SIMON BROWN: I’m chatting now with a Sithembile Bopela, investment analyst at FNB Wealth and Investments. Sithembile, I appreciate the early morning time. We’re talking (about) rising fuel prices. Our petrol price did drop 12 cents last week, but of course the government is still giving us a R1.50 sort of discount for the rest of this month. June looks like we are going to have a fairly steep increase in it.
Obviously a higher fuel price makes for higher inflation, which pushes up interest rates, and this has impacts on investing. It’s negative for bonds, but also it can have a negative impact on equities generally because of how we do valuation techniques. I’m thinking particularly of discounted cash flows and the like, where you are using that interest rate as one of your input numbers.
SITHEMBILE BOPELA: Yes that’s exactly it. As you said, at least in April there was some intervention from the government to kind of support higher fuel prices. But in June the market is expecting quite a massive increase, just because we’re not going to have that safety net. So we are seeing that fuel prices are going to have quite an impact on investing, and as you’ve mentioned, definitely on on fixed-income assets, but on equities as well.
SIMON BROWN: Consumer stocks are obviously being hit here. That makes perfect sense. Inflation takes money out of the pockets of consumers, particularly when that inflation is in the transport space as well. But you made the point that actually banks can do fairly well in a higher interest-rate environment?
SITHEMBILE BOPELA: Yes. Generally high interest rates are positive for banks; that’s the nature of the market – where there are losers there are winners, and banks tend to do well in a high interest-rate cycle, hiking path. But there is a caution there as well, because the rate of increase does … put downward pressure on consumers’ ability to borrow and save, which in turn has a negative effect …. But generally banks tend to do quite well in the market.
SIMON BROWN: I take your point on that. Just good old-fashioned affordability for loans in particular could take some of the shine off that. Obviously locally there are companies such as Sasol, they are well linked to the oil price, Kaap Agri … results out yesterday, they’ve got the fuel-retail business, and we’ve got global and local oil ETNs [exchange-traded notes].
But you’ve also picked up on two offshore companies you particularly like, the one providing technology services within the industry, so benefiting from that – and I’m going to be a little bit sly here and leave the pronunciation of the company to you, because it looks German and it looks like a tongue-twister.
SITHEMBILE BOPELA: [Laughing]. I settled on ‘Schlumberger’. No one has corrected me as yet, so I’m just going with it. So yeah, we quite like that company, as we mentioned, that provides tech services to the energy industry, specifically for reservoir capitalisations for drilling, for production and processing. It’s not an energy company, but it has exposure to energy companies, so it does give you sort of an indirect exposure to the energy place, while at the same time consumers might be wanting to play directly via the likes of, as you mentioned, Sasol or Kaap Agri, which are in the local space. We do like the company.
Enphase Energy is also a nice company looking ….. There are also tech companies that develop and sell software for energy solutions. So it’s a similar play there, but they do provide some exposure from an international perspective for local investors.
SIMON BROWN: Interesting, both of them. And Schlumberger sounds perfectly fine to me, I’m not going to correct you on that. Enphase Energy, both [are] sort of tech-orientated and supplying into the industry, rather than the sort of traditional Shell or a BP, and certainly Shell and BP are having knockout numbers. But these guys perhaps have almost in a sense a little bit more leverage, because as Shell and BP are having those knockout numbers, they turn into their suppliers, such as these two and [are] ramping up orders.
SITHEMBILE BOPELA: Correct. And industry fundamentals have been quite favourable. There has been steady demand or rather a steady demand recovery. There is a tight supply market and also supportive for … currency and that has benefitted these companies that are, as you mentioned, the suppliers to the energy players in the market. So the outlook for the likes of Schlumberger and these tech companies that provide services to energy players, the outlook is quite positive for them, and the margins look good looking forward, and also from a valuation perspective they seem to be offering value to investors.
SIMON BROWN: We’ll leave it there. Sithembile Bopela, investment analyst at FNB Wealth and Investments, I appreciate the early morning time.