be celebrated, there are many entrepreneurs who will not have survived South Africa’s lockdown. Entrepreneurs who would have been critical in providing jobs and services. But, for today, a little good news is worth enjoying. ■

Please visit psg.co.za to find an adviser near you. For more information contact your financial adviser, call 0800 600 168 or email assetmanagement@psg.co.za

In brief

6 8 10 11

News in numbers Growing SA’s informal market An adverse amendment Exports show SA production slump may be smaller 12 Capitalising on e-commerce 13 South Africa losing out on international M&A front

Marketplace

16 Fund in Focus: Exposure to cutting-edge global businesses 17 House View: Distell, Sasol 18 Killer Trade: Exxaro Resources, Nedbank 19 Invest DIY: Changing the game 20 Simon Says: Anchor Group, City Lodge, Consolidated Infrastructure Group, JSE Ltd, lockdown, Naspers, PPC, Richemont, SibanyeStillwater 22 Investment: Compiling your own portfolio 23 Share View: Computing in the long term 24 Trader’s Corner: A shot at Las Vegas 26 Invest DIY: The danger of price bias 27 Investment: The carry trade loses its lustre

Cover

28 Metals for a greener world economy

In depth

34 ETFs steer steady as markets roil 38 Millions of jobs to be gained 40 SA poultry industry determined to preen its feathers

On the money

42 Entrepreneur: Making an iconic South African shoe globally recognisable 44 Personal finance: Tackling debt 45 Quiz and crossword 46 Piker

Seeing the bigger picture tells the full story. Right from the start, we never stop pursuing your future success.

Wealth Asset Management Insure Affiliates of the PSG Konsult Group are authorised financial services providers.

PUBLICISMACHINE 15954MMS/E/6

g

Opinion

4 For some, a little faith goes a long way

opinion

By Johan Fourie

SOCIO-ECONOMICS

For some, a little faith goes a long way

n

Can religion make people more resilient during times of hardship? Recent research suggests so.

six months and again 30 months after the intervention, publishing the o industry has been left untouched by Covid-19. Religious results in the latest issue of the Quarterly Journal of Economics. and spiritual services are no exception. Churches across The first, and perhaps most obvious, result is that those following the South Africa closed during hard lockdown; many remain V curriculum turned out to be more religious than the control group, i.e. closed, with services moving online. The Hajj pilgrimage those not enrolled in the programme, six months after the experiment. that began on 28 July had only 1 000 pilgrims, down from 2.5m in 2019. More exposure to religious teachings makes people, well, more religious. Public celebrations of Jewish Passover have been cancelled. Buddhists A more surprising finding is that those following the V curriculum also around the world observed Vesak Day virtually. have 9.2% higher household income compared to the control group. The financial implications of such a supply shock are becoming all This is only true for income; the authors find no differences between the too clear. Donations have fallen and many churches have been forced two groups in terms of labour supply, assets, consumption, to delay or scrap their outreach programmes. Some food security or life satisfaction. ministries have had to let go of staff. Places that depend Why would Christian theology and values boost incomes? on pilgrimages have been particularly badly hurt. The The authors explain “that the religiosity treatment effect Santiago de Compostela Cathedral has been renovated operates by increasing grit – specifically, the portion of grit at great expense in anticipation of the surge of Camino of Americans said associated with perseverance of effort (and in particular, pilgrims expected to make the journey during next year’s that the pandemic has agreement with the statements ‘I am a very hard worker,’ ‘I Holy Year; many may choose to suspend their plans. strengthened their faith or finish whatever I begin,’ and ‘Setbacks don’t discourage me.’).” The Hajj and Umrah usually add $12bn, or 7%, to Saudi spirituality; only 3% said their faith had deteriorated. This mechanism, the authors conclude, accords with Weber’s Arabia’s GDP; the collapse of pilgrim numbers would conception of the Protestant work ethic. In addition, they find have seriously hurt Mecca’s economy. no consistent movement in the other potential mechanisms But in contrast to other industries, where supply measured: social capital, locus of control (other than the belief that God is shocks have been exacerbated by a decline in demand, the pandemic in control, which increases), optimism, and self-control. has forced people to reflect on their own mortality and the meaning Two-and-a-half years after the experiment the authors returned to the of life. Many have turned to religion for answers. In the US, more than Philippines. They again measured the incomes, assets, beliefs and values half of all respondents to a Pew Research survey in March said that of the almost 8 000 households. But this time they found that the large they “prayed for an end to the spread of coronavirus”. In the same difference in incomes between those exposed to the Christian curriculum survey, 29% of Americans said that the pandemic has strengthened and those not, had disappeared, and so too had the differences in grit. The their faith or spirituality; only 3% said their faith had deteriorated. two groups were almost indistinguishable on all outcome variables, While the supply of religious and spiritual services may except that those formerly enrolled in the programme seemed have declined, demand is certainly on the increase. to be more optimistic than those not enrolled. The turn to religion is likely to have economic In a different experiment, the results of which were consequences. Social scientists have long debated published in the same journal, five economists randomised the economic benefits of religiosity. German members of a Pentecostal church in Ghana into an sociologist Max Weber famously argued that one insurance scheme. The authors tracked whether those reason for North-Western Europe’s industrial who were enrolled in the insurance scheme were more or revolution was the Protestant values of hard work, less likely to continue giving money to the church. They find discipline and frugality. Although the theory has that church donations dropped significantly for those that received some empirical support, its causal argument also (randomly) received insurance. The authors conclude that remains contentious: Was it Calvinism that caused “adherents perceive the church as a source of insurance and that Protestant values to emerge, or was it people with those this insurance is derived from beliefs in an interventionist God”. values that adopted Calvinism? What do we learn from these experiments? One hypothesis is that One way to find out, of course, is to run an experiment. This is exactly religion is a placeholder. When we are sick, religion brings comfort. When what economists Gharad Bryan, James Choi and Dean Karlan did. we lack understanding, religion helps to explain. When we lack motivation, They approached International Care Ministries, a Christian, anti-poverty religion gives purpose. When we lack social networks, religion builds trust. organisation in the Philippines, to roll out a large training programme. Replace these things with private and public services – good health, Almost 8 000 Filipino households were randomly selected from 320 education, insurance – and the need for religious services falls. communities to undertake the Transform curriculum, which consists of Covid-19 has brought hurt and hardship. The challenges going 90-minute interactions over 15 weeks. forward might be even greater. We need grit – to knuckle down and Transform consists of three components: the teaching of get through this. We need optimism – to believe that things will get Protestant Christian theology and values (V), the teaching of health better, even if the evidence doesn’t back it up. Perhaps a placeholder is behaviours (H) and the teaching of livelihood skills (L). The authors exactly what we now need. ■ randomly assigned certain households to receive the full training package, other households received only the health behaviours editorial@finweek.co.za Johan Fourie is professor in economics at Stellenbosch University. package and others received no training. They measured outcomes

Photo: Shutterstock

29%

4

finweek 27 August 2020

www.fin24.com/finweek

1886

Why limit yourself to only 1%? Discover the full picture by investing offshore with Allan Gray and Orbis. Most investors tend to focus their attention on seeking opportunity locally, but with South Africa representing only around 1% of the global equity market, we understand the importance of seeing the full picture and unlocking investment opportunities beyond the local market. That’s why Orbis, our global asset management partner, has been investing further afield since 1989. Together we bring you considerably more choice through the Orbis Global Equity Fund and Orbis SICAV Global Balanced Fund.

Invest offshore with Allan Gray and Orbis by visiting www.allangray.co.za or call Allan Gray on 0860 000 654, or speak to your financial adviser.

Allan Gray Unit Trust Management (RF) Proprietary Limited (the ‘Management Company’) is registered as a management company under the Collective Investment Schemes Control Act 45 of 2002. Allan Gray Proprietary Limited (the ‘Investment Manager’), an authorised financial services provider, is the appointed investment manager of the Management Company and is a member of the Association for Savings & Investment South Africa (ASISA). Collective Investment Schemes in Securities (unit trusts or funds) are generally medium- to long-term investments. Except for the Allan Gray Money Market Fund, where the Investment Manager aims to maintain a constant unit price, the value of units may go down as well as up. Past performance is not necessarily a guide to future performance. The Management Company does not provide any guarantee regarding the capital or the performance of the unit trusts. The Orbis Global Equity Fund invests in shares listed on stock markets around the world. Funds may be closed to new investments at any time in order for them to be managed according to their mandates. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request from the Management Company.

in brief EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Jacques Claassen, Andrew Duvenage, Johan Fourie, Moxima Gama, Mariam Isa, Glenneis Kriel, Schalk Louw, David McKay, Timothy Rangongo, Petri Redelinghuys, Peet Serfontein, Melusi Tshabalala, Glenda Williams Sub-Editor Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli Advertising Paul Goddard 082 650 9231/paul@fivetwelve.co.za Clive Kotze 082 335 4957/clive@mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/ tanya@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela. silver@newmedia.co.za

Published by New Media, a division of Media24 (Pty) Ltd Johannesburg Office: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 713 9601 Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: newmedia@newmedia.co.za Printed by Novus Print Montague Gardens – Sheetfed & Digital and Distributed by On The Dot Website: http://www. fin24.com/finweek Overseas Subscribers: +27 21 405 1905/7

ENQUIRIES SUBSCRIBERS 087-353-1305 subs@finweek.co.za

Fax 0864-575-918

SHOPS 0861-888-989 assistance@onthedot.co.za

Share your thoughts with us on: @finweek

finweek

finweekmagazine

FINWEEK SUBSCRIBES TO THE SOUTH AFRICAN PRESS CODE WHICH COMMITS US TO JOURNALISM THAT IS TRUE, ACCURATE, FAIR AND BALANCED. IF YOU THINK WE ARE NOT COMPLYING WITH THE CODE, CONTACT THE PRESS OMBUDSMAN AT 011-484-3612 OR ombudsman@presscouncil.org.za © FINWEEK 2011 ALL RIGHTS RESERVED. TO INQUIRE ABOUT PERMISSION TO REPRODUCE MATERIAL CALL OUR ARCHIVE AT 021-406-3232.

6

finweek 27 August 2020

>> Trend: Giving spaza shops the means to grow p.8 >> Mining: Draft amendment bill will hamper junior miners p.10 >> Export volumes show mining sector is bouncing back p.11 >> Listed Property: How Covid-19 boosted industrial property p.12 >> Business: The lucrative market SA is missing out on p.13

“OF COURSE, THERE COULD ALWAYS BE CENTRAL BANKERS WHO . . . COULD OVERLOOK THEIR RESPONSIBILITIES IN TERMS OF THE CONSTITUTION, BUT THIS ONE IS NOT ABOUT TO.” Lesetja Kganyago

— Lesetja Kganyago, governor of the South African Reserve Bank, defended the central bank’s response to the coronavirus-led economic downturn in SA in the face of growing calls from politicians and trade unionists to deepen its rate cuts and buy up more government bonds. He told the Financial Times that the policy rate, now at its lowest in nearly half a century, was also now negative in real terms against where inflation is expected to be in the next year, showing the bank’s “substantial” response.

“People are giving me too much credit that I do not deserve. I do not run government.” —Minister of cooperative governance and traditional affairs and chair of the National Command Council, Dr Nkosazana Dlamini-Zuma, chided critics who pinned her as the sole force behind government’s decision to ban tobacco sales for five months, during a media conference on the move to level 2 of the national lockdown. Dlamini-Zuma said she was being used as a “scapegoat” for decisions taken by a collective. The sale of alcohol and tobacco has been permitted under level 2, as well as concerts, weddings and smaller events (restricted to no more than 50 people), and inter-provincial travel for leisure.

“This is a dramatic breakthrough that will make the Middle East safer.” — US President Donald Trump’s chief adviser, Jared Kushner, said the US-brokered Israel-United Arab Emirates (UAE) peace treaty represents a “massive change” for the Middle East. Speaking to CBS News, Kushner commented that the deal, which was unexpectedly announced at the beginning of August, would make the region safer. It marks the third Israeli-Arab peace treaty in the Middle East, and the first one involving a Gulf state. Though the international community has welcomed the deal, Palestine, Iran and Turkey have denounced it. The signing of the deal is expected to normalise relations between the two countries, including opening embassies in each other’s territory. www.fin24.com/finweek

DOUBLE TAKE

THE GOOD

BY RICO

Biotechnology and Nasdaq-listed company Novavax announced the beginning of a Phase 2b clinical trial in South Africa to evaluate the efficacy of the company’s Covid-19 vaccine candidate. Dr Shabir Madhi, professor of vaccinology at Wits University, will lead the clinical trial. Madhi said in a statement that the major motivation for the vaccines being evaluated at an early stage in SA is to gather evidence in the African context on how well these vaccines work in settings such as our own.

THE BAD JSE-listed insurer Momentum Metropolitan told customers that a third party ‘unlawfully accessed’ a limited portion of data of a subsidiary of the group. The insurer said it became aware of the data breach on its network on 13 August and immediately activated its IT security incident plan, which included the implementation of additional systems monitoring and the reinforcement of its IT security.

Photo: Gallo/Getty Images

THE UGLY Sasol reported an annual loss of R91.3bn for the full year ended 30 June compared with earnings of R6.1bn in the previous year. The company wrote off assets worth $6.5bn (R111.6bn) and said the start-up of the last unit at its Lake Charles Chemicals Project has been delayed again. It said earnings were severely impacted by a collapse in oil prices and the economic impact of Covid-19 in the second half of the year despite good production and higher oil prices in the first half of the year. Sasol will issue up to $2bn (R34.8bn) of shares in the second half of 2021 to pay down almost R200bn in debt (also see p.18). @finweek

finweek

TOO LITTLE, TOO LATE

21 000

Non-profit organisation VinPro, which represents over 3 000 SA wine producers, cellars and industry stakeholders, said in a statement that although the SA wine industry is grateful for and acknowledges the recent lifting of the alcohol ban, it “might be a little too late”. The organisation estimates that more than 80 wineries and 350 wine grape producers would go out of business over the next 18 months, with a potential loss of more than 21 000 jobs across the value chain – as a result of the temporary ban. The industry is believed to have lost more than R7bn since the introduction of sales restrictions in March 2020. SHIFTING FOCUS

15 years

MTN announced that it is leaving the Middle East after 15 years and focusing on Africa. The company said it will exit the Middle East in the medium term, starting with the sale of its 75% stake in MTN Syria. Advanced talks have been entered into to sell the stake in MTN Syria to TeleInvest, which holds the other 25% of the business. Among reasons for divesting from the region, MTN cited losing money on falling regional currencies, the Middle East’s volatile geopolitics, and problems with Western sanctions. In the 15 years that MTN operated in the region, there had been no shortage of headlines, including allegations of bribery, contravening sanctions and funding terrorism – all of which the company denied.

finweekmagazine

TOTAL INVESTMENT

R6.95bn

Total’s oil and gas rig arrived in Cape Town in preparation for expanding on the petroleum giant’s discovery off the coast of Mossel Bay. The rig, known as the DeepSea Stavanger, was built in Norway and commissioned by Total and its partners to drill the Luiperd prospect, which is in the same block in the Outeniqua basin where Total’s Brulpadda discovery was made. The department of mineral resources and energy said the DeepSea Stavanger rig is part of a $400m (R6.95bn) oil and gas exploration drilling campaign by Total. Offshore Energy reported that Total is expected to pay between $145m and $190m for the 180 to 300 days the drilling campaign is expected to take. MINING OUTPUT DOWN

-28.2%

SA’s total mining output fell 28.2% year-on-year in June compared with a revised contraction of 27.6% in May, reported Stats SA. The largest negative contributors were platinum group metals (PGMs), with output down 42.5% and contributing -10.6 percentage points; and iron ore, with output down 54.2% and contributing -6.7 percentage points. FNB economist Geoff Nolting said headwinds are likely to continue, particularly in attracting investment in new projects. He said factors like declining global competitiveness; electricity supply and cost constraints; regulatory uncertainty; and logistical bottlenecks such as inadequate railway networks and port infrastructure increase the risk premium for investors on the back of a highly uncertain operating environment. finweek 27 August 2020

7

trend

By Glenneis Kriel

i

Growing SA’s informal market Zande Africa’s innovative informal market solutions bring efficiencies to spaza shops.

