Guest market watcher: Mohammed Nalla, head of strategic research, Nedbank Capital

‘I think the retail sector should do OK.’

SIKI MGABADELI: We are talking markets now. The JSE continued its rise up today, above 51 000 at 51 200 points. Up 0.9% on the all-share and up just over 1% on the Top 40 index. The rand is at R11.50/dollar, R17.43/sterling and R13.03/euro. The gold price a bit softer today at $1 288.26/oz, platinum at $1 259.49/oz, and Brent crude at $48.88/barrel.
   Mohammed Nalla is head of strategic research at Nedbank Capital and joins us now on the line. Hi, Mohammed.

MOHAMMED NALLA: Good evening, Siki, and good evening to the listeners.

SIKI MGABADELI: Another strong rand today. Yesterday we bucked the trend and we continued today to stay up. And those banks tipping records again today.

MOHAMMED NALLA: Yes, yesterday we saw the financial sector quite strong. In fact, if we have a look at today’s trading session, for most of the trading session financial stocks were strong. They trended strong throughout most of the day. Resources as well until the latter part of the session and then they seemed to give back most of those gains. So the resources were the underperformer today, with financials and industrials doing quite well.
   As you mentioned, the banks have been putting in quite a strong showing. I guess a lot of this also relates to the expectation in some respects that we’ve got the SARB MPC tomorrow. What is the prospect of them actually cutting rates? That’s certainly not my base case. I do think the market may be getting a little ahead of itself.
   But the reason why that speculation has been building is that we’ve seen some rather untoward moves from major central banks globally. We had the Swiss national bank not so long ago, but overnight we’ve seen the Singaporean central monetary authority coming out – their primary monetary policy too, effectively their currency; so they were removing some of those currency controls, along with seeing even more monetary easing globally. So I think that’s lending some support, speculation in that respect.
   And by and large, like I said, a fairly strong performance across the board and I guess some of that related also to some of the trading updates that we’ve had on the day for some of those resource stocks, Anglos putting in a fairly strong performance today as well.

SIKI MGABADELI: We are going to talk about those in a moment. But just taking a look at the international front, a softer tone we are seeing in Europe and the US.

MOHAMMED NALLA: In fact if we have a look at the US, they opened up in positive territory initially, afterwards giving some of that back. We’ve ha d a very mixed set of results coming out from the US. As we speak, the S&P is marginally down, just around 0.1%.
   We had very strong numbers coming out of Apple. Now, Apple is the largest market capitalisation stock sitting there on the S&P, so we need to see strong earnings coming through. And by and large we are about a quarter of the way through the US earnings season – roughly 70% of stocks actually beat analysts’ expectations.
   But I still think it’s early days and, like I said, the US is pricing in considerably good news to continue ad infinitum. And if we have a look, some of the recent economic data started to disappoint in that fourth quarter. So all eyes there are on the Fed – the FOMC meeting this evening. They should give us some colour in terms of what their anticipation is in terms of when they will likely push through the first rate hike this year. I still think they’ve got some time, so we are possibly not gong to see that in the first half if this year, but I think the Fed will give us their hike some time during the course of 2015, even though the consensus has pushed that out to pretty much early next year.

SIKI MGABADELI: All right. We are going to be spending some time with Peter Major, talking about Anglos, Amplats and Kumba, but it looks like, if you just look at where those shares ended the day, the production update was well received.

MOHAMMED NALLA: Ja. In fact, Kumba was the second-best performer on the Top 40. So that stock is up just over 3.5%. I think the nice thing for me on Kumba is that the production volume has largely tried to offset the declines that we have actually seen in terms of the underlying commodity cycle. That being said, it has been a chronic underperformer over the course of the last year. So that stock has really been struggling along with the broader resources sector in general. If you have a look at Kumba specifically, over the last 12 months down it’s around 44%. So still a long way to go before investors start seeing returns, especially those that got in at the beginning of last year expecting some sort of turnaround in the resources market.

SIKI MGABADELI: All right. A quick look at Clicks and Spur. Clicks sales were up 13.9%, and it looks like maybe December wasn’t so bad after all. Yesterday David Shapiro told me not to jump the gun. But I’m quite excited about some of the numbers that we’ve been seeing from our retailers.

MOHAMMED NALLA: Surprisingly the retailers have been quite strong. A stock like Clicks has had a phenomenal run over the last 12 months. It’s up almost 70%. A reasonable set of numbers – the market really seemed to like them. That stock ran over 5% today. I think if you look at the numbers, yes, it has been relatively better than some of its peers in that retail sector. The numbers have been good – let’s not say good but better than the market has been anticipating. Not really rock-solid kind of numbers that justify the kind of PE multiple that we are seeing right now.
   So I’ve long said if you want exposure to the consumer, my preferred entry into that specific exposure would be through the banks, for example. In the out-and-out retailers you’re going to have to be a lot more picky with regard to which ones you choose there. A player like Clicks – they define a certain niche in which they’ve done quite well.
   I’ve been liking Woolies as well. I think they’ve done quite a reasonable job in terms of carving out [their] niche in the market as well.

SIKI MGABADELI: So if you are being picky, what should you be looking for among our retailers?

MOHAMMED NALLA: Among the retailers you are going to get players that are going to be stronger. They are going to be taking market share from their competitors. What I like about a player like Clicks, for example, is they define their space quite nicely. Their pharmacy businesses seem to also be a little bit of a defensive play in terms of some of that consumer sector.
   When you look at a player like Woolies, for example, they define a little bit of exposure to that upper LSM group, but that food business in Woolies is always kind of, I guess, one of those star performers. But they seem to be getting the fashion retail right as well. So those are the kind of nuances I guess that anyone looking for exposure in these sectors would be looking for.
   But, like I said, retail still not my favourite sector. I think the retail sector should do OK – consumers shouldn’t be under as much pressure as last year. But I don’t think it’s going to be all smooth sailing. And the stocks do look quite expensive on an earnings multiple basis.

SIKI MGABADELI: Any expectations from the Fed?

MOHAMMED NALLA: If you look at the Fed, they are probably going to continue talking more of the same story. I’d be looking for more indications in terms of their response to the recent weak data out of the United States over the last fourth quarter. I don’t anticipate any fireworks just yet, but I guess more of the detail we’ll only get once the minutes are released – and that in about another two to three weeks’ time. Let’s see. I’m hoping for no surprises from chairwoman Janet Yellen just yet.

SIKI MGABADELI: Thanks, Mohammed.

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