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Market watcher: Magnus Heystek – Brenthurst Wealth

‘Our market is at a record level or very close to it, mainly because the rand is down about 25% in the last 12 months.’

HILTON TARRANT: Let’s get straight into our guest market watcher for the evening, Magnus Heystek of Brenthurst Wealth, who joins us on the line. Magnus, not much to speak of on the JSE. We saw gold shares lower, and the market as a whole pretty flat on the day.

MAGNUS HEYSTEK: Yes, good afternoon, Hilton. It was a bit surprising because the Asian markets, especially Japan, had a very good day. The European markets had a good day and so far today the American markets – the Dow Jones is up, the S&P very close to a record level. It’s a bit surprising that our market didn’t follow suit, ending almost flat.
   I think our market’s a bit confused with the huge volatility in the currency. The currency at one stage was R9.29/US dollar, which was a big drop, then it clawed its way back to about R9.20. But the trend is down. The rand is under a lot of pressure. The macro numbers are not looking good, and the current-account deficit and foreign inflows that perhaps could go back out are having a bit of an impact on the market.
   Nevertheless some interesting moves – Times Media, a big move in that share price, up more than 11%. I don’t know if there’s some corporate activity there. And then if you look at the volumes, a lot of buying of FirstRand, which had another very good day, up 1.19%. Richemont also attracted a lot of money; that went to record level. And old Mutual. So there was a lot of activity in those three companies in terms of volume.
   And then on the negative side a lot of selling of Growthpoint – that was down 2.77%. Hospitality was down, so the property funds are taking a bit of, as they say, a smack. There’s a bit of a fear.
   I just came back from a big investment conference in Sun City on Monday and Tuesday. The listed property funds had a fantastic run last year and do not expect that to recur again at yields between 6% and 6.5%. That’s about what you can expect, but there could be some capital losses if the bond yield starts spiking. So there’s a bit of selling on the listed property stocks.

HILTON TARRANT: Magnus, you speak about the current-account deficit there – the budget deficit as well as that twin-deficit problem we are sitting with on the macro fund. As far as economic data is concerned, we saw mining production higher than expected, the first positive move since September of last year, up 7.3% in January. Manufacturing higher than expected, almost 4% growth year on year for January. The rand is regaining some of that lost ground, R9.18 against the dollar at the moment.
   We’ve a question in from Sylvester Mkondwane who says with the rand at these levels he hears analysts talking about rand-hedge stocks. What are rand-hedge stocks and how do they work?

MAGNUS HEYSTEK: It’s a bit late to be talking about rand hedges. Our market is very much almost a rand-hedge market with certain exceptions. But a rand hedge – the pure definition – would be a company that operates offshore or is domiciled in South Africa but earns most of its earnings and revenue somewhere else, priced in dollars or euros. A very good example would be Richemont. That’s a pure rand hedge. It earns money in Swiss francs, essentially. So every time the rand weakens it boosts the bottom line. SABMiller and Sasol are very good examples.
   So you look for companies that export either lots of their products or all of their products, when the rand goes down those profits go up and that has helped our market. That’s why our market is at a record level or very close to it, mainly because the rand is down about 25% in the last 12 months. So that’s a rand-hedge stock.

HILTON TARRANT: You spoke about that investment forum at Sun City. A story up on Moneyweb at the moment is: “Why Magnus Heystek chooses Sun City sages over Warren Buffett.” I’m guessing taking money offshore was on the agenda there but also, as you say, perhaps a little bit too late, given that we were at R7.50, R8 and now at R9.20 – perhaps a little bit too late.

MAGNUS HEYSTEK: There’s always a chance, when it comes to the currency, if you are taking money out purely as a currency play, you run the risk of taking it out when it’s too late and the rand has already bolted, so to speak. The feeling at the seminar and the point I make in my article is that Duncan Artis, who runs one of the biggest funds in the country at Allan Gray, actually said if he could he would take all of his money offshore and invest it there – not because of rand weakness, but because of better opportunities offshore.
   And that was something that was reiterated by Coronation and even the Old Mutual and Sanlam people, who also said they tend to favour offshore equities as the primary asset class in the next year or three, with South African equities coming second and then listed property and South African bonds very much at the bottom of their list. But the issue of rand weakness was very much a topic of discussion.

HILTON TARRANT: As far as the elephant in the room is concerned – and you do spend quite some time in your article explaining this – we tend to think here in South Africa that, when there are short-term crises such as strikes in the mining sector, strikes in the transport sector, these are very problematic and perhaps might have long-lasting effects. And yet we don’t pay too much attention to foreign inflows and foreign capital and the requirement that we have for that foreign capital. Is that really the elephant in the room?

MAGNUS HEYSTEK: The elephant in the room is the amount of capital that we need over the next three years. Treasury two weeks ago said we need R700bn – that’s not million, that’s a “b”. And if you look at the total net inflow of foreign capital over the last 17 years, that’s about R800bn. So we need in the next three years almost the total amount of foreign capital that South Africa as a country received from abroad over the last 17 years. Now, that’s a very, very big risk factor. And the credit agencies – Standard & Poor’s, Fitch, Moody’s – all are looking at this with a great deal of concern.


HILTON TARRANT: It was a day when the JSE ended up 0.08%, 32 points higher at 40 908, within touching distance of record territory. We saw resources down by a third of one percent, gold shares down by over 1.5%, and financials and industrials ticking up, with financial stocks up about 0.5% on average.
   And 52-week highs for a couple of interesting stocks – Coronation, it’s been there before, the asset manager. Consolidated infrastructure groups are getting a lot of attention on the market. Oceana, the fishing group, well known for its Lucky Star brand, and then Distribution and Warehousing Network, Dawn, out with financial results today – that stock at a 52-week high.
   On the low side, Telkom is at a fresh low, the lowest it’s been in the past year, as well as Argent Industrial also falling below that R6 level at about R5.85 a share today.

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