n 2015, the absence of credit solutions for spaza shop owners administrative burden for us, but it is their preferred channel of led to bankers Siya Ntutela and Mdu Thabethe deciding to communication,” Ntutela says. fill this gap by starting their own financial services company, To add additional value to their service, Zande Africa has Zande Africa. created business opportunities for independent owner drivers and “The name of the company was derived from a Nguni word sales agents. The drivers are responsible for product deliveries, that means ‘to multiply’, in reference to our objective to unlock while the sales agents act as merchandisers by checking shop the spaza shop economy, which boasts an annual revenue of over supplies during deliveries. R40bn,” says Ntutela. “The sales agents keep record of stock movements and place Their subsequent analysis uncovered that supply issues were orders for new stock on behalf of the shop owners. Stock is usually an even greater challenge than cash constraints. “Spaza shop delivered the next day,” says Ntutela. owners, at least once a week, have to either close shop or employ someone to run the shop while Covid-19 and plans for the future Our objective was to unlock the spaza shop economy, which they are away buying merchandise. To address this Competition in the spaza shop market is quite fierce, boasts an annual revenue of over challenge, we added supply and logistics solutions with Zande Africa having to compete with hypermarkets to our product offering,” says Ntutela. and discount stores for their clients’ attention. However, Zande Africa has a significant edge due to their ability to timeously supply shop owners with the right products on Unlocking a market their doorsteps. “The start-up has turned into something Getting the initiative off the ground was easier like a Takealot of the spaza shops,” says Ntutela. said than done and had to be self-financed by Zande Africa has grown to employ 42 people, with Thabethe and Ntutela. In 2016, Zande Africa received a R1m warehouses in Ermelo and Mbombela in Mpumalanga. They were injection from Merrill Lynch South Africa and AlphaCode, and won in the process of opening another warehouse near Orange Farm, R750 000 when it took third place in the SAB Innovations Awards south of Johannesburg, but had to postpone its opening until programme in 2018. August because of business disruptions caused by the Covid-19 “There is a lot of great innovation competing for funding out lockdown. there, so winning in some of these rounds proved to us that our The company had 1 500 spaza shop owners on their books at business idea was on the right track,” Ntutela says. the start of this year, which had declined to 1 200 due to Covid-19 As newcomers to the fast-moving consumer goods (FMCG) regulations. Trading volumes have nevertheless remained the same. industry, Ntutela and Thabethe had to work hard to build the trust “There had been a lot of confusion during lockdown level 5 as of suppliers and spaza shop owners. FMCG companies also have to whether spaza shops were still permitted to operate or not. We highly formalised distribution networks, so it took a lot of effort tried to help by keeping clients up to date with developments to persuade them to change their business practices and via WhatsApp, and supplying them with face masks supply spaza shops more directly. and sanitiser to ensure their businesses complied with Zande Africa’s first big break came in 2017 when government regulations,” Ntutela says. Pioneer Foods appointed it as a distributor. From He adds that Covid-19 once again unveiled the there, the start-up established partnerships with big gap between the haves and the have-nots various companies, allowing it to buy food in bulk in South Africa: “People living in townships had on credit. Spaza shops have the option of buying to travel up to 20km and more to buy their food this stock from Zande, in cash or on credit. because of the closure of spaza shops. This not Since most of its clients are unbanked, only added to the financial burden on these people, business is limited to cash transactions for who are already struggling to make ends meet, but up to six months, during which time Zande also posed a great health risk as they had to make use Africa compiles a portfolio of the profitability of public transport.” and creditworthiness of the shop. Thereafter The company’s plan for the future is to become more owners could qualify for an interest-free credit line Siya Ntutela (left) is the digitised. “At the moment more than 80% of our clients are that is valid for up to 14 days. The cost of the credit line is chief commercial officer calculated into the price of the products, which is still 10% and Mdu Thabethe is the foreigners and they are extremely vulnerable, as more than CEO of Zande Africa. 90% of their business is conducted in cash. We are looking into cheaper than spaza owners would pay at wholesalers or solutions to migrate them to other payment systems without supermarkets, according to Ntutela. adding any significant costs to transactions. The solution will The company initially used unstructured supplementary service probably be launched within the next year or two,” Ntutela says. data (USSD) technology, which allows clients to apply for credit Zande Africa recently also acquired a customer management and check their balances by entering a specific number on their system tool, which will further enhance its ability to analyse the phone – in the same way mobile operators allow customers to opportunities presented within this informal market. “We are check their balances and buy airtime. While this technology is still gathering a lot of valuable market information that will allow better offered, most of Zande’s clients have since switched to WhatsApp product and service linkages with this economy.” ■ to access these services. “Engaging shop owners via WhatsApp creates a heavy editorial@finweek.co.za

Photo: Supplied

R40bn

8

finweek 27 August 2020

www.fin24.com/finweek

in brief in the news By David McKay

MINING

An adverse amendment

A feature of the Draft Taxation Laws Amendment Bill may hamper junior miners. Minerals Council SA is requesting reconsideration from National Treasury to avert a negative impact on the industry.

s

outh African mining has recently suggested there are grounds for hope that the government will respond positively to reform proposals placed before it by Business Leadership SA’s B4SA. Roger Baxter, CEO of Minerals Council SA, which contributed the mining sector slides to B4SA’s presentation to government, said visible signs of policy improvement could be seen within six months. A proposal, for instance, to incentivise exploration investment via tax benefits attached to so-called flow-through shares, could be met with a favourable response before October, he said. Unfortunately, the government ‘policy’ doesn’t appear to be either homogenous or synchronous. While National Treasury may view flow-through shares positively, it tabled the Draft Taxation Laws Amendment Bill in July that may frustrate junior mining. Addressing the tax treatment of allowable mining capital expenditure where mining services are provided through contractors, the draft amendments say only mineral right holders can benefit from accelerated depreciation; in other words, not the contractor miners. “It is anti-junior mining as it is junior miners who are most capital-constrained and are most likely to need contractors,” said Paul

Miller, a former mining company CEO. “I hope the amendments are more a case of being poorly drafted (than policy),” said Errol Smart, CEO of Orion Minerals, which is building the R4.5bn copper-zinc project near Prieska in SA’s Northern Cape province (see sidebar). “I don’t know whether our project would have got going with these laws,” he said. Said the Minerals Council when asked about the draft amendments: “The Minerals Council will be making a submission to National Treasury on this feature of the Draft Taxation Laws Amendment Bill, pointing out that it will have an adverse impact on the industry and requesting a reconsideration.” There’s also some confusion about whether the department of mineral resources and energy’s (DMRE’s) decision to withdraw an appeal regarding the ‘once empowered, always empowered’ clause in the 2010 Mining Charter is a benign move or not. Styled by the Minerals Council as evidence that reform was being supported by the DMRE, the decision to drop the appeal over the High Court’s decision relating to the 2010 Mining Charter is so it can contest an industry interpretation of once empowered, always empowered as contained in the 2018 Mining Charter, according to a note by Fasken, a law firm. ■ editorial@finweek.co.za

Unfortunately, the government ‘policy’ doesn’t appear to be either homogenous or synchronous.

Roger Baxter CEO of Minerals Council SA

Errol Smart CEO of Orion Minerals

Photos: Gallo/Getty Images I www.orionminerals.com

Orion’s touching the skies Shares in the JSE’s Orion Minerals have nearly doubled in value since the start of August, which is timeous as the firm is thought to be in the final stages of equity financing the Prieska copper-zinc project. This followed the grant of a mining permit over the remainder of Orion’s Northern Cape property which Errol Smart, CEO of the company, says has been delivered in double-quick time and is a reminder that when minded, South Africa’s mining regulatory environment can be a force for good, not frustration.

10

finweek 27 August 2020

“My biggest fear, the one thing that kept me awake at night, was that it would take six to nine months to get the permit,” he told finweek in an interview. Now is the time to be financing and building mines in SA with infrastructure development fresh in the collective mind of President Cyril Ramaphosa’s economic cluster. Smart says the Northern Cape licensing office of the DMRE has been responsive and efficient, and quite unlike some offices in Australia where Orion Minerals also has exploration properties.

“We criticise SA all the time, but you can go months on end without hearing from any (official) one in Australia,” says Smart. Expect, then, more upward momentum to Orion shares when the financing is in place and assuming economic recovery after Covid-19 remains supportive of base metal prices which feed industrial growth. Smart wants the mine, proposed to do 22 000t of copper and 70 000t of zinc annually over 12 years, to start construction in the first quarter of next year. ■

www.fin24.com/finweek

in brief in the news By David McKay

MINING

Exports show SA production slump may be smaller

s

As more and more miners return to full production, fears of metal price contraction are being allayed. For now. ibanye-Stillwater, the gold and the recovery in mining stocks has now run its platinum producer, said in a trading course. PGM shares have rerated in the past statement earlier this month that it three months; even in absolute terms, the didn’t expect a high risk of further likes of Anglo American Platinum and Impala operational disruption because of Covid-19. Platinum were nearing their February highs at The statement confirms a growing the time of writing. expectation that SA’s mining sector might But it also needs to be remembered that be over the worst of the Covid-19 pandemic, SA PGM stocks held up well even though the extent of which was retrospectively Nornickel, the Russian producer, and North demonstrated in recent Stats SA data that American production continued largely showed mining production for June had fallen unabated through the worst of the pandemic. about 28% year-on-year. “The delta in the South African supply According to Henk Langenhoven, chief ramp from here could then be smaller than economist at Minerals Council South Africa, previously expected, which bodes well for the sector is “bouncing back” as measured the sustainability of prices off current levels by the volume and value of exports. Export given an expected demand recovery into the volumes were, in fact, 28% higher in June than 2H20 (second half of this year),” said Morgan at the same time last year, while the value of Stanley in a note last month. export sales, which had fallen to a four-year low In other words, a significant kick-up in SA in the five weeks following the government’s PGM supply is not expected to heavily disturb hard lockdown, had recovered to about R40bn the pricing of the underlying metals. for the month in April – and were rising. The outlook for gold is potentially even rosier. “We expect the average real production Although labour intensive and therefore more decline between 2019 and 2020 to be 11%,” crowded and logistically challenging, the dollar said Langenhoven, an outlook that compares and rand gold price improvement has more with expectations of a 15% decline previously. than offset production shortfalls. According to He thinks the weighted average nominal Mark Bristow, the SA-born CEO of Canadian (unadjusted) decline in mining production will gold miner Barrick Gold, we should expect be at 7% compared with 12% previously. significant volatility in the gold price, but no The worst-case scenario is correction to previous levels. We expect the average that average real (adjusted) “We won’t get a return to $1 100 real production decline production could be 15% lower to $1 200 per ounce,” he said in an between 2019 and compared with a decline of 21% interview with finweek following 2020 to be previously, Langenhoven said. the company’s second-quarter The nominal weighted average financials. “The gold price is going for 2020 is forecast to be an 11% to settle at a new (higher) base as decline (compared with a 17% all the major economies are printing decline previously). money.” The well-established theory The upshot of the forecasts is mining is that when money becomes cheaper, production and sales will not be as bad as investors turn to gold, which is viewed as a previously expected, as another trading store of wealth and hedge against inflation. statement – this one from Harmony Gold – Bristow also thinks that although stimulus also illustrates. Harmony said this month it efforts have put some vim into equities, the expects to be at full production from August; real damage perpetrated by restructuring and Sibanye-Stillwater and Northam will be at full staff furloughs is yet to make its presence felt capacity in the fourth quarter. at a consumer level. “That’s still a hidden part Set against impressive dollar-based pricing of the crisis. People don’t generally want to see for gold and platinum group metals (PGMs) the gold price go high as it has because it’s in particular, assisted by renewed rand recognition of a high-speed collision.” ■ weakness, raises the question as to whether editorial@finweek.co.za

Photo: Gallo/Getty Images

11%.

@finweek

finweek

finweekmagazine

Henk Langenhoven Chief economist at Minerals Council South Africa

A significant kick-up in SA PGM supply is not expected to heavily disturb the pricing of the underlying metals.

finweek 27 August 2020

11

in brief in the news By Glenda Williams

LISTED PROPERTY

Capitalising on e-commerce

f

Photos: Supplied

Industrial property is benefitting from declining in-store retailing and the huge growth in data consumption.

or the most part, industrial property (factories, logistics warehouses and distribution centres) has been the poor relation in the local property investment landscape. Even South Africa’s listed property and real estate investment trusts (Reit) sector has largely fixed its attention on retail and office assets. According to Bridge Fund Managers, on 31 July 2020 only 18.3% of the FTSE/JSE Listed Property Index (SAPY) comprised exposure to the industrial sector. Of that, 6.6% being traditional industrial (primarily manufacturing) and 11.7% logistics (warehouse storage and movement of goods). The FTSE/JSE REIT SA Index figure is somewhat higher at 23.5%, split between 5.7% Steven Brown traditional and 17.8% logistics. CEO of Fortress REIT Ironically, given lower exposure to the asset class, industrial property is cheaper to own and operate compared to other asset classes. “A lot of the costs are pushed to the tenant, and per square metre it is much cheaper to Redefine’s Atlantic Hills in the Western Cape, where build,” Steven Brown, CEO of Fortress one of Amazon Web Services’ REIT, tells finweek. availability zones is situated.. But the approach to the asset class has been upended by the Covid-19 pandemic, which has brought with it strong e-commerce and e-tailing tailwinds on the back of declining in-store retailing – advancing the gains the industrial sector has made in recent years due to retailers requiring more efficient supply chains and e-commerce. The pace of change is especially driving growth in logistics real estate, the backbone of e-commerce, with online retailers and even traditional retailers ramping up their logistics and supply chains. Many businesses are capitalising on the increased reliance on e-commerce. But e-commerce requires more than three times the logistics space of traditional brickand-mortar retail sales, according to Prologis research. “Retailers are now spending a lot more on online infrastructure, in order to give them the backbone to roll out an omni-channel experience for the customer,” says Brown. “Even smaller businesses are getting scale and rapidly building trust with the end consumer and that’s been an opportunity for our logistics real estate business.” Fortress is the largest logistics developer in SA, Clint Marais logistics accounting for one-third of its R30bn direct Western Cape regional head of Galetti property portfolio. By investing R1bn annually in new Corporate Real Estate logistics assets over the next five years, by 2025 Brown expects logistics to account for two-thirds of the portfolio. Industrial sector exposure constitutes 20% of Redefine Properties’ local portfolio, R13.7bn by value. And the Reit’s 12

finweek 27 August 2020

European logistics platform (in partnership with Panattoni, the biggest logistics developer in Europe), is expanding. For the six months ended 29 February, the value of these income-producing assets totalled €270.3m, with new developments in progress comprising €62.3m. Location, including proximity to ports, rail and urban metropoles, and high-end technology are key to logistics success. Robert Dobrzycki, CEO of Panattoni Europe, which is multiplying its logistics development roll-out, says that the next five years will be reshaped in terms of location and what is built. “E-commerce will continue to grow and become a much larger part of what logistics is offering its clients,” he says. Many international counters trading at, or at a premium to, net asset value (NAV) are logistic-focused Reits like Prologis, Segro and Warehouses De Pauw. SA only has one specialist logistics Reit listed on the JSE; Equites Property Fund. Its R15bn assets are situated in key logistics nodes in SA (58%) and the UK (42%). Industrial property also stands to benefit from the huge growth in data consumption. Redefine houses Amazon Web Services’ three availability zones in Cape Town; while SA’s largest Reit, Growthpoint Properties, is developing data centres for two large international operators in Midrand. Growthpoint’s local industrial portfolio (excluding V&A Waterfront) comprises 17.5% by value. It also has 31% exposure to industrial properties in Growthpoint Australia and some exposure in Poland and Romania through its 29.4% stake in Globalworth Real Estate Investments. “We have seen an encouraging increase in demand for industrial properties from various sectors,” Galetti Corporate Real Estate Western Cape regional head, Clint Marais, tells finweek, attributing this to the changing nature of retail and businesses focusing on manufacturing personal protection equipment. “Adding to the demand is the fluctuation of exports and the depreciation of the rand. Manufacturers are scaling up local production to mitigate the possibility of disrupted supply chains in future,” he says. Marais predicts a major uptake in recently-developed industrial nodes such as Midrand and Pomona in Gauteng; Riverhorse Valley in KwaZulu-Natal; and Bellville South, West Coast, Airport Industria and Epping in the Western Cape. “These areas are on the rise, and we predict a significant increase in industrial real estate development once stakeholders realise their profitability.” ■ editorial@finweek.co.za www.fin24.com/finweek

in brief in the news By Jaco Visser

BUSINESS

South Africa losing out on international M&A front

s

As the world grows wary of China’s ability to remain the factory of the world, South Africa – and the rest of the continent – has a limited time to enjoy the spoils. outh Africa’s attractiveness as a R1bn) values for transactions in order to realise foreign investment destination is an acceptable return on assets. It often takes declining even as the country, as the same time and effort to undertake a R1bn part of the Africa Continental Free transaction as it would a R100m one, he says. Trade Agreement (AfCFTA), offers physical “There are several acquirers and investors who access to markets in the rest of Africa. Not to are still looking into Africa, especially fintech and mention supplying manufactured goods into the software companies,” says Bahlmann. In addition, European and US markets. China’s competitiveness as a manufacturing base As the most industrialised nation on the and reliable supply chain partner is on the decline, continent, even as manufacturing is buckling under he explains. “We still have a robust skills base in poor government decisions and amid a global several industries in SA.” health pandemic, SA should be a lucrative market The problem, however, with fintech is that for mergers and acquisitions from abroad. That is, it relies on customers’ discretionary disposable however, not the case. income. Taking current-dollar GDP per capita The value of mergers and acquisitions more as a measure, sub-Saharan Africa compares than halved in the first six months of 2020 unfavourably with other emerging markets. compared with the same period a year ago – Manufacturing remains an opportunity for a from $8.2bn to $3.3bn, according to Statista region with a young population moving up the data supplied by Andrew Bahlmann, managing income ladder. director of Deal Leaders Africa. The number of Outside of strong growth opportunities in transactions slid from 160 to 132 between the SA itself, international acquirers are attracted comparable periods. to companies with established SA’s GDP, the 38th-largest in markets in the rest of Africa that The value of mergers and the world in current US dollars, would enable diversification in acquisitions more than halved was recorded as $351.4bn in revenue and currency streams, in the first six months of 2020 compared with the same period 2019, according to World Bank according to Bahlmann. a year ago – from data. Hong Kong, with almost It stands to reason then, as eight times fewer people than one of the big drivers behind the SA, had a GDP of $366bn. The AfCFTA, for SA to ensure that whole of sub-Saharan Africa had local companies’ access to the a GDP of $1.75tr – bringing SA’s rest of the continent is smooth to contribution to this region to a once the agreement kicks in on fifth of all goods and services 1 January 2021 (it was delayed produced. Manufacturing from 1 July this year due to the contributed about 12% of SA’s Covid-19 pandemic). GDP in 2020 and has been on The window of opportunity a net decline trajectory since the to cash in on the slide in China’s first quarter of last year, according to Stats SA data. competitiveness, and global supply chains’ This is the sector where steady jobs are created, wariness of the country’s dependability following and exports could be realised on a large scale. the pandemic, is but a short one. Why are these figures important in a discussion Africa is physically closer to the markets of around mergers and acquisitions (M&A)? A billionEurope and the US. Lest Africa’s leaders – judging dollar M&A target in SA will be equal to about 0.3% by their actions over the past six decades – act of GDP. In the US, with its $21.4tr economy, the in cohort and get the free trade agreement same transaction will be equal to 0.004% of GDP. implemented as soon as possible, with minimal red “One obstacle to mergers and acquisitions tape at border posts, countries such as Vietnam, in SA is the size of potential targets,” explains Indonesia and Cambodia may gather and divide the Bahlmann, adding that a number of potential spoils of manufacturing. ■ acquirers have set minimum (many in excess of editorial@finweek.co.za

Photo: Supplied

$8.2bn $3.3bn.

@finweek

finweek

finweekmagazine

Andrew Bahlmann Managing director of Deal Leaders Africa

“One obstacle to mergers and acquisitions in SA is the size of potential targets.”

finweek 27 August 2020

13

HOME VANTAGETM

WILL & LEGACY PROTECTION PLAN TM HOME COVER LIFE COVER BOND

TAZKIYATM LEGACY PROTECTION PLAN TM

LEGACY SUCCESSION PLANNINGTM

WILLS

OFFSHORE

COMPANIES

ACCOUNTING

TAX LEGAL INTER VIVOS TRUSTS ESTATE ADMINISTRATION

NO COSTLY SETUP FEES

market place

>> >> >> >> >> >> >> >> >>

House View: Distell, Sasol p.17 Killer Trade: Exxaro Resources, Nedbank p.18 Invest DIY: Give credit where it’s due p.19 Simon Says: Anchor Group, City Lodge, Consolidated Infrastructure Group, JSE Ltd, Naspers, lockdown, PPC, Richemont, Sibanye-Stillwater p.20 Investment: 5 steps for a DIY portfolio p.22 Share View: Get in on the technology giant making quantum leaps into the future p.23 Trader’s Corner: Betting on a casino stock p.24 Invest DIY: Check your bias at the door p.26 Investment: Fundamentals no longer support SA as a carry trade destination p.27

FUND IN FOCUS: LUNAR BCI WORLDWIDE FLEXIBLE FUND

By Timothy Rangongo

Exposure to cutting-edge global businesses Investing in companies with innovative technologies and business practices. Fund manager insights:

FUND INFORMATION:

Benchmark: Fund manager:

CPI + 5% p.a. Sabir Munshi and Carl Isernhinke

Fund classification:

Worldwide – Multi-asset – Flexible

Total investment charge:

1.95%

Fund size:

R69.2m

Minimum lump sum/fixed administration fee: Contact details:

None/R15 excl. VAT on all direct investor accounts with balances of less than R100 000 083 305 7860/sabir@lunarcapital.co.za

TOP 10 HOLDINGS AS AT 30 JUNE 2020:

1

iShares Nasdaq Biotechnology ETF

10.4%

2

BCI Money Market

8.3%

3

Amazon.com

7.8%

4

Berkshire Hathaway – Class B

6.3%

5

Okta – Class A

4.8%

6

Microsoft

4.7%

7

Naspers*

4.6%

8

Aspen Pharmacare

4.6%

9

Mediclinic

4.1%

10

Remgro

3.2%

TOTAL

58.8%

*finweek is a publication of Media24, a subsidiary of Naspers. PERFORMANCE (ANNUALISED AFTER FEES)

As at 30 June 2020: ■ Lunar BCI Worldwide Flexible Fund

■ Benchmark

20 15

18.11%

10 9.53% 8.12%

5 0

16

1 year

finweek 27 August 2020

7.8%

Since inception in June 2016

Lunar Capital’s BCI Worldwide Flexible Fund comprises a portfolio that is invested in listed local and global companies that meet the investment managers’ investment criteria of wielding some competitive advantage through the adoption of innovative technologies and business practices. Added in June 2018, and currently the fund’s largest holding, the iShares Nasdaq Biotechnology ETF shows how the investment criteria is employed. The ETF provides exposure to biotechnology and pharmaceutical shares listed on the Nasdaq. “Some of our investment themes are that people are living longer and that technology innovation will continue to solve some of the world’s biggest problems. As people get older, they require more healthcare and medication,” says fund manager Sabir Munshi. The ETF was trading at an attractive valuation when Lunar invested, and has returned approximately 10% a year in dollars for investors, Munshi says. He explains that the high weighting in the ETF reflects Lunar’s view that the sector will perform well during and after the pandemic – and that it is trading at a reasonable valuation. “By investing in an ETF, we also reduce company-specific risk, but have exposure to a large number of biotechnology companies providing a wide range of cures and research.” Another holding, Microsoft, is poised to become a global social media giant overnight, should it successfully acquire the US operations of the Chinese-owned video app TikTok. TikTok’s global business is reportedly worth about $50bn, with its US operations valued at less than that. Analysts and bankers have estimated the US operations at $15bn to $50bn, according to Bloomberg. Lunar’s view is that TikTok could supplement Microsoft’s product and service offering and Munshi says they are closely watching how the deal pans out. The fund returned 11.67% for the quarter ending 30 June 2020, well above inflation amid a volatile investment climate that the fund views as both a risk and an opportunity. By maintaining a higher cash allocation, the fund has been able to take advantage of opportunities that present themselves on targeted investments when prices come down to more reasonable levels. Munshi says when the rand recently strengthened against the dollar, they took the opportunity to increase offshore exposure. Approximately 60% is now offshore, providing a rand hedge and providing investors ownership in some of the world’s top businesses and markets together with South Africa’s.

Why finweek would consider adding it:

Lunar Capital’s shareholders and directors have invested a significant portion of their own wealth in the fund and have committed to be invested for the long term. The fund provides exposure to businesses with potential to grow over the long term as part of a diversified investment portfolio. ■ editorial@finweek.co.za www.fin24.com/finweek

house houseview view DISTELL XXXXXXXXXXXXXXXX

BUY

SELL

marketplace

HOLD

By Simon Brown

Bottoms up, carefully

Last trade ideas

The government has announced level 2 of lockdown to curtail the spread of the coronavirus. Among other things, alcohol sales and its onsite consumption are once again allowed. It should be a huge benefit to Distell. Its trading update for the year ending June showed headline earnings per share (HEPS) will be between 45% and 65% lower as it lost over two months of trading income with a relatively fixed-cost base. Sales will bounce back quickly, although those sales which were lost will remain so. Consumption should return to normal levels after an initial surge of buying as restrictions are lifted. The weaker rand will also help profits from export sales into Europe. In the financial year ending June 2021 Distell should be able to easily repeat the HEPS of 656c of the 2019 financial year, after reporting 548c for the half-year through December 2019. Actually, they could aim for HEPS of 1 100c for 2021 placing them on a price-to-earnings multiple of around seven times. There are still two real risks. Firstly, the alcohol ban could be reinstated. Secondly, consumers remain under financial pressure. I think a price below 9 000c would be ideal for a buyer. ■ BUY

SASOL LTD

SELL

BUY

Shoprite 13 August issue

BUY

Pan African Resources 30 July issue

BUY

Purple Group 16 July issue

CAUTION

Banks 25 June issue

HOLD

By Moxima Gama

Recovery, despite results?

Photos: distell.co.za | sasol.com

Sasol’s financial results for the year ended 30 June saw the company writing off assets worth R111.6bn, resulting in a loss of R91.3bn compared with a profit of R6.1bn a year earlier. The much-awaited performance of the company’s $12.8bn Lake Charles Chemicals Project came through in the second half of the financial year. Lake Charles delivered a R100m contribution to earnings before interest, tax, depreciation and amortisation (ebitda) in the second half of the book year, compared with a loss of R1.1bn in the first six months, according to a statement announcing Sasol’s financial statements. “The virus spurred a sudden drop in commodity prices, while also suppressing product demand and causing general economic decline. Additionally, we suffered credit rating downgrades as a result of the volatile macro environment,” Sasol CEO Fleetwood Grobler, who took over the reins last year, said in the statement. How to trade it: Despite the results, Sasol’s share price has been recovering some of its previous losses – thus forming an uptrend within its two-year bear trend. However, it’s currently encountering major resistance at 15 715c/share. If this recovery trend remains intact in the coming days – as the market assesses Sasol’s sustainability – a good buying opportunity would be presented above 15 715c/share, with potential upside to its next resistance level at 24 865c/share. Alternatively, if Sasol reaches a ceiling at 15 715c/share, it could fall back towards 10 300c/share. The current uptrend would end below that level and further downside to 6 960c/ share could ensue. In which case, refrain from going long. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

Last trade ideas BUY

MTN 13 August issue

BUY

South32 30 July issue

BUY

Woolworths 16 July issue

BUY

Telkom 25 June issue

Sasol’s financial results for the year ended 30 June saw the company writing off assets worth R111.6bn, resulting in a loss of R91.3bn.

finweek 27 August 2020

17

marketplace killer trade By Moxima Gama

XXXXXXXXXXXXXXXX EXXARO RESOURCES

Waiting for the breakout

e

xxaro, which is one of the largest coal suppliers to Eskom’s power stations, reported an 18% jump in revenue on 13 August as coal volumes reached a record high in the six months through 30 June. Coal volumes sold increased 3% locally and 39% internationally, the miner reported. Exxaro’s headline earnings per share (HEPS) declined by 24%, mainly driven by R470m less equity-accounted earnings from its stake in Sishen Iron Ore Company. Exxaro declared an interim dividend of R6.43 per share, down R2.21 from the comparable period a year ago. Outlook: Exxaro has abandoned its bear trend by trading through

EXXARO RESOURCES

52-week range: R75.07 - R146.26 Price/earnings ratio: 5.41 1-year total return: 25.77% Market capitalisation: R50.8bn Earnings per share: R26.18 Dividend yield: 8.53% Average volume over 30 days: 851 408 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

the resistance trendline (grey bold trendline). It’s also forming an inverted head-and-shoulders formation, which is a bullish reversal pattern. On the charts: Exxaro is forming the final shoulder of the bullish reversal pattern, with the horizontal neckline situated at 14 380c/share. Breaching that

level would confirm a positive breakout of both the bear trend and bullish pattern – potentially triggering a healthy recovery in the share price. Go long: Upside above 14 380c/ share or above 15 320c/share would present a good buying opportunity. Such a move should prompt further gains back to

the 18 345c/share prior high. Continued buying through that level could see Exxaro retest its all-time high at 21 495c/share. Go short: Refrain from going long if Exxaro reverses through 11 510c/share. It could then fall to next support at 9 580c/share. The 7 090c/share level would be retested on continued selling. ■

NEDBANK

A bearish continuation pattern?

n

edbank warned shareholders in May that it expects its profit to fall more than 20% for the six months to end-June in anticipation of a 7% contraction in the South African economy in 2020. By the end of April, the group had restructured loans worth R81bn to assist clients to better manage their cash flow amid a country-wide lockdown to contain the spread of Covid-19. Nedbank is expected to release its first-half financial statements on 26 August – after finweek went to print. Outlook: Nedbank confirmed a negative breakout of its bull channel when it traded through the 19 800c/share support level. On the charts: The share has 18

finweek 27 August 2020

NEDBANK

52-week range: R67.30 - R251.24 Price/earnings ratio: 4.03 1-year total return: -47.27% Market capitalisation: R52.7bn Earnings per share: R26.05 Dividend yield: 13.47% Average volume over 30 days: 2 428 634 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

regained upside in the form of a bull channel. It’s currently teetering on the lower slope of the channel and bouncing there could prompt upside to either the 12 865c/share level or the upper slope. Either slope would have to be breached to trigger forceful impetus. Go short/stay short: The current bull channel could also be a

bearish flag, which is a bearish continuation pattern. Breaching the lower slope and trading below 10 020c/share would confirm the pattern and downside to 6 490c/ share could follow. The 5 010c/ share prior low would be tested on continued selling. Go long: Upside through the upper slope or above 12 865c/ share would negate the bearish

pattern. Nedbank could then recover more of its losses towards 15 500c/share, or even retest the 19 800c/share resistance level. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa. She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

www.fin24.com/finweek

marketplace invest DIY By Simon Brown

TRADING

Changing the game

t

A surge in traders that don’t operate ‘traditionally’ has unsettled many ‘old-school’ investors. Simon Brown explains why this disdain is misplaced.

he phrase “Robinhooders” or “Robbing Robinhood accounts certainly pumped the Traders” has become the latest swear share price higher and many lost money. But word in financial markets as the traders this is not the story of all the stocks Robinhood this term refers to get accused of traders have jumped into. Over the same time pushing any stock, even bankrupt Hertz, up frame, Amazon’s share price has gone from $1 hundreds of percent as they all jump into the 900 to $3 200 and the number of Robinhood stock. The slur implies that no skill is involved, accounts holding the stock has increased from and everybody is losing their money. But this 107 000 to almost 420 000, making a lot of is neither fair nor accurate. money for the holders. With VOO, the S&P500 The name comes from the hugely popular tracker, the number of holders doubled since US trading app that came to the highs of February, again market in March 2015, offering showing profits for the holders. Since the lockdown took effect, user growth in the zero-commission trading. These Locally, Charles Savage, industry has been massive days zero-commission trading is CEO of Purple Group**, which and it’s very possible that more widespread, with the large owns 70% of EasyEquities, Robinhood now has Charles Schwab, E*Trade and commented that its clients had Fidelity Investments all offering put around R1bn into Sasol at an it since late last year. But back in average price of some 5 500c, 2015, the idea was radical, and with the majority exiting at an traders and investors flocked average of over 9 000c – netting accounts. to the Robinhood* app, which serious profits. reported 13m accounts at the Now sure, many may be end of 2019, ahead of Charles Schwab and treating the stock market like a casino and E*Trade, with 12.7m and 5.5m respectively. just as many may not really know what they’re Since the lockdown took effect, user doing. But this has always been true, and growth in the industry has been massive and everybody has to start somewhere – usually it’s very possible that Robinhood now has with little or no knowledge. If we all invested 20m accounts. the same way with the same expertise, longThe issue old-timers have with these 20m term thinking and risk-avoidance, the market Robinhood traders is that they buy almost would be boring and would see little activity. anything. One can track their buying habits on And just because these Robinhood the website Robintrack.net, which shows not (and EasyEquities) traders may have more only the share price of a stock, but also the appetite for risk (both platforms report that number of Robinhood accounts that hold it. the average age of their users is around 32 In early March, less than 2 000 Robinhood years) doesn’t make them wrong or stupid accounts held Hertz, with the price above $8. – especially as in the case with Amazon and Yet, by end-May, the company had gone into Sasol, where they’re actually making money. Chapter 11 (a form of bankruptcy) and the price Rather than dismissing and ostracising collapsed to $0.55. Over 44 000 accounts then these new market entrants, we should held the stock and the following weeks saw embrace them. Yes, they may make us feel old the share spike to $5.50, with the number of and grey as they push bankrupt stocks higher Robinhood accounts holding the stock jumping but, if they’re making money, we should also to over 170 000. Hertz is now back at around applaud them as we do anybody else making $1.50 a share and there are still 139 000 money in the market. ■ Robinhood accounts holding the stock. The editorial@finweek.co.za share spike after the bankruptcy filing has been *Robinhood has announced it will be restricting access to its blamed on Robinhood traders – and that may APIs (software tool that allows third parties to pull data from be true – while the collapse that followed was websites) and will no longer display the number of customers who hold a particular stock via its site. This move will lead to seemingly driven by other holders who used the robintrack.net shutting down. run to exit a bankrupt stock. **The writer owns shares in Purple Group. In this example, and many others, these

Photo: Supplied

20m

@finweek

finweek

finweekmagazine

Charles Savage CEO of Purple Group

If we all invested the same way with the same expertise, long-term thinking and risk-avoidance, the market would be boring and would see little activity.

finweek 27 August 2020

19

marketplace Simon says By Simon Brown

CONSOLIDATED INFRASTRUCTURE GROUP

It can go as low as zero Consolidated Infrastructure Group’s share price is down to 24c. This stock traded above 3 500c in October 2015 and serves as a reminder that the answer to the question “how low can it go?” is always zero.

NASPERS

Simon’s stock tips

CITY LODGE

Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

The right(s) maths JSE LTD

Photos: Gallo/Getty Images

Tech war drags Regulatory overhang on JSE US President Donald Trump issued an executive order banning monetary transactions with TikTok and WeChat, but stayed the order until 20 September. Investors were initially confused whether the order related to Tencent or WeChat, but it was later clarified that it was just related to the mobile app. There are a couple of million WeChat users in the US, mostly consisting of Chinese nationals. So, it’s not directly a big deal for WeChat, which has over 1bn active monthly users in China. But the Trump announcement did send Naspers* and Prosus down by about 5% on the day, opening a new drama on the global stage of trade wars. Essentially Trump is expanding his attack into the technology sector, even as neither app poses a provable security issue relating to the Chinese government. The next question is if the ban will happen in September and how that will work. The bigger question is if and how China will respond. Could China go after a company such as Apple and ban the latter’s products or services? I suspect China will hold off on the bet that there will be a new US president sworn in by January 2021. In addition, China has enough fires burning, with Japan and India both also pushing back against what they see as Chinese aggression in Asia. 20

finweek 27 August 2020

The JSE Ltd. (owner of the stock exchange) published solid results, especially if one removes several one-off costs. However, one must also ask how much of the boost to revenue from increased trading activity during the market collapse in March will continue into the new financial year. I think trading volumes will decline back to normal levels and then the concern remains around how the JSE can continue growing them. This is the case, especially if you consider regulatory pressure in the form of the ‘best-execution rule’ that I wrote about in July, which is expected to be implemented in the first half of next year. I don’t like industries that have regulatory concerns working against them and hence I continue to avoid the JSE Ltd. as an investment.

It’s not directly a big deal for WeChat, which has over

1bn

active monthly users in China.

The City Lodge rights issue will have been concluded by the time this issue of finweek has gone to print, and I am being asked if it is time to buy the stock. It is not my strategy to buy beaten down stocks and then hope for the recovery. I like to wait for evidence of the recovery first. Sure, I will pay more but it reduces my risk. Thus, I thought to pull apart the numbers to try and see when City Lodge will get back to breakeven, using its year-end results to June 2019. The company had revenue of R1.5bn and an occupancy of 55%. Keeping this quite simple: I divided occupancy into revenue and got about R28m of revenue per one percentage point of occupancy. I am assuming that the company’s costs are fixed. Naturally, they’re not totally fixed, but they are almost. I then used full-year costs of R1bn for the company. Dividing the R28m into the R1bn gave me a 35.7% occupancy level for breakeven. This excludes interest, depreciation and amortisation, BEE costs, tax and the like. But it does give us an idea that an occupancy level of more than a third is needed before the company starts to make money. The question is then: When will City Lodge hit this breakeven occupancy? For the year ending June 2021 I think they can, even if not by much. We, however, need to remember that there are now 13 times more shares in issue following the rights offer, so headline earnings per share (HEPS) will be tiny. I also expect a share consolidation in due time. If City Lodge doesn’t attain those breakeven occupancy levels, I expect a subsequent rights issue. www.fin24.com/finweek

marketplace Simon says

ANCHOR GROUP

SIBANYE-STILLWATER

Why not skip the dividend?

Money flowing in Investment group Anchor released a solid trading statement for the six months to the end of June on 13 August. The company expects its adjusted HEPS to be between 2% lower and 14% higher, coupled with a 13% jump in assets under management (AUM). Now, I don’t like adjusted HEPS as a lot can be hidden in that figure, but Anchor did have an extra R70.4m income during the comparable period from the termination of a management agreement with Astoria. Brokers and asset managers (and the JSE) have seen increased trading activity, client sign-ups and AUM inflows. I hold Coronation** and Purple Group**, with the latter up 16% since I suggested it as a buy back in June; and it remains my preferred pick in this sector, even as the price has moved. Coronation should also do well, with the 4 100c level an attractive buying zone.

LOCKDOWN

Photos: Archive

Better outlook for leisure Several stocks have reacted positively to the government’s announcement that lockdown regulations will be eased further. The leisure sector still has a way to go, but alcohol stocks should be a quick winner, with Distell the locally-listed option. (Also see p.17.) Gaming and leisure will benefit, albeit Distell is still a long way from normal trading. The more relaxed level 2 lockdown restrictions will certainly see improved fortunes for these sectors, while quick-service and casual sit-down restaurants should also start experiencing improved trading conditions. These leisure stocks will, however, continue to find it hard going as the SA consumer remains under financial pressure. @finweek

finweek

finweekmagazine

RICHEMONT

Rubbing hands for dividend Sibanye-Stillwater** issued a trading update in August that sent the stock up over 10% to trade at four-year highs. This is exactly what you’d expect as the company reduces debt and benefits from improved metal prices and a weaker rand. The lockdown has taken some shine off its revenue, but the miner still expects HEPS for the first half to be around 351c. If it can do the same for the second half and earn HEPS of 700c, it will put the stock on a forward price-to-earnings multiple (P/E) of under eight times. If Sibanye-Stillwater pays half its HEPS as a dividend, its forward dividend yield is calculated at 4%. Both forward P/E and dividend yield are cheap for a miner when commodity prices are rising.

While negotiations are under way with lenders and potential capital providers, PPC will likely end up owning a reduced stake in PPC International.

Richemont is proceeding with issuing warrants instead of a dividend in what it calls a “shareholder loyalty scheme”. The pricing is still to be announced and the expiry of the warrants (and thus the right to buy Richemont shares) is scheduled for September 2023. I understand what they’re doing: protecting capital during a pandemic that adds significant uncertainty to the luxury goods market. But the company is quite flush with cash, sitting on €2.3bn at the end of March. Subsequently, Richemont issued a series of bonds worth €2bn in May, with maturity dates of 2028, 2032 and 2040. So, the outlook is very gloomy, and the group is being extra cautious. But then why not just skip the dividend entirely? Surely shareholders would understand that? Certainly, if the next three years are very tough, the warrants will expire worthless, leaving no dividend being paid after all.

PPC

Troubles on the continent Cementmaker PPC’s woes continue as its African expansion hits trouble and the Democratic Republic of Congo division needs a capital injection. This expansion into the rest of the continent was supposed to protect the group against tough market conditions in SA. But PPC International (in which the rest of the African operations are held) looks likely in need of fresh capital – capital which PPC itself doesn’t look able to provide without a rights issue. So, while negotiations are under way with lenders and potential capital providers, PPC will likely end up owning a reduced stake in PPC International. And, even with the share trading below 100c, I don’t see any value in this stock. ■ editorial@finweek.co.za *finweek is a publication of Media24, a subsidiary of Naspers. **The writer owns shares in Sibanye-Stillwater, Coronation and Purple Group.

finweek 27 August 2020

21

marketplace investment By Schalk Louw

FUNDAMENTALS

Compiling your own portfolio

t

Schalk Louw sets out some steps individual investors could follow to build a portfolio suited to them. here is no doubt that people are different, and a perfect example of this is when it comes to using a road map or assembling a piece of furniture. Where there’s more than one person involved, there will usually be at least one looking at the map or the set of instructions, and at least one who chooses to figure it out for themselves without help or input from others. Many investors use this latter approach when it comes to their personal investments – they choose not to follow any guidelines, often simply because it appears to be too complicated. But there are in fact simple guidelines that investors can follow, especially when compiling their own investment portfolios.

STEP 1: Speculators are not investors

According to historical data (which is no promise for future performance), equity investments still deliver the best returns over the long term. An investor that decided to invest in the JSE in May 2008, for example – when the market reached an all-time high but was also on the verge of one of the biggest-ever corrections – and held on to their investment until the end of July 2020, would have earned 141% growth on their investment. And this despite two of the greatest corrections of all time, the Great Recession and the recent Covid-19 pandemic. Would that have been phenomenal growth? Not necessarily, but it shows us that despite some of the worst times that the SA market has endured until now, that investor still would have been able to beat local inflation by two percentage points per year with their earnings.

Photo: Shutterstock

STEP 2: Diversify

It remains a simple concept, and yet I see so many investors struggling with diversification, mainly due to personal preferences and emotional involvement. The fact is that capital loss hurts. One investor may have lost capital value in shares over the short term and may have decided to only focus on the money market going forward, while another investor may have had so much luck with their property investments that they now refuse to ever consider another type of investment. Historical figures show that diversification, or the spread of capital across different types of 22

finweek 27 August 2020

investments, not only reduces risk, but it can also provide better returns.

STEP 3: Focus on time, not timing

Because share prices fluctuate constantly, many speculators would have become incredibly rich if they had bought when share prices were at their lowest and sold when share prices were at their highest. But if that were as easy as it sounds, I probably would have written this article somewhere on a powdery white beach on a tropical island and definitely not in my office. The fact is that even the biggest and most successful investment experts cannot get it right 100% of the time, and this can be seen quite clearly in historical returns. As an example, only 15% of general equity unit trusts managed to outperform the FTSE/JSE All Share Index’s total returns over the past three years, and this includes returns from passive funds such as exchange-traded funds.

STEP 4: The power of compounding

This concept requires roughly the same amount of self-control as not using the brandnew credit card you just got in the mail. The investor that managed to exercise self-control over the last 25 years, for example, by investing R1 000 in shares in 1995, would have had an investment worth R23 256 today. If the same investor had withdrawn from their investment on a regular basis, let’s say 10% every year, things would look drastically different as they would be left with only R2 545 today. It’s easy to understand why Albert Einstein claimed that compound growth or interest (growth earned on growth) is one of the most powerful forces in the universe.

15% As an example, only

of general equity unit trusts managed to outperform the FTSE/JSE All Share Index’s total returns over the past three years.

STEP 5: Invest in what you know

Don’t look at your investments as just figures on a page. If you want to invest in shares, make sure that you invest in good, reputable companies – and make sure that you know these companies well. You should know where your money is going, and you should know your investments. If you’re unsure, rather consult a professional to guide you. As I have said to my clients so many times before: No one cares more about your capital than you do. ■ editorial@finweek.co.za Schalk Louw is a portfolio manager at PSG Wealth.

www.fin24.com/finweek

marketplace share view By Peet Serfontein

OFFSHORE XXXXXXXXXXXXXXXX

Computing in the long term

i

Photo: Shutterstock

An investment in the technology giant IBM could teach investors a lesson in patience. have always been a champion of technology and I remember clearly when a former divisional head, years ago, once said to me that I am too “automated”. With a background in programming, what else could he expect? I can understand his fear of technology and his great aversion to such an ‘evil’ concept back then. He has since retired, luckily, because during the lockdown, we didn’t revert to carrier pigeons to communicate with one another – we used Zoom to hold meetings. Technology can be used to improve critical thinking and literacy skills. Currently, virtually everything that forms part of the 21st century is online and the benefits resulting from technology are multiplicative. A consequence of technology is of course computers, which form an integral part of our lives. But, unfortunately, these devices consume a certain amount of energy per bit to do calculations. If we look at the current curve for energy consumption, a shortage is predicted by 2040. We are already seeing growing interest in green energy, which of course demands a fundamental reduction in energy consumption. This is where quantum computers come in. Briefly, quantum computers can do calculations at exponentially greater speeds than conventional computers, while using far less energy. Technology company IBM caught my eye as one of the major players in the quantum computing space. IBM offers information technology and integrated solutions used in business processes. Although involved in a range of segments, most people will be familiar with IBM because of its development of the personal computer in the early 1980s. IBM’s share price of about $127 makes it somewhat expensive for local investors, taking into account the weak rand, but I regard it as a long-term investment. IBM had 18 quantum computers in its arsenal in May this year. It might not sound like many, but given the fact that its competitors have fewer, IBM stands out.

What makes the share attractive as an investment option? A sideways price action has been in place @finweek

finweek

finweekmagazine

IBM

170

110 Sideways price action

Price/earnings ratio:

– 160

1-year total return:

2006

2008

2010

2012

2014 2016

2018

2020

$90.56 - $158.75

– 127

Market capitalisation:

– 100

Earnings per share:

– 73

Dividend yield:

– 55

Average volume over 30 days:

19d 10h

– 41 2004

52-week range:

– 240 – 200

10.07 -2.06% $110.82bn $12.36 5.24% 4 714 794 SOURCE: IRESS

2022

SOURCE: Peet Serfontein/Trading View

since 2010. This stability increases the in the share. The OBV is used in technical share’s attractiveness. As the playing analyses to measure buying and selling field of technology shows progress every pressure. If the volume on upward days is day, the price could experience a strong higher than the volume on downward days, run at any moment. And, of course, then the OBV will increase. The basic market psychology remains an theory behind the OBV indicator interesting aspect, which can is that volume is the leading make investors decide to indicator of the price. buy or sell a share. I will classify buying My solution for such of the share as long a situation is simply term, with an eye to become involved on the value that and to increase quantum computers exposure to such can offer. a share over time. The graph is the Patience is one of the long-term monthly best characteristics of a (logarithmic) depiction long-term investor. of IBM’s share price. The The share’s trading upward potential of the volume remains uniform, share is currently $170. Leave together with the price. This this option open, should the uniform trading volume, share in fact reach this price IBM caught my eye which supports the price and there is still room for movement, is conducive to further gains to adjust the as one of the major peace of mind as co-investors price. Should the price break players in the quantum out below $110, we can do in fact see value in the share; if there hadn’t been expect the share to decline computing space. value, the price trend would further. Regard this level have been more downward. as a stop-loss to protect capital. It is always advisable to predetermine a But should you buy? profit target price as well as a stop-loss. You The prospects of quantum computers and can always adjust your target price – but it’s IBM being one of the major players in the better to start out with a target rather than space make the share an interesting choice. having no target whatsoever. ■ The recent sideways trajectory of the on-balance volume (OBV) of the share editorial@finweek.co.za indicates that capital does in fact remain Peet Serfontein is an independent market analyst. finweek 27 August 2020

23

marketplace trader’s corner By Petri Redelinghuys

ANALYSIS

A shot at Las Vegas

i

One of the world’s largest casino operators may benefit from a post-Covid-19 boom in Asian gambling demand. nteresting times lead to interesting stock picks, and the one we have gone for in this issue is a casino stock – Las Vegas Sands (LVS). It trades on the New York Stock Exchange and owns some of the most iconic gambling properties in the world. These properties are in Las Vegas (which, ironically, only accounts for a small percentage of the company’s total earnings), Singapore and Macau. LVS is a play on the Chinese demand for gambling, which is generally high. With Las Vegas accounting for less than 10% of LVS’s earnings, it means that the bulk of the generated profit originates in Asia. LVS is considered the “Ferrari” of the casino businesses because it not only has the best-looking hotels in the industry (who hasn’t noticed the Marina Bay Sands hotel in Singapore during the Grand Prix?), its properties are also found in the world’s most profitable gambling destinations – Macau and Singapore. LVS also is not only the company with the best gambling destinations, it is also the company in the industry with the most robust balance sheet. Net debt is 2.2 times earnings before interest, tax, depreciation and amortisation (ebitda), compared with its peers whose debt is closer to 5 times ebitda (based on pre-Covid-19 numbers).

Photo: Shutterstock

So why would you buy casinos in a Covid-19 world?

We don’t believe the Covid-19 restrictions and fear will last forever. Leaning on history as our guide, the fear and restrictions on movement, as happened with previous outbreaks of infectious diseases, eventually abate and the world goes back to its old ways. Furthermore, Asian countries are more used to dealing with these types of diseases and we believe that business will rebound there a lot sooner than in Western nations. Another important benefit that LVS locations has is that Macau and Singapore cater for the real “high rollers”, as the saying goes. These two destinations account for 90% of the earnings and are a boon for investors. Gambling revenue per visitor in Macau is a few multiples of what is earned per player in Las Vegas. Another extraordinarily strong positive for LVS is that there are only two casinos in Singapore, so 24

finweek 27 August 2020

GRAPH 1: LAS VEGAS SANDS SHARE PRICE

15

Feb

14

Mar

16

Apr

20

May

18

Jun

15

Jul

20

Aug

17

77.50 75.00 72.50 70.00 67.50 65.00 62.50 60.00 57.50 55.00 52.50 50.00 49.07 47.50 45.00 42.50 40.00 37.50 35.00 32.50 30.00

SOURCE: Metastock and Herenya Capital Advisors

competition is not really an issue. Currently LVS is embarking on expansion projects worth $5.5bn in Macau and Singapore and will also more than likely benefit from any new increases in Chinese middle-class wealth. Bloomberg estimates that LVS should earn $3.12 per share in 2022, putting this business on a priceto-earnings multiple of around 16 times – which is not cheap. But over the longer term, entry into this sector will become a lot more difficult for competitors, and quality businesses never trade at cheap multiples. (Also see graph 1.) As stated before, we believe that this is a stock that should benefit from the growth in Chinese middle-class wealth and a relaxation of travel restrictions in a post-Covid-19 recovery environment that will likely see a rush of tourists who are looking for their gambling fix. Also, LVS provides an investment entry into a China-based operation via an American-run business, which some might see as a pro. What we like, though, is that the company’s founder, chairman and CEO, Sheldon Adelson, owns 52% of the shares in the company. His interests are very much aligned with the future of LVS, which we think is a strong positive for the long-term outlook of the company. ■ editorial@finweek.co.za

Founder, chairman and CEO, Sheldon Adelson, owns 52% of the shares in the company. His interests are very much aligned with the future of Las Vegas Sands.

www.fin24.com/finweek

marketplace trader’s corner

Taking a hammer to tech analysis

i Photo: www.twitter.com/stevenison

This short-term pattern has a 65% success rate.

n finweek editions gone by, we’ve looked at some key concepts with times longer than the ‘real body’ of the candlestick pattern. Hammers regard to technical analysis and how those concepts can be useful in with long tails have a success rate of around 65% in predicting shortmaking short-term trading decisions. term bounces and trend reversals. Topics we’ve covered include trends and moving averages, risk The best way to use these hammer candlestick formations is to enter management, longer-term price patterns and a few more. It has been the trade at the close of trading when a hammer is spotted, or if entering a while since we last shared some educational insights, so to the next day, placing the entry on a trade above the hammer close with get us back on track, we’re going to look at something a stop-loss below the lower tail of the candlestick (see graph 2). quite simple in this issue. In general, hammer formations become more reliable and Basically, we are going to be looking at just one offer higher success rates when they are on or above key easy short-term pattern that can be extremely horizontal long-term support levels. They are also more helpful when spotted and traded correctly. reliable when the daily volume traded on the day that the It is part of a family of Japanese candlestick hammer candlestick formation was formed is more than patterns, which is a method of plotting price data double the average daily traded volume. In other words, the in an easily legible graphic format using four price hammer is formed in conjunction with a spike in volume. points: open, high, low and close. No doubt you’ve The ultimate form of this signal would be a hammer formed seen Japanese candlestick charts before, as they are on a long-term horizontal support level with a significant popular technical analysis tools widely used to help traders volume spike on the day of the formation. Steve Nison find higher-probability trading signals. For more information on this and other candlestick Author of Japanese The candlestick pattern we are looking at in this formations and patterns, a good book to read is Japanese Candlestick Charting Techniques column is the ‘hammer’ and is usually found at the bottom Candlestick Charting Techniques by Steve Nison. of a downtrend. The hammer candlestick pattern is a In graph 3, we have a perfect hammer formation in Kumba reversal pattern, which means when the price action that forms the Iron Ore that gave us the low on this stock in mid-March and a good hammer candlestick pattern is present, there is a high probability that entry point for a long trade. ■ the previously prevailing downtrend is going to reverse. editorial@finweek.co.za In general, hammer candlesticks have ‘tails’ that are three or more Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.

GRAPH 2: EXAMPLE OF HAMMER CANDLESTICK FORMATION (BUY AND STOP-LOSS SIGNAL)

GRAPH 3: KUMBA IRON ORE (HAMMER CANDLESTICK FORMATION)

10 SOURCE: Metastock and Herenya Capital Advisors

17

24

2 March

9

16

23

30

April

6

14

20

28

SOURCE: Metastock and Herenya Capital Advisors

@finweek

finweek

finweekmagazine

finweek 27 August 2020

25

marketplace invest DIY By Simon Brown

INVESTMENT

The danger of price bias

a

Rather than just looking at a company’s historical share price, also consider the fundamental factors that will potentially drive its future profits. nchoring bias is when we fixate value to its current levels. on a single piece of information Basically, the price collapse over the last to make an assessment. That is five years has been driven by a collapse in why, during a price negotiation, the fundamentals of the stock. Thus, rather you should always be the first to suggest a than focusing on the price, we need to focus number, because all further negotiations will on the fundamentals over the next couple of anchor around the number you proposed, years. It’s these fundamentals that will drive which you would have skewed in your the price higher, not the fact that the price favour. The price should be low if you’re has been higher in the past. buying and high if you’re selling. Capital & Counties’ latest half-year For investors, anchoring bias can results to the end of June show a loannegatively influence their judgement. In this to-value (LTV) ratio of 32% and property column, I want to focus on share prices and values down by about 17% (this is around something I call ‘price bias’. the mid-range of expectations for property We have more than 100 shares on the value declines). On the surface the company JSE trading more than looks alright, considering 30% below their 12-month the pandemic and Take property stock Capital & Counties highs, with several of them resultant lockdown that as an example. The share price peaked down by 80% from these occurred during half of the at over R100 in late 2015 and then started this year at around highs. An investor may reporting period. look at this and decide However, the real that it means a share is concern should be that cheap and worth investing the two issues that drove in. But that investor is the share price lower, It is now below suffering from price bias Brexit and lockdown, as they are fixating on the are far from over and share price while missing could continue to hurt the real story. the business. We also So, what is the real have no idea how long story then? It is the any recovery will be. expected earnings of a stock over the next Furthermore, when will the recovery get us few years because, ultimately, this is what back to the pre-Brexit and pre-lockdown matters most. business activity of the company? Take property stock Capital & Counties In other words, the focus is on the future as an example. The share price peaked at earnings and my sense is that while we will over R100 in late 2015 and then started get back to some sort of ‘normal’ in due time this year at around R50. It is now below (albeit I think the new normal will rather be R30. Focusing on just the share price, one a very different new reality), it is going to can make an argument that the current take some time and more pain. And worse price looks attractive; we can dream of the results will likely be experienced before we days when the stock returns to R50 and hit a bottom. Adding to the risk, especially ultimately R100, ensuring the investor great with UK property, is that maybe even more riches. capital will be required by the company. But this ignores the reason for the price So, as an investor, ignore previous price collapse and the future of the company. levels and certainly keep in tune with The first collapse was the result of the current results. Rather focus on what will Brexit vote in mid-2016 that saw the stock drive profits in the years ahead and ask down a third in one month, and down by yourself how the profits will grow. Those almost half by the end of that year. Then this profits will be what determines any future year bought the pandemic and lockdown share price. ■ that saw the share lose another third of its editorial@finweek.co.za

Photo: capitalandcounties.com

R50. R30.

26

finweek 27 August 2020

Capital & Counties’ Covent Garden, located in London’s West End.

We have more than 100 shares on the JSE trading more than 30% below their 12-month highs, with several of them down by 80% from these highs.

www.fin24.com/finweek

marketplace investment By Andrew Duvenage

STRATEGY

The carry trade loses its lustre

g

The fundamentals that supported South Africa’s benign status as a carry trade destination have weakened. iven the low interest rate environment in South Africa, are there benefits to utilising a carry trade strategy? Although such a strategy is less applicable than in the past, it continues to exist and cannot be discounted. Essentially, a carry trade is a trading strategy whereby an investor borrows money at a low interest rate to buy an investment that provides a higher rate of return, in order to generate a larger riskadjusted profit. It is typically based on borrowing in a low interest rate currency and converting and investing the borrowed amount into another currency. The reason that carry trades occur is due to the fact that over time global capital flows seek out higher interest rates, providing support in the form of foreign capital flows into markets with systemically higher interest rates. Carry trades were a popular trading strategy after the global financial crisis of 2008 and 2009 as capital from the developed world desperately sought out higher yields. In theory, currencies are supposed to weaken at the rate of the inflation differential between them – the theory of purchasing power parity. Interest rates include the inflation rate within them, which usually more than compensates for the inflation differential, making the carry trade worth doing. Let’s use the US dollar (USD) and the South African rand (ZAR) to illustrate this practically. If the SA inflation rate is 2.2%, while the US inflation rate is 0.6%, in theory the ZAR weakens by 1.6% per year against the USD. Currently, the SA repo rate is 3.5% while the US Federal funds rate is 0.25%. Investors who swap USD for ZAR therefore earn 3.25 percentage points more. This is typically achieved through borrowing the USD, so the borrower pays more than 0.25% (for argument’s sake, let’s assume 1%) which means they are earning 2.5 percentage points more by investing in ZAR. However, given that the currency weakens by 1.6%, they are 0.9 percentage points better off. In the context of ultra-low interest rates globally, this pick-up is not immaterial. The carry trade strategy assumes that interest rates hold. It is worth noting, however, that in recent months the pickup has narrowed significantly. While both the US and SA have seen large interest rate cuts this year – three percentage points for SA and 1.5 percentage points for the US – the larger absolute cuts in SA have eroded the carry trade pick-up from approximately 2.5 percentage points in January to the current level of 0.9 percentage points. There are two primary forms of risk to carry trade as a trading strategy and these risks form the crux of the argument in terms of whether the carry trade in the local context is as relevant today as it once was.

The first risk is that any one or a combination of the five variables (SA inflation, US inflation, SA interest rates, US interest rates and US credit spreads, assuming a USD-ZAR carry trade) change or that the relationship between them changes. In the short term, it is unlikely that local or US inflation will change materially. Furthermore, the interest rates in both countries are likely to remain at their respective low levels for some time. US credit spreads, on the other hand, are a little more difficult to call, given that they have narrowed significantly over the last few months as markets bet that the Federal Reserve (Fed) is able to reduce the risk of corporate defaults. JP Morgan estimates that 18% of US junk bonds now trade at distressed levels, down from 41% in March this year. However, broadly speaking, the fundamental variables appear to be stable enough to support the carry trade for the time being. It is the second risk that is arguably the bigger concern and which potentially negates the carry trade, and that is that as volatility and uncertainty rise, it makes it more likely that the relationship between the rates breaks down, making it more likely that investors end up with a different result to the one they had originally planned. The current environment exhibits unprecedented conditions. Not only is the global economy attempting to navigate the aftermath of the Covid-19 pandemic, but US-China relations are on a knife-edge – with the upcoming US election creating additional uncertainty. The environment in SA is even more unpredictable. The state of the local economy combined with the fallout of Covid19 threatens to wreak havoc on the country’s finances. This has political implications as the population feels increasing levels of economic pain. Essentially, the carry trade pick-up has been eroded to the extent that while it is still positive for the time being, it may not provide a significant enough margin of safety to investors, which makes it a less attractive trading strategy. The reality is that the tough state of the local economy; recent credit rating downgrades (and the risk of more); concerns around the political ramifications of Covid-19; and a decade of economic mismanagement and decline, ensure that the carry trade is anything but a safe bet. International investors will be assessing the risk-reward payoff profile and, given the current circumstances, it will be difficult to justify a carry trade investment, particularly as they will be recalling recent events in Argentina where an IMF bailout and political changes resulted in a significant disconnect in that country’s currency compared to its emerging market peers. ■ editorial@finweek.co.za

Photo: Shutterstock

Carry trades were a popular trading strategy after the global financial crisis of 2008 and 2009 as capital from the developed world desperately sought out higher yields.

@finweek

finweek

finweekmagazine

Andrew Duvenage is managing director of NFB Private Wealth Management. This column was written in collaboration with Paul Marais, managing director of NFB Asset Management.

finweek 27 August 2020

27

cover story mining

METALS FOR A GREENER WORLD ECONOMY

With the worldwide shift to greener energy, David McKay analyses the impact this will have on mineral production. Which metals will be the winners and who will lose out as global economies strive to be more sustainable? By David McKay

28

finweek 27 August 2020

www.fin24.com/finweek

cover story mining

i

n July, Elon Musk, the founder of Tesla, issued Swiss-headquartered mining and marketing group. an unusual public challenge to the world’s Cobalt gives batteries their ability to recharge and mining industry. Commenting during an investor is therefore considered critical to the fabrication presentation, he dangled the prospect of a “giant process. The trouble is that about 60% of the world’s contract for a long period of time” to the firm that could cobalt is sourced from the Democratic Republic supply responsibly-mined nickel. of Congo, the central African nation from which Nickel is not particularly in short supply. According Glencore mines a significant portion of its copper, to a June report by Australia’s Macquarie Bank, and all of its cobalt. previously forecast deficits in nickel for this year until 2025 are now expected to turn into narrow A thorny issue surpluses. This is partly owing to the impact of the Child labour in the Congo’s burgeoning artisanal Covid-19 disease, which has dented consumption sector has long been flagged by civil and watchdog more than supply, the bank says. groups. While there’s no suggestion of wrongdoing Availability, however, was not behind Tesla’s in that regard involving Glencore, the onus is clearly request. In a world of improving environmental, social on the mining sector to get its act right. Welcome, and governance (ESG) standards, it’s peace of mind then, to the often subfusc world of battery-mineral that’s harder to source than minerals. production where mining firms are tasked with trying The mining industry has been boosted by to find enough economic resources to satisfy the increased demand for metals – such as growing demand and meet ever-increasing nickel, which is used by industrialists standards of extraction ... all of which are like Musk for the batteries that go complicated by a third factor. into electric vehicles (EVs). In the Owing to the problems associated case of Tesla, its Shanghai-based with cobalt supply – forecast by Gigajoule factory is expected to Benchmark Minerals to grow into increase capacity by 570% over 300 000t of demand by 2029 from the next decade to 248 gigawatt 70 000t last year – scientists are hours, according to data company finding ways to engineer out the ESG Benchmark Mineral Intelligence. risk. Thus, this month, Tesla announced One GWh of battery capacity is its first cobalt-free EV battery, the enough for 18 000 cars, on average. Tesla Model 3, that uses a lithium-ion According to a report by Bloomberg phosphate battery. NEF, global passenger EV sales will be just The pace of the engineering is a real headache shy of 26m vehicles by 2030. Total all-segment user for mining firms as they plan multi-year resource demand for lithium-ion batteries, the most popular development and capital allocation. On hearing the type of battery technology currently in use for EVs, news of Tesla’s latest breakthrough, BMO Capital will still be over 2 000GWh by 2030, the report said. Market analysts Colin Hamilton and Kimberly Berman While growth in EVs is an enormous opportunity lowered their medium-term forecast of nickel and for mining firms – which also supply cobalt consumption in EVs. manganese, cobalt and a raft of Said BMO Capital Markets in a separate According to a report by Bloomberg NEF, other minerals into the battery note on battery minerals: “The bottom line is global passenger EV manufacturing process – there are that we are seeing more zero-cobalt, nickelsales will be just shy of difficulties. Mining firms are faced rich cathodes being evaluated and a number with having to reduce their own of top scientists in the field are investigating carbon footprints, even in the process possible cobalt substitutions ... In short, of supplying the minerals that may there is a big push to remove cobalt (and all vehicles by 2030. help resolve the world’s environmental its supply chain woes) from the equation.” risks. They are also facing increased While Tesla’s new cobalt-free battery levels of scrutiny from investors wouldn’t replace existing models, the job switched on to the ESG risks, as well as faith-backed of having to understand future demand is a challenge organisations and civil society groups that keep tight for miners. So much so that Sibanye-Stillwater bought checks on the human and environmental impacts the UK-based research house SFA Oxford to help involved in mining. understand how the fast-moving battery minerals In June, it emerged that Tesla had agreed to market might evolve ahead of potential merger and buy 6 000 tonnes of cobalt from Glencore, the acquisition (M&A).

Photos: Shutterstock

26m

@finweek

finweek

finweekmagazine

finweek 27 August 2020

29

cover story mining

“Where I am positioning the business is to be ready to play in either. We certainly are going to push our role in the green economy.”

Neal Froneman, CEO of Sibanye-Stillwater, wants a piece of the EV battery minerals action. “We’re not sitting on our hands,” he said in an interview with finweek in July. “We bought SFA Oxford to do that work. It doesn’t require any specific due diligence at this stage, but it’s a lot of strategic work,” he said. There is a multiplicity of battery models in the market into which several Johannesburg-listed mining firms can supply – the cobalt-free version is just the latest of specific battery electric vehicles (BEVs). According to SFA Oxford, a different type of battery, powered through the manipulation of hydrogen, will co-exist, not compete, with lithium-styled BEVs. Hydrogen electrolysing technology (see sidebar on p.31) will also have applications not just in the automotive manufacturing sector, but broadly, across other industries.

Neal Froneman CEO of Sibanye-Stillwater

Photos: www.sibanyestillwater.com I www.angloamericanplatinum.com I www.twitter.com/paulatherley2

Platinum’s role

While nickel and cobalt, as well as lithium, manganese and copper are the constituents of BEVs, hydrogen-powered fuel-cell electric vehicles (FCEVs) make use of platinum group metals (PGMs), the class of precious metals Sibanye-Stillwater produces, as well as its competitors Impala Platinum, Anglo American Platinum (Amplats) and Northam Platinum. PGMs are critical in the automotive industry, owing to their chemical properties that, when fitted to autocatalysts, absorb noxious gases. In hydrogen technology, PGMs are used in the engine manufacturing process for their cooling properties. So, while Froneman wants to potentially buy a battery metals company, he also wants to anticipate how PGMs – and platinum specifically for hydrogen energy – will feed into growing demand for FCEVs. According to SFA Oxford, new platinum demand from hydrogen power will total more than 400 000 ounces by 2030 from demand of less than 50 000oz of platinum production today. That’s according to forecasts in April, but no one really knows where demand will settle, or even how to position themselves for the future. It’s a problem acknowledged by Amplats CEO Natascha Viljoen, who told finweek her company would try to keep its options open. “We are having exactly this conversation on how we see the recovery of the PGM market and whether we’ll see a fast-track of the electric vehicle or would people

30

finweek 27 August 2020

continue with the conventional drive trains (internal combustion engine or ICE),” said Viljoen. Vehicles powered by old-fashioned ICE provide Amplats with a known margin for the PGMs supplied; there’s less certainty of the economic return of PGMs from FCEVs. “Where I am positioning the business is to be ready to play in either. We certainly are going to push our role in the green economy,” says Viljoen. The potential of EVs to support future platinum production is considered significant by RMB Morgan Stanley analysts Christopher Nicholson, Brian Morgan and Jared Hoover. “The platinum market currently sits in a large surplus and over the near to medium term, palladium for platinum substitution in conventional internal combustion engine autocatalysis applications likely holds the key to a market rebalancing,” they said in a report earlier this year.

Political will

Natascha Viljoen CEO of Amplats

Paul Atherley Chairman of mining firm Pensana Rare Earths

As hydrogen-powered batteries can only be carbonneutral when supplied by green energy, there’s obviously a need to accelerate the move of primary power sources from fossil fuel to renewable power. Paul Atherley, chairman of mining firm Pensana Rare Earths, is hoping his company can successfully mine rare earths in Angola to supply the renewable energy battery market. Arcane though they sound, neodymium and prasoedymium, to be mined from Pensana’s proposed $200m Longonjo mine, about 300km from Lobito, are used in the manufacturing of large permanent batteries used in wind farms. Atherley told finweek that in addition to popular demand for carbon-neutral energy solutions, his company’s efforts had been boosted by the shape of Covid-19 stimulus. “There is some $16tr in stimulus efforts around the world, but particularly in Europe it has to be a green deal.” In addition to global recession, the impact of Covid-19 lockdowns was to very quickly demonstrate how a less carbon-intensive world might look to people like you and me. In fact, it took weeks, not years, for the skies of the world’s most populated cities to clear, observed Bloomberg Green in a report in May. The International Energy Association estimated that some 2.6bn tonnes of carbon dioxide was not emitted during lockdown. When a similar, but much smaller phenomenon,

www.fin24.com/finweek

cover story mining

HOT AIR

According to SFA Oxford, hydrogen-powered batteries benefit from a chemical process called electrolysis, which uses electricity to split water into hydrogen and oxygen. The hydrogen can then be stored and used to power a fuel cell, a stationary fuel-cell system, or for power-to-other applications such as power-to-heat or power-to-liquid fuels. The only by-products of the chemical reaction are electricity, heat and water so hydrogen electrolysis can play an important part in improving local air quality and helping to avert global warming. Importantly, electrolysis is the enabling technology that will ultimately supply power to fuel-cell electric vehicles (FCEVs), but will probably first serve as an energy source before finding an end-use in heavy-duty vehicles, and before it’s popular among passenger vehicles. Said SFA Oxford: “For FCEVs to become credible, they must achieve the same fast-fuelling and long range as fossil-fuelled vehicles and the same low emissions at the point of use as BEVs, all at a competitive cost. Automakers need a viable hydrogen fuelling infrastructure before they can fully resource the development of such competitive fuel-cell vehicles.” That’s not stopping the innovators. Angelo Kafantaris, CEO of Los Angeles-based firm Hyperion Companies, told Bloomberg News his company can build a supercar that, using hydrogen technology, will speed to 60km/h in 2.2 seconds and travel 1 000 miles before running out of fuel. “We’re proposing what the penultimate hydrogen car should be,” said Kafantaris. “This car is meant to showcase the beauty of hydrogen.” Tesla’s view? “Mind-bogglingly stupid,” said CEO Elon Musk in a recent interview, commenting on the difficulty of storing hydrogen. There are only 44 hydrogen filling stations in the US, mostly in California, while consumers only have three hydrogen models to choose from currently, produced by Honda, Hyundai and Toyota. To date, US consumers have bought about 8 000 hydrogenpowered cars and sales declined last year. ■

@finweek

finweek

finweekmagazine

Photo: Shutterstock

Are hydrogen-powered batteries viable?

ANGLO AMERICAN

52-week range: R204.13 - R452.67 Price/earnings ratio: 14.76 1-year total return: 39.64% Market capitalisation: R456bn Earnings per share: $1.71 Dividend yield: 2.87% Average volume over 30 days: 1 715 797

Cents

45 000 40 000 35 000 30 000 25 000 20 000

SOURCE: IRESS

Sep ‘19

Nov ‘19

Jan ‘20

Mar ‘20

May ‘20

Jul ‘20

SIBANYE-STILLWATER

52-week range: R15.37 - R58.42 Price/earnings ratio: -138.97 1-year total return: 177.3% Market capitalisation: R145.4bn Earnings per share: -R0.40 Dividend yield: 0% Average volume over 30 days: 20 805 630

Cents

6 000 5 000 4 000 3 000 2 000 1 000

SOURCE: IRESS

Mar ‘20

Apr ‘20

May ‘20

Jun ‘20

Jul ‘20

Aug ‘20

PENSANA RARE EARTHS

52-week range: Price/earnings ratio: 1-year total return: Market capitalisation: Earnings per share: Dividend yield: Average volume over 30 days:

GBP pence

40 35 30 25 20

17.5p - 41p N/A N/A £72.2m N/A N/A 767 950 SOURCE: IRESS

13 Jul

20 Jul

27 Jul

3 Aug

10 Aug

finweek 27 August 2020

31

cover story mining

Photos: Gallo/Getty Images I Shutterstock

“Copper isn’t like other metals: it is relatively concentrated, easy to process like gold and it’s a metal central to the new world vision. But we’ve got a long way to go.”

occurred during the 2009 financial crisis, it was followed by a recovery that resulted in a sharp increase in pollutive emissions. The aim in a post-Covid-19 world is to avoid another onset of higher emissions. That’s why public sector stimulus is trying hard to incentivise a green, renewable recovery. Months after the US government exceeded $700bn in bank bailouts, it came back with an additional $800bn stimulus package that included more than $80bn for emission cuts, energy efficiency and technological innovation. This carrot approach to developing sustainable economic growth has its stick, too, in the form of ever-tightening emissions legislation. A major beneficiary of stimulus and legislation is copper. According to BMO Capital Markets, EV adoption necessary to meet regulatory targets helps copper owing to its higher loading in EVs relative to ICE. In fact, BEVs require about 3.6 times the copper of their petrol-powered vehicle counterparts which, in turn, would have to double their energy efficiency were they to match the emission standards of BEVs. Assuming 11% global EV penetration by 2025, this is equal to an extra 3.2m tonnes a year of additional copper supply. All the major diversified mining firms are switched on to the potential of copper, including Anglo American and Glencore. But copper’s importance also brings in gold producers not generally considered much part of EV mineral supply chain. At least, this is the view of Mark Bristow, CEO of Barrick Gold, the world’s largest gold producer. “Fundamentally, copper is the strategic metal of the future,” he said in an interview. “It’s not like other metals: it is relatively concentrated, easy to process like gold and it’s a metal central to the new world vision. But we’ve got a long way to go,” he added, citing reservations in current battery technology’s ability to store energy. Major gold producers are going to be involved in copper production like it or not, according to Bristow. The remaining 10 or 11 major known gold resources occur with significant copper reserves in mineralisations known as porphyries, he said. Barrick has already sounded out Canadian firm Freeport McMoRan about the prospect of it buying its Indonesian Grasberg deposit. ■ editorial@finweek.co.za

32

finweek 27 August 2020

And the losers are ...

Mark Bristow CEO of Barrick Gold

10 11

The remaining

or

major known gold resources occur with significant copper reserves in mineralisations known as porphyries.

If nickel, copper, manganese, and even vanadium and cobalt are the winners in the new world order of carbonneutrality, then there must be some losers, too. Those minerals representing the industrial smokestack age. Certainly, thermal coal fits in this category, but then so may its sister element, metallurgical coal, according to Anglo American CEO, Mark Cutifani. “The switching from thermal coal will continue at pace in my view,” he said in an interview with finweek. “We still think metallurgical coal has got a good future, but by 2035 it will be getting tougher there as well because the hydrogen technologies will be taking over in steelmaking,” he said. The recycling of steel instead of producing new material may also have an impact on iron ore production over the longer term, which must be a concern for Kumba Iron Ore, the JSE-listed firm in which Anglo has a 70% stake. However, Themba Mkhwanazi, CEO of Kumba Iron Ore, thinks the company is well-positioned by dint of the quality of its resources. He told finweek that the transition to a low-emission economy will see steel producers, especially in China, seek out higher-quality iron ore, a key ingredient in steel manufacturing. Kumba produces a lumpy iron ore, with a 64% iron content that melts efficiently in furnaces and has a lower carbon footprint. The other grade of iron ore – fines – requires sintering so it melts efficiently. “Structural factors support a flight to quality,” he said, following the firm’s interim results presentation in July. “Firstly, blast furnaces are getting bigger and that is good for lump (ore). Secondly, China – to which Kumba exports about two-thirds of its product – needs to meet air pollution targets which supports premium ore.” Kumba can currently fetch a $10 per tonne premium for its product. ■

www.fin24.com/finweek

SUBSCRIBE

NOW

FINWEEK IS SOUTH AFRICA’S LEADING INVESTMENT AND FINANCIAL MAGAZINE. WE DELIVER IN-DEPTH REPORTING ON BUSINESS AND THE ECONOMY, EQUIPPING OUR READERS TO MAKE SOUND INVESTMENT AND BUSINESS DECISIONS. ECONOMY

WHY MORE TAXES ARE A BAD IDEA

SPOTLIGHT

SIMON BROWN

AMPLATS CEO ON KEEPING MINES RELEVANT

NOW’S THE TIME TO GO FOR GOLD FIND US AT: fin24.com/finweek

ENGLISH EDITION

30 July - 12 August 2020

EVERY TWO WEEKS

MARKETS

PRINT EDITION

SINGLE ISSUE: R25.60 1 YEAR = R542.40 Offer expires on 31 August 2020.

ZINIO

MAGZTER

13 August - 26 August 2020

INSIGHT

THE VALUE AND IMPACT OF YOUR INVESTMENTS

Inside

20 Introduction 21 The worst of times... is it absolute?

21 An alternative to GDP 22 New initiatives to combat the crisis 23 Can we get on the same page? 24 How to shift the focus 26 Survival of the fittest 26 A spurt for economic revival 28 Why pension funds should support GDP 29 Choosing the best fit 30 Make your intent clear 31 Exploring impact metrics 32 What will it take? 32 Changing one sentence in Reg 28

ASTRAL FOODS SHOPRITE BAT FIND US AT: fin24.com/finweek

+

EVERY TWO WEEKS

SHARE VIEWS ON:

SA: R 32.00 (incl. VAT) NAMIBIA: N$ 32.00

MEDICLINIC LIFE HEALTHCARE NETCARE

CAN

SASOL

GET ITS CHEMISTRY RIGHT?

+

THE OUTLOOK

FOR SHAREHOLDERS LISTED PROPERTY: SURVIVAL OF THE STRONGEST BALANCE SHEETS

BUY NOW AT

BEYOND LAKE CHARLES

SA: R 32.00 (incl. VAT) NAMIBIA: N$ 32.00

DIGITAL EDITION

SHARE VIEWS ON:

SA’s PRIVATE HOSPITALS: AILING IN A PANDEMIC COLLECTIVE

INSIGHT INTO SA INVESTING FROM LEADING PROFESSIONALS AUGUST 2020

IMPACT INVESTING HOW TO BETTER MEASURE

ENGLISH EDITION

SUBSCRIPTION OPTIONS*: 7 ISSUES (3 MONTHS) = R202 13 ISSUES (6 MONTHS) = R333 25 ISSUES (1 YEAR) = R600 Offer expires on 31 August 2020. *Includes all postage or delivery costs, South Africa only. TEL: O87 353 1305 SUBS@FINWEEK.CO.ZA

COLLECTIVE INSIGHT

HOW TO BETTER THE PROBLEM MEASURE WITH THE TECH STOCK SURGE IMPACT INVESTING

OPINION: HALF - HEARTED ECONOMIC POLICIES WILL CONTINUE TO FAIL

indepth in depthxxxxxxxxxxxxxxxx exchange-traded products

ETFs STEER STEADY

tors Although the economic fallout of the coronavirus pandemic hasn’t left inves

t

he allure of exchange-traded products (ETPs) rose as world equity markets swung ferociously between deep losses and record increases in the aftermath of the coronavirus-induced panic at the end of March. The total assets under management rose by almost 16% between the end of March and the end of June – to R106.6bn from R91.7bn, according to data collected by etfSA.co.za (etfSA). A decade ago, at the end of 2010, total assets under management totalled R32.2bn. According to Mike Brown, managing director of etfSA, this second-quarter surge was mainly due to market price movements. “The growth in the size of the local ETP industry has been due to the recovery in prices of many of the markets and assets tracked, rather than because of new capital raised by the listing of new ETPs, or the issue of new shares or ETP securities already listed on the JSE,” he said with the release of the data in July. The economic fallout of the coronavirus pandemic has, however, not left investors in ETPs or the underlying funds unscathed. Coupled with the delisting of three large exchange-traded notes (ETNs) by Deutsche Bank, total capital issued and redeemed showed a net decline of R6.2bn in the three months through June. Taking a longer-term view, though, it seems that the demand for ETPs remains solid. “We are seeing ongoing, consistently increasing demand for exchange-traded funds (ETFs),” Vicki Tagg, head of indexation at Ashburton Investments, tells finweek. “This has been driven by regulatory pressures, demand for lower costefficient products with greater transparency, and the global trends towards growth in ETFs.”

34

finweek 27 August 2020

in exchange-trad

In and out

The total assets under management rose by almost

16%

between the end of March and the end of June – to R106.6bn from R91.7bn.

ETPs issue new shares when the demand for a certain ETF or ETN justifies this action. Due to the ETP managers acting as market makers, and thus guaranteeing the tradability of ETP shares on the stock exchange, it also necessitates them to sometimes redeem these shares. Especially when sales pressure is experienced for a specific ETP. The largest redemptions that occurred in the first half of this year came with the delisting of Deutsche Bank’s ETNs that tracked indices in China, emerging markets and African equity markets. These ETNs were redeemed at a value of R5.67bn. According to data from etfSA, ETFs tracking platinum and palladium also experienced large redemptions: Absa’s NewGold Platinum ETF redeemed R4.3bn and 1nvest’s palladium ETF bought back R4.3bn. On the other side, Union Bank of Switzerland (UBS) saw a steady increase of R902.1m in the ETPs it backs (including the actively-managed ETPs run by, among others, Absa, Momentum, Efficient Group, FNB, Strategiq Capital, Excelsia Capital, Reitway ad Anbro Capital), data from etfSA shows. This is a rather novel approach to ETPs, which usually track an index or physical underlying asset such as a metal or even a currency.

Ready, set . . .

With 74 ETFs and 27 ETNs listed by 11 providers in South Africa, the ETP market is deepening, and not only in terms of provider choice. Underlying products offer a larger and increasingly specific range of underlying assets. Despite the delisting of Deutsche Bank’s ETNs, which focused on emerging markets for investors with an appetite for higher-risk assets, those looking for currencies, Krugerrands (see sidebar on p.36), fixed-income

www.fin24.com/finweek

in depth exchange-traded products

AS MARKETS ROIL

upward trajectory. ded products or the underlying funds unscathed, the market continues its By Jaco Visser

and industry-specific assets can now turn to ETPs. So why, then, are retail investors, as opposed to institutional money, still to some extent hesitant to pour funds into ETPs? “The appetite for ETPs has been growing nicely in SA but not to the levels we have seen in the developed markets like the US and Europe,” says Michael Mgwaba, head of ETP business at Absa Corporate and Investment Banking. “The issuers in SA experience good inflows but have more work to do around investor education, especially to retail investors. This is because in markets where we see high trading activities they’re markets where the products are equally embraced and supported by both retail and institutional investors.” SA’s institutional investors prefer ETPs holding commodities like gold, platinum and palladium, he explains. Retail investors are generally big on noncommodity ETPs, he says. “Again, in the developed markets, large money managers have found creative ways to use the ETPs in their portfolios,” Mgwaba says. “They see ETPs as investment vehicles that can complement their investment strategies. Large investors that employ core satellite strategies prefer ETPs as the passive element of their strategy or use them as their core strategy.”

Secondly, there has been a growing recognition of the value of transparency in ETPs, Visser says. This is apparent in that investors can ascertain an ETP’s underlying holdings daily. “That compares to a traditional unit trust where holdings are made public once a quarter and also delayed,” she says. For example, the day after Steinhoff crashed, many retail investors scrambled to find out whether their unit trusts held stocks in this company, Visser explains. “It took me a couple of minutes to see whether an ETP held the company, with the longest delay being the computer starting up.” Michael Mgwaba Head of ETP business at Absa Corporate and Investment Banking

Yusuf Wadee Head of exchange-traded products at Satrix

Photos: Shutterstock I Supplied

Not only costs

Traditionally, the allure of ETPs has been their low management costs. However, two other important factors are now considered by investors. The first consideration is the tradability or liquidity of listed ETPs, Nerina Visser, a long-time consultant to the ETP industry and director at etfSA, explains to finweek. This ensures that investors, when they place a buy or sell order for an ETP, are confident that they will get their position at the closest possible price to the ETP’s net asset value, she says. The market makers fulfil this guarantee, which results in investor confidence.

@finweek

finweek

finweekmagazine

Nerina Visser A long-time consultant to the ETP industry and director at etfSA

All that glimmers … is gold

So where did the money go recently? Volumes of ETFs traded on the JSE have traditionally been dominated by ETFs that focus on local shares, Yusuf Wadee, head of exchange-traded products at Satrix, tells finweek. “However, 2019 saw a tipping point where volumes of ETFs of foreign-referenced markets traded just as much as locally-focused ETFs,” he says. “This strong trend towards offshore ETFs has continued with offshore-referenced ETFs on the JSE now edging just ahead of local ETFs.” Wadee explains that this is because of the diversity available when considering global ETFs. “With the South African economy facing headwinds, these strong-performing global ETF alternatives have continued to fuel interest,” he says. As the gold price rallied to new heights, albeit retracting a little lately, commodity ETPs have seen enormous growth as investors look for safehaven assets amid immense uncertainty globally, says Wadee. “Commodity ETPs do act as an efficient portfolio diversifier and this is clearly seen in the outsized demand for precious metal ETFs, especially the gold and platinum ETFs. These precious metal ETFs continue to attract the largest ETF volumes currently.”

finweek 27 August 2020

35

in depth exchange-traded products

The ETP market has changed the investment industry by making it accessible for retail investors, and institutional ones looking for a core holding, to invest in “the market”.

Off and off they go

editorial@finweek.co.za

36

finweek 27 August 2020

By Timothy Rangongo

“Not the traditional ETF”

FirstRand’s Krugerrand Custodial Certificate can be likened to a safety deposit box containing a Krugerrand listed on the JSE.

The traditional exchange-traded fund (ETF) serves as an investment vehicle that provides investors with direct access to a basket of securities, such as shares and bonds, that are traded on the stock exchange – with the convenience of trading them in a single security, namely the ETF that tracks an index. In 2014, FirstRand created, listed and issued a Krugerrand instrument called the Krugerrand Custodial Certificate (KCC), which reportedly became the first gold coin-backed and physically-redeemable instrument in South Africa. Investing in Krugerrands appeals to investors who wish to make a direct investment in gold, hedge their portfolios against the US dollar or to further diversify their portfolio. However, this type of investment in gold is physical in nature and as a result, comes with the hassle to store, secure and insure the bullion. The Krugerrand Custodial Certificate has become a way of continuing to invest in gold by owning Krugerrands, albeit without having to worry about the risk of security, insurance and storage. The KCC is listed on the JSE and traded as a commodity ETF. According to the fund’s prospectus, each certificate represents one full ounce Krugerrand, held by a custodian. The ETF can be likened to a safety deposit

box containing a Krugerrand listed on the JSE. The custodial certificate provides direct ownership, meaning the coin belongs to the investor. The fund’s performance is tied to the market price of Krugerrands, which is correlated to the spot price of gold. The benefit of having a coin on the exchange is that the responsibility of storage and insurance is transferred to FirstRand, on the investor’s behalf. Secondly, the bank provides full liquidity against the coin should the investor decide to pull out. While other ETFs usually carry management fees, FirstRand incurs the storage fee, which it pays upfront to the custodian, according to the Rand Merchant Bank (RMB) commodities desk. They say the aim is to make the holding of Krugerrands as cost-effective as possible for investors. The RMB commodities desk tells finweek that investors prefer the custodial certificate to physically investing in the underlying asset mainly due to safe storage, price transparency and tight bid-offer spreads, convenience of acquisition and disposal, competitive pricing on storage and premium, and their liquidity. The KCC’s net asset value was R37 100 per unit at the time of publication, representing a 138% annualised year-todate return and 20.45% annualised return since inception. ■

Photos: Shutterstock

Looking at the most recent monthly performance survey of index-tracking ETFs, ETNs and unit trusts (for July), those geared towards the rest of the world lead the returns tables for longer-term investments. Commoditytracking ETPs take the lead in the shorter term. The survey is conducted by etfSA. Over a 10-year period, the Sygnia Itrix MSCI USA ETF returned 22.89% annually, followed by the Sygnia Itrix MSCI World ETF on 19.06%, the Sygnia Itrix MSCI Japan ETF on 14.1% and the NewGold ETF on 14.06%. Over a three-year period, 1nvest Rhodium ETF returned 126.06% annually (although a large part of these gains happened over the past year), the Standard Bank Palladium Linker ETN 48.68%, the 1nvest Palladium ETF 44.3% and the NewGold Palladium ETF 43.16%. The winners over the 12-month period through the end of July were 1nvest Rhodium ETF with a return of 193.6%, NewWave Silver ETN on 75%, NewGold ETF on 64.84% and 1nvest Gold ETF on 64.79%. Interestingly, the performance survey shows that the returns leaders in the very short term, over a three-month period annualised, differs from their longer-term peers. The NewWave Silver ETN returned 46.82% annualised, Standard Bank Oil ETN 46.81% and the Standard Bank Silver-Linker ETN 39.96%. An actively-managed ETN, offered by UK-based AnBro Capital Investments and called the International Unicorn Portfolio (with code UBS UABCPA) returned 33.6% annualised. This fund targets disruptors in the technology, healthcare and consumer sectors that are led by good management. Although the fund is dollardenominated, SA investors buy shares in rand. The ETP market, with more than R100bn under management, has changed the investment industry by making it accessible for retail investors, and institutional ones looking for a core holding, to invest in “the market”. With activelymanaged ETPs coming to market, the market is deepening even further. ■

www.fin24.com/finweek

in depth economy

MILLIONS OF JOBS

As the world turns to advanced technology – accelerated by the coronavirus pandemic – South Africa

t

he dramatic acceleration in digitisation triggered by transformation and culture at PwC. Covid-19 lockdowns and social distancing will make “The old approach to a nation’s prosperity was to millions of job losses across the world permanent, implement economic interventions in the hope that these unless the global workforce rapidly acquires the skills stimulate job creation and growth. Today, our approach needed to tackle new technologies. should be to equip people with the skills they need to Technology giant Microsoft has warned that the innovate and thereby create jobs and prosperity, measured transition is essential to drive recovery from the worst in both financial and human capital.” global recession in at least eight decades, which may leave One of the big obstacles to the introduction of new a quarter of a billion people unemployed this year. The technology in SA has been concern over the inevitable job pandemic has shone a “harsh light” on what was already a losses as manual skills and occupations become obsolete widening global skills gap, it says. and labour intensity declines. But the fallout of Covid-19 “Crises have a way of accelerating trends already in has made the transition impossible to postpone any motion, and the Covid-19 pandemic has proven no further, and failure to do so will make more businesses exception. Our data shows that two years’ worth of uncompetitive, worsening unemployment and making digital transformation have been concentrated into the future job creation even more difficult. past two months,” it said on 30 June. The final weeks “Digitisation and technology are a double-edged of March alone saw as much broadband traffic as could sword for a country like SA,” says Dobek Pater, director be expected in a full year, it added. of business development at ICT consultancy Africa Technologies powered by artificial intelligence (AI) are Analysis. Dobek Pater ushering in an era of automation and disruption, which is “We’re going to see greater automation in business Director of business development at ICT now widely described as the fourth industrial revolution on the one hand, which is going to lead to job losses. consultancy Africa Analysis (4IR), incorporating cloud computing, robotics, advanced On the other hand, digitisation creates a lot of new job wireless technologies and the Internet of Things. opportunities; both in the country and working globally But even in developed countries, skills to address the from the country. But if you don’t have the technology transition are in short supply, partly because of a drop-off and skills in place, they are just not accessible.” in corporate training investments over the past two Microsoft predicts that over the next five Microsoft predicts that over the decades. years, the global workforce can absorb 149m new next five years, the global In South Africa the problem is acute, given the lack technology-oriented jobs, in industries ranging from workforce can absorb of emphasis placed on technology in both public and food production to healthcare and manufacturing. private higher learning institutions. There will be an explosion of work in software Last year, the country was 49th out of 63 in development, data analysis, machine learning, cloud the World Digital Competitiveness ranking, a and data roles, and cyber security. new technology-oriented jobs. benchmark introduced by the International Institute SA has not been a complete outlier in digital of Management Development. In a Global Skills Index transformation. John Purchase, CEO of Agbiz, says compiled by software management company Consera, that farmers have been using satellites and drones to its overall data science proficiency is lagging well monitor crops and orchards for years, while precision behind, with a ranking of 44 out of 60 countries. farming is increasingly being used to drive efficiency and This is alarming, given a domestic jobs bloodbath that sustainability of production. economists fear could push SA’s official unemployment Many supply chains are becoming digitised as rate as high as 50%. There has been much talk by traceability becomes imperative for biosecurity, food politicians of preparation for the 4IR, but a digital strategy safety, and consumer choices – SA’s wool industry is has been slow to emerge and is likely to take even longer fully digitised and all lots traded are now traceable using to implement, given the government’s poor track record of blockchain technology, he says. The industry was invited structural reform. by the EU last year to share the technology and concepts “It is now, more than ever, imperative for the SA it has developed. government, private sector, non-governmental sector and None of this has hampered job creation within the citizens to work together to upskill people for a disruptive, sector. In the past eight years, employment in both digital future,” says Barry Vorster, lead for HR technology, primary agriculture and agro-processing has increased

Photos: Gallo/Getty Images | consultancy.co.za

149m

38

finweek 27 August 2020

www.fin24.com/finweek

in depth economy

TO BE GAINED

needs to sort out its digital policy issues or risk being left outside a new world order.

By Mariam Isa

THE GREAT LOCKDOWN WILL ACCELERATE DIGITISATION

Digital job capacity from 2020-2025

Job capacity — millions

With the right policy and business environment, another 100 000 GBS export jobs could be generated by the end of 2023 and half a million by 2030, the report said.

200 – 180 – 160 – 140 – 120 – 100 – 80 – 60 – 40 – 20 – 0–

190m

127m

149m*

Privacy and trust

6m

Cyber security

20m Data analysis,

machine learning, and AI

new jobs by 2025

90m 66m

23m

51m

41m

1m

Cloud & data roles

98m Software

development

2020

2021

2022

2023

2024

2025

*May differ due to rounding. SOURCE: Microsoft Data Science utilising LinkedIn Data

by about 20% – despite severe droughts and prolonged uncertainty over land expropriation. “Since we are a net exporter of nearly half of what we produce, we need digitalised and efficient value chains to stay ahead of the curve and remain globally competitive,” Purchase says. Financial services and insurance companies are among those that have embraced new technology. But within the government, only the South African Revenue Service (Sars) is digitised, with home affairs receiving some support through domestic banks. Even with minimal skills, there are ways in which South Africans can join the digital economy, according to a report called South Africa in the Digital Age (SADA), which was compiled by Genesis Analytics and the Gordon Institute of Business Science and released in January. It identified global business services (GBS), which already employs 250 000 South Africans, more than double those employed in the automotive sector. Of those, 50 000 already serviced offshore demand and the jobs were growing at 24% a year, it said. With the right policy and business environment, another 100 000 GBS export jobs could be generated by the end of 2023 and half a million by 2030, the report said. An SA matric qualification was enough to qualify if backed by smart and effective training at scale. Growth in digital platforms for consumer-facing industries was another promising avenue for job creation as so far they were catering for middle- and upper-income @finweek

finweek

finweekmagazine

consumers, and could be developed for relevance to lowincome consumers, which would in turn boost demand for low-skilled services, the report said. It pointed out that affordable access to both mobile and fixed data was crucial – an issue which has festered for a decade as policy paralysis and mismanagement blocked the allocation of new spectrum for cheaper and broader connectivity. In response to a government directive, the Independent Communications Authority of SA issued new spectrum temporarily – and for free – in April to meet a surge in demand for data generated by remote work during lockdown. Demand is unlikely to return to pre-Covid levels when SA’s lockdown is completely lifted, but withdrawing the spectrum would hurt business activity and, so far, there is no plan in place to resolve the dilemma. Another broad question is whether layering advanced technologies over the existing structural inequality in SA will exacerbate existing social, economic and political inequalities, warned a draft paper released by the National Planning Commission in July. While preparing for “inevitable technological developments” was an important aspect of developing a forward-looking digital policy, the conflation of that policy with social and economic transformation was “problematic”, it said. ■ editorial@finweek.co.za Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

finweek 27 August 2020

39

in depth agriculture

SA POULTRY DETERMINED TO PR

i

Apart from continued international predatory trade, the local poultry

n the interest of South Africa, local poultry producers are making a major contribution to food security, early childhood development and the creation of sorely needed job opportunities. The local poultry industry slaughters just under 20m broilers a week. But even before the outbreak of Covid-19, the figures showed that the growth in local production cannot keep pace with the growing consumer demand. According to analyses, this lag in growth can be attributed to the dumping of surplus production on the local market by the US, Brazil and certain EU countries.

According to the latest available statistics of the UN’s Food and Agricultural Organisation (FAO), the US produces 18% of the world’s poultry, followed by China, Brazil, and the Russian Federation. In 2017, poultry represented about 37% of the world’s meat production.

SA choked by dumping for years

From 2010 to 2018, SA’s consumption of poultry increased by 2% per year, while the local production on average only grew by 1%. In addition to this, the rate of poultry imports was eight times higher than the growth of local production for the World production corresponding period. The US currently exports 40% of its “These figures indicate the extent production, says Izaak Breitenbach, general of the dumping,” says Breitenbach. manager of the SA Poultry Association’s “According to Genesis Analytics, imports (Sapa’s) broiler organisation. Before the met 75% of the increase in demand, advent of the trade war between the US because the profits made by the local and China, the latter imported a lot of industry were too small to reinvest. This poultry portions from the US, owing to a is directly attributable to the unfair trade protein shortage in China practices of other countries with The US produces caused by swine and avian more bargaining power.” flu. “As a result of this Breitenbach says these trade war, Brazil currently practices consist of dumping, meets many of China’s underdeclaration of imported of the world’s poultry, poultry needs, while the US products to limit import duties, followed by China, Brazil, is exporting more poultry and false declaration of products and the Russian Federation. portions to South Africa, subject to tariffs under product In 2017, poultry represented among others.” names that are duty-free. about 37% of the world’s meat production. It suits the US, which – in He reckons Brazil last year the case of South Africa – exported chicken portions to made the benefits of the last extension of SA that were not deboned – known as its Africa Growth and Opportunities Act “bone-in portions” – as mechanically(AGOA) subject to its poultry exports to the deboned meat (MDM). MDM is duty-free, country. An agreed-upon tariff rate quota but this is not the case with non-deboned (TRQ) stipulates that the US may export portions. “Brazil indicated in 2019 that it poultry portions to SA from 2016 to 2025. exported only 10 000t of MDM to SA, but It kicked off at 65 000 tonnes per year, government data shows that 350 000t but escalates according to a formula and is entered the country. For this reason, Sapa currently at 69 000t per year. and the Association of Meat Importers

18%

40

finweek 27 August 2020

Ebrahim Patel Minister of trade, industry and competition

Izaak Breitenbach General manager of the SA Poultry Association’s broiler organisation

and Exporters (AMIE) asked for a formal investigation to be made in this regard.” According to Francois Baird of the FairPlay Movement the problem with dumping is twofold. It disrupts local and international supply chains, and includes SA’s lesser import and protective measures compared to other regions’ measures. Together, this has thus far prevented a reversal in the too slow growth rate of local production. Nevertheless, Sapa had drawn up a recovery plan for the industry, even before the outbreak of Covid-19, in conjunction with the government and other role players. In fact, the industry and the minister of trade, industry and competition, Ebrahim Patel, had already signed the plan in November last year.

The impact of Covid-19

According to Breitenbach, the lessons SA learnt from the US, EU and Brazil were that we had to try and prevent too many people from contracting Covid19 simultaneously so that the country’s labour-intensive poultry and other food factories could remain open. The poultry industry succeeded in keeping production volumes at normal levels and to maintain the value chain. Despite fluctuations, the rand/dollar exchange rate is generally weaker;

www.fin24.com/finweek

in depth agriculture

Y INDUSTRY REEN ITS FEATHERS

By Jacques Claassen

y industry is ready to combat Covid-19’s additional trade disruptions. therefore inputs, especially imported feed vaccines, are more expensive. The consumption of poultry dropped markedly in the second quarter. Under lockdown level 5 it was 18% lower than the normal consumption of around 200 000t a month, followed by a drop of 13% during level 4 of lockdown and a decrease of 7% since then.

Covid-19’s aftermath

Concern about Covid-19’s disruption of international supply chains was expressed during the recent webinar “Poultry Road to Recovery”. Breitenbach confirmed the veracity of these fears. “Owing to the disruption, poultry exports to SA dropped to 41 000t in May (compared with 51 000t in May last year). At the same time, consumption decreased globally – by 40% in Pakistan, for instance – and stocks began to accumulate in cold storage. In the meantime, Covid-19 cases have reached their highs in several overseas countries. As world trade is starting to normalise, and as soon as the major export countries start running out of storage space, a new wave of poultry exports are expected to reach SA.”

Photos: Gallo/Getty Images I Shutterstock I Supplied

Size of the problem

According to government data, whole chicken was recently exported to SA for as little as R9.99. “How is that possible? In order to justify dumping, a misperception was created that it was limited to only so-called brown poultry meat. This is an unfair strategy to gain access to the market. Now it seems that even whole chickens are being dumped here,” says Breitenbach. Consultancy firm FC Dubbelman and Associates found that more than 90%

@finweek

finweek

finweekmagazine

The local industry in figures The poultry industry provides 50 000 direct jobs and 130 000 in the whole value chain. Its annual turnover amounts to R48bn. Even before the outbreak of Covid-19, imports amounted to about 50 000 tonnes a month against Astral Foods’ (SA’s largest poultry producer) production of some 33 000t a month. Astral produces 5m broilers a week, compared with the US’ largest producer’s 45m tonnes a week. SA’s monthly production amounts to 135 000 tonnes compared with the US’ 300 000 tonnes a month. SA is the fifth-largest importer of US poultry and the third-largest importer of poultry from Brazil (a country with low feed costs that has been benefitting for many years from agricultural production). About 47% of SA’s small-scale poultry producers stopped farming in 2019 owing to the devastating impact of dumped poultry. ■

of all poultry imports to SA, even in the midst of Covid-19, are sold here at less than the production costs and the sales price in the country of origin.

How does SA protect itself?

Baird points out that so-called “safeguard” tariffs against all EU countries, starting at 35.3%, were agreed to in 2018, but these are reduced annually and they will fall away completely in 2023. However, Sapa has found that the dumping margins on poultry from Germany, the Netherlands and the UK amount to 307%. Sapa therefore approached the International Trade Administration Commission (ITAC) in February to renew SA’s anti-dumping tariffs in respect of these countries. “ITAC published the findings of our studies and a year has been set aside for comments,” says Breitenbach. According to Baird, new most favoured nations (MFN) tariffs – among others, Brazil and the US – were increased in March this year on cuts that have not been deboned, increasing from 37% to 62%, and from 12% to 42% for deboned portions. According to the findings of a further anti-dumping investigation undertaken by Sapa, and confirmed in a sunset review, margins on the dumping of poultry from Brazil and four new EU countries vary from between 57% and 176%. Sapa therefore approached ITAC to also impose anti-dumping measures against those countries that are subject to the same process as mentioned above. “It is, however, a slow process. In the meantime it is important to quickly start implementing the industry’s new recovery plan,” according to Baird. ■ editorial@finweek.co.za

finweek 27 August 2020

41

on the money

>> Personal finance: The importance of debt management p.44

ENTREPRENEUR

By Timothy Rangongo

Making an iconic South African shoe globally recognisable From A-listers and royalty to ordinary folk, here at home and abroad, people are enamoured with the redesign and return of the iconic South African velskoen shoe.

t

he year was 2016 and the Summer Olympic Games had just drawn to a close in Rio de Janeiro. Veldskoen co-founders Nic Dreyer and Ross Zondagh were disappointed by the South African team’s apparel and thought that it “really should have been more representative of how amazing South Africa is”, explains Dreyer. Velskoen shoes – an ankle-length subset of the chukka boot made of soft but strong rawhide – came up, but the duo felt the traditional footwear could do with some colour. So, Dreyer had a friend photoshop colourful soles and laces onto a pair and they “immediately knew we were on to something”. Dreyer and Zondagh registered Veldskoen Shoes (Pty) Ltd, crammed into a 3x3m office in Woodstock, Cape Town, and ran with the fresh redesign. Another co-founder, Nic Latouf, also came on board, helping to set up Veldskoen’s e-commerce platform. Three years later, the company has successfully entered global markets (US, UK, Europe, Zimbabwe and Zambia), and counts Brian Joffe (Bidvest founder), Ashton Kutcher (US actor and entrepreneur) and Marc Cuban (US entrepreneur and investor) among its shareholders. Veldskoen is also eyeing Israel, Portugal, Germany and the Netherlands for expansion, after the Covid-19 pandemic. Dreyer, the company’s chief executive, spoke to finweek.

42

finweek 27 August 2020

Let’s start with the name…

It simply could not be called anything else. Ask any South African what a velskoen is and they will tell you. It’s part of the South African lexicon and our mission is to make that known globally.

What inspires new designs of the shoe?

Velskoen shoes have been around for about a century and they have two key characteristics. Firstly, they are well-made and should last a long time. Secondly, they need to be seriously comfortable. So, whenever we tackle a new shoe design, it must pass these two tests. Then, we look at what sort of shoes we would love to wear and take it from there.

On average, how long does it take to make a shoe and what goes into the process?

“In the last financial year, we made around 80 000 pairs of shoes and that is growing monthly. Of those, around

10 000 pairs were exported.”

Our shoes are handmade by unbelievably skilled artisans, specialists in each part of the production line. If you had to walk one pair through the entire production line, it would take around seven hours. That said, we make lots and lots of shoes, so a sizeable order takes a few weeks. Our manufacturing partners, Hopewell Shoes in Durban, are the best in the business and are fully committed to delivering exceptional manufacturing standards for Veldskoen.

How did Veldskoen make its very first sale? We have always been a digital storytelling brand and for the first 18 months all our sales

www.fin24.com/finweek

on the money entrepreneur

“Our shoes are handmade by unbelievably skilled artisans, specialists in each part of the production line. If you had to walk one pair through the entire production line, it would take around seven hours.”

What are some of the biggest difficulties Veldskoen has had to overcome?

were made at www.veldskoen.shoes, our e-commerce platform. I must tell you, getting that first “stranger validation” (when someone other than your mates and family buys a shoe) was an incredible feeling!

Being an online footwear brand is tough and that has come with many challenges and mistakes. Our team culture, however, allows for mistakes and improvements – so, we manage to get through them. The biggest singular challenge has been Covid-19, unsurprisingly. Like everyone, our business lost a potentially fatal amount of revenue with the lockdown. It took a massive team effort, sacrifice and creativity to survive it and I am immensely proud to say that Veldskoen is in a good position to get through this period, and wellplaced to grow coming out of it.

How tough is the competition?

Footwear is a competitive space and since we launched three-and-a-half years ago, around eight new velskoen brands have popped up. I think we may have started something. We are totally comfortable with the competition and wish them all well. We know what our mission is and won’t be distracted: Veldskoen strives to be SA’s most recognised global brand. The motivation behind Veldskoen since we started has been to shine a positive light on SA. We wanted to create a piece of apparel that connects us as a nation and is a visual representation of all the incredible characteristics of our great country.

The biggest lesson(s) learnt?

The biggest asset in any business is its customers. We are deeply grateful for our customers, value their loyalty and strive to deliver them world-class products and service. In addition to our customers, it’s our team. We have an amazing team, including Iridium Business, who is an integrated part of our business. When we started out, we required an inventory management system that could work in the e-commerce world and began a search for one that met all our needs. Iridium helped us implement effective and efficient systems, an IMS that plugged into our online store and accounting system. Inventory is key to retail success. By providing the systems and training, they literally changed our business.

How has Veldskoen’s expansion into international markets been?

Having a global brand was the mission, so we have focused on building an international business from day one. We started in the UK with an online store and that has been growing nicely over the last three years. (It really helped that Prince Harry wore our shoes!) After the UK we launched in the US. Ashton Kutcher and Marc Cuban invested in Veldskoen US and that has grown aggressively for the last two years. We have seven more territories where we have passionate South African distribution partners.

What keeps you motivated?

How many shoes are made annually, and how many are exported?

We are passionate advocates for local brands and local manufacturing. We feel a responsibility to share our experience and learnings with other local brands and startups that want to grow. We know that in SA we make incredible products because our people are so talented. We stay motivated to make sure we all grow and hopefully employ more and more people.

Photos: Supplied

In the last financial year, we made around 80 000 pairs of shoes and that is growing monthly. Of those, around 10 000 pairs were exported. Our biggest international market is the US. We are excited, though, that all the territories are growing nicely, and we should be able to fundamentally increase our manufacturing year-on-year.

How many employees does Veldskoen have?

We now have a team of 14 working directly for Veldskoen; in our factory we have around 120 people. @finweek

finweek

finweekmagazine

Nic Dreyer CEO and co-founder of Veldskoen

What is the long-term vision for Veldskoen? To be SA’s most globally-recognised brand. We are committed to building this business to be something that SA can be proud of. ■ editorial@finweek.co.za finweek 27 August 2020

43

on the money personal finance By Timothy Rangongo

Tackling debt South African households faced high levels of debt even before the economic impact of Covid-19. Carefully considering debt management is now more important than ever.

b

efore Covid-19, the South African consumer credit market was already struggling with challenging economic conditions. The total value of credit granted to consumers was up 1.66% to R145.38bn for the quarter ended December 2019, according to the National Credit Regulator’s quarterly consumer credit market report. Credit bureau TransUnion said the demand for credit continued well into the first quarter of 2020 and began to accelerate as both consumers and lenders started to experience the impacts of Covid-19 (towards the end of the first quarter). Figures from the bureau’s first-quarter consumer insights report showed flat or negative growth across all product categories, except for bank personal loans, which grew by 10.6% year-onyear. Outstanding balances continued to grow across all major consumer lending categories, with non-bank personal loans growing by 17.2% year-on-year. Though delinquency deterioration was most pronounced for secured products, vehicle loan delinquencies continued to soar – a consistent pattern observed over the last three years. The delinquencies more than doubled, and stood at 7.5% in the first quarter of 2020, resulting in some lenders having to introduce repayment terms of up to 96 months to accommodate challenges with consumer affordability. The impact of a constrained economy, amplified by the pandemic, has placed strain on the SA consumer, says Dawid Spangenberg, head of retail credit at FNB. He says previously financially sound segments of the consumer population are also finding themselves in distressed positions due to the impact of the pandemic. “Consumers working in industries that were more severely impacted by the lockdown have seen a material decline in their income, especially during the initial hard lockdown,” he says. Cowyk Fox, managing executive at Absa retail and business banking, warns that consumer debt levels are expected to worsen even further due to the expected surge in retrenchments and low economic growth over the next year due to the macroeconomic impacts of the pandemic.

“Lenders can be sure that consumers will buckle under the pressure – utilisation rates will increase and so will defaults,” the credit bureau said. The central bank was quick to act by introducing four consecutive repo rate cuts, which lowered the prime lending rate to 7%. While the cuts reduced lender margin profitability, Spangenberg says they provided relief to borrowers trying to manage reduced cash flow and revenue for purposes of servicing their debt obligations.

Tighter lending criteria

Steven Barker Head of lending for personal and business banking at Standard Bank

Non-bank personal loans grew by

Lenders were already responding to the pre-pandemic economic conditions and had started to adjust their risk appetites accordingly and scale back on growth, according to TransUnion – which forecasts SA’s overall credit demand to drop in the second quarter of 2020 due to the Covid-19-induced economic downturn. “Given the impact of Covid-19, and the resultant impact on the financial position of customers, loan applications (both secured and unsecured) have significantly declined since the commencement of the national lockdown,” says Fox. Spangenberg attributes FNB’s drop to stricter underwriting criteria, among others. “The reason for the more conservative supply-side recovery, both from a volume and balance perspective, is due to a more restrained lending approach by most credit providers across the market,” he says.

17.2%

Unsteady incomes and debt

TransUnion’s financial hardship study into the pandemic showed that 83% of consumers had reported that their household incomes were negatively affected by the pandemic; 37% reported that their work hours had been reduced; and 14% reported that they had lost their jobs. 44

finweek 27 August 2020

year-on-year.

Are the repayment holidays paying off?

Mariné van Brakel Chief financial officer of local consumer finance business RCS

SA’s major banks and financial institutions introduced various measures to assist customers financially impacted by the pandemic and subsequent lockdown. Absa gave qualifying customers the option to defer payments on credit products for a period of three months, with no turnover limits or income thresholds. Some 740 000 accountholders have benefitted from the relief, across retail and business banking, says Fox. Nearly 300 000 individual customers were offered payment breaks by FNB through a separate credit agreement worth approximately R5bn, at prime interest rates, with 60 months repayment terms and no penalty fees on early settlements. Steven Barker, head of lending for personal and business banking at Standard Bank, tells finweek that the bank had provided R92bn in relief to individuals, SMMEs and commercial clients in SA across 285 000 accounts. It’s worth noting that taking a payment holiday is not always the best solution, argues Mariné van Brakel, chief financial officer of local consumer finance business RCS. www.fin24.com/finweek

on the money quiz & crossword

Insuring debt against loss of income

Credit life insurance assists customers to reduce their debt burden when unexpected health- or income-related events occur. Examples of typical events that may be covered through credit life insurance policies include death, disability, critical illness and retrenchment. Such insurance provides relief, provided that the right policy is in place, says Steven Barker, head of lending for personal and business banking at Standard Bank. “It is important that customers understand their policies and terms, and the protection provided on their policy, to help them make the right decisions in these difficult times.” In the event of death, permanent disability or contracting a critical illness, the outstanding debt is usually fully settled by the policy. In the event of temporary disability, retrenchment or loss of income, the policy can pay up to 12 months’ instalments, says Cowyk Fox, managing executive at Absa retail and business banking. ■

“A payment holiday is simply an extension of when the debt payment is due – it is not a debt waiver – and usually comes at a higher cost of credit when the time comes to settle the debt.”

Considering credit during tough economic times

For better credit management during a financial crisis, Van Brakel says, as a starting point, it’s always important to know your credit score. This shows you the strength (or weakness) of your credit report by rating your management of existing credit. The best advice, according to Fox, would be for people in financial distress to speak to their bank immediately. Spangenberg shares the same view and says, “the important thing is communication with credit providers. Consumers should identify the various repayment plans offered by their credit providers, find a plan that works for them and stick to it. If a consumer is unable to reach an agreement with their credit providers, they may need to seek the assistance of a professional debt counsellor.”

Test your general knowledge by completing this quiz, which will be available via fin24.com/finweek from 24 August. 1. Trade union Nehawu said it plans to strike against the government’s refusal to increase public servants’ salaries. What does Nehawu stand for? 2. Who did democratic presidential candidate Joe Biden name as his running mate in the upcoming US elections? ■ Bernie Sanders ■ Hillary Clinton ■ Kamala Harris 3. True or False? South Africa’s total mining output fell 28.2% year-on-year in June. 4. Which region did MTN announce it will exit in the medium term? ■ Middle East ■ West Africa ■ Europe 5. True or False? Building materials retailer Cashbuild has agreed to sell The Building Company to Pepkor.

6. South African Breweries (SAB) is cancelling R5bn of planned investments as a result of revenue losses sustained during the ban on alcohol sales in SA. Which company owns SAB? 7. True or False? Insolvent payments company Wirecard is being ejected from Germany’s benchmark DAX index. 8. Who is the CEO of Uber? 9. Twitter’s share price jumped after the social media group revealed a record increase in users in the second quarter. How many users did the company add in this period? ■ 20 000 ■ 200 000 ■ 20 000 000 10.True or False? The Shining Girls novel by South African author Lauren Beukes is to be adapted into a TV series after being ordered by Apple TV.

CRYPTIC CROSSWORD

ACROSS 1 Exclusive owner of business, selling shoe parts? (4,6) 7 & 22 Ancient mariner has aged so badly (3,3) 8 Having a drink without hesitation is sheer freedom (10) 11 Limiting stretch in a pound (8) 12 Main course (4) 14 Arch is completely covered in paintings, we hear (7) 15 Short girl in the money once (6) 17 Unusual to get poison from copper (4) 18 Baffle first lady with discouraging remark (8) 21 Criminal is scared to be left out (10) 22 See 7 23 Wish granter to clean up her mess (10)

NO 759JD

DOWN 1 Leave musical society to argue about the small details (5,5) 2 Choice of two politicians in opposition to research centre (10) 3 Three times deprived of a boundary (8) 4 Verified correct after the start (6) 5 Set tone for hairstyle (4) 6 & 20 Cheers, we hear, for copper (3,3) 9 Airs income discrepancy in the islands (10) 10 Tristram includes registered judo expert in rickety old vehicle (10) 13 Alabama oil conglomerate: 99 suffering from hair loss (8) 16 Better footballers in Ireland, right? (6) 19 Essential nature shows from the outset (4) 20 See 6

Photos: Supplied

Tackling debt burdens

Maintaining existing debt repayments during a financial crisis is important to ensure that one’s credit rating is not negatively affected, as this will determine what credit you qualify for in the future, says Van Brakel. Making debt more affordable can be achieved through debt consolidation, selling assets to pay off debt or reverting to options like debt counselling. Debt consolidation means taking out a new loan to pay off several smaller debts. Multiple debts are combined into a single, larger debt, usually with more favourable payoff terms, such as a lower interest rate or lower monthly payment or both. The individual should consider the negative consequences of each option, says Barker. ■ editorial@finweek.co.za @finweek

finweek

Solution to Crossword NO 758JD ACROSS: 1 Destination; 9 Oar; 10 Barrister; 11 Socle; 13 Almonds; 14 Larder; 16 Aslosh; 18 Deep-end; 19 Get up; 20 Tailpiece; 21 Hoe; 22 Great danger

DOWN: 2 Err; 3 Imbue; 4 Normal; 5 Trismus; 6 Out-and-out; 7 Consolidate; 8 Grasshopper; 12 Corsetier; 15 Exempla; 17 Addend; 19 Glean; 21 Hie

finweekmagazine

finweek 27 August 2020

45

Piker

On margin Safety first

This issue’s isiZulu word is phepha. Phepha is “be safe”. Safety is ukuphepha. Iphepha is paper. That word obviously comes from the English word “paper”, as we did not have paper before being colonised. We used iPads. Back to phepha; I think Peppa Pig would be a great safety mascot – Phepha with Peppa Pig. We should co-opt her to become the face of Covid19 safety. Maybe the government can give me tonnes of iphepha money to run the programme. They are giving away money to just about anyone, aren’t they? Anyway, I wrote a song to go with Peppa Pig the Phepha mascot. But, first, I need to take you through some words that feature in the song. Phupha – dream Iphupho – a/the dream Phapha – to be tjatjarag Iphaphu – a/the lung Impepho – sage Phephuka – blow away (by the wind)

Here goes: Phepha with Peppa Pig. Phepha with Peppa pig. She uses impepho – that’s Phepha Pig. She phupha-ed iphupho – did Peppa Pig. She’s pink like iphaphu – that’s Peppa Pig. She won’t let you phephuka. She won’t let you phapha. She’ll make sure you phepha. That’s Peppa Pig. Peppa with Phepha Pig. If you do not know who Peppa Pig is, you obviously do not have little kids, and I am happy for you. As the name says, Peppa Pig is a pig. I am not sure why her name is Peppa. Maybe it’s purely because it works with pig. Little kids the world over love Peppa Pig, and she has definitely helped me with my kids while I work from home. I just plonk them in front of the TV, play Peppa Pig and they stay glued. Do not judge my parenting, because working from home and looking after children is no child’s play. – Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

Michael Jordaan @MichaelJordaan I have a banking joke but it’s not attracting any interest. Monica Scott @chantelmakuwa The Gautrain bus will take you around the whole world before you reach your destination. Flick @Frediculous The amount of money they’re saying some colleges will lose if they don’t have a football season is showing that they’re not even really colleges. They’re just football programmes that teach classes as a side hustle. Mind of a Dad @TheMindOfADad If ever you’re wondering if you and your spouse are on the same page, fold a large blanket together. You’ll find out quickly. Yaaseen Barnes @Ya_a_seen_Him We’re all going through a very tough time, but no one speaks about the real struggle of putting in a password with a TV remote. Jade Jackson @IAMJADEJACKSON “Once Covid is over” is starting to sound about as confident as “When I win the lotto.” Swedish Canary @SwedishCanary If you think things are bad now fast forward 20 years when our country will be run by people that were home-schooled by day drinkers. Leah Spigelman @leahspig The most memorable part of this pandemic has been washing 80 000 dishes Mike Royce @MikeRoyce A reporter should ask Trump if he’s ever cried. The answer will be amazing, whatever he says.

“We should reward people, not ridicule them, for thinking the impossible.” — Nassim Taleb, Lebanese-American essayist and former option trader and risk analyst (1960 -)

46

finweek 27 August 2020

www.fin24.com/finweek

IN PARTNERSHIP WITH

WE HAVE EMPTY RESTAURANT KITCHENS … BUT MORE AND MORE HUNGRY SOUTH AFRICANS

WE’RE RAISING FUNDS FOR RESTAURANTS TO FEED THOSE IN NEED

DONATE AT HELP.EATOUT.CO.ZA