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Draghi disappoints: David Shapiro – deputy chairman, Sasfin

‘From a governance point of view [we are] sinking fast.’

HANNA BARRY: We are talking markets now with David Shapiro of Sasfin. David, the all-share index is down 1.4% on the day at 50 424 points, and really pretty much weakness across the board. What were we seeing today?

DAVID SHAPIRO: A lot of weakness.

HANNA BARRY: You took the words out of my mouth.

DAVID SHAPIRO: I think Chris Gilmour said it, as reported in the introduction. If you look at what’s happening, there are a lot of concerns in our economy about the pressure on commodity prices, how that’s going to affect mining companies. We’ve got the drought. So many other issues on the global front as well.

I think what just dominated markets today is that on the ECB Draghi came out with a very disappointing analysis. Everybody expected much more from him. In other words, he didn’t live up to his own heights. We thought that he would extend the quantitative easing. What he did do, he extended the dates but not the amount. Also we thought that he would cut rates there further. He did cut the deposit rate. And it impacted on European stocks that followed through to US stocks and also to our stocks as well. That’s why we saw a bit of a kick-down in the afternoon session.

HANNA BARRY: Just to update our listeners quickly on that, you mentioned the ECB bond-buying programme. Essentially he is extending it by six months to March 2017 and quantitative easing, QE, will now total at least €1.5trn, up from the original €1.1trn. So essentially an expansion of €360bn over that period, R5.6trn. Not insignificant.

DAVID SHAPIRO: No. he says that it’s working. We are dealing with market expectations and market sentiment. The market was expecting more. What happened is the euro kicked up from $1.06 to $1.08. Now, why that is important is that it also helped the rand a little. We saw the rand at one stage at R14.25/dollar on the back of that, but now it’s back to about R14.37, R14.38. So it was short-lived strength.

Hanna, our biggest worries are commodity prices. We see the platinum price still under pressure, and iron-ore prices – and that’s weighing on that segment. And once again today we had platinum the weakest, even though we saw a little bit of kick-up in the platinum price. Royal Bafokeng down quite a lot, Impala down, even Sasol down. Sasol is probably responding to yesterday’s oil price, because the oil price did move up a little. Opec meets tomorrow, or I think today and tomorrow, and we’ll have an announcement there. And there is pressure on Saudi Arabia to actually reduce its output in an effort to help the price up and help other Opec nations who are under a lot pressure now because of the lower oil price.

So these are some of the factors. You mentioned MTN as well. That’s another big factor on our market. When the reduction in the fine was initially announced, the share price moved up, in fact, to about R147/share. But as we started to digest the consequences of a R50bn fine on MTN, I think operationally it’s going to hurt. It’s going to be very difficult for them to find the money by the December 31. The share price came down as well on that.

So quite a few factors. There are a couple of bookbuilds today as well. Another big faller was Super Group, which raised R360m. That’s not a huge amount but it’s dilutionary. And PSG also came down a bit on their bookbuild, which they’ve now extended from R1.5bn. They got applications for over R3bn, but they accepted R2.2bn – again, dilutionary, putting pressure on the share.

HANNA BARRY: MTN’s share price down more than 4.5%. So, as you say, digesting the fact that although the fine was reduced by about $1.8bn, it’s still a very, very big fine.

Other news out yesterday and perhaps being digested by the market today, David, was from the US Federal Reserve chairwoman, Janet Yellen, seeming to provide clear indications that the central bank will raise interest rates this month at the Federal Open Market Committee meeting. The JSE perhaps reacted negatively to that?

DAVID SHAPIRO: It’s in the market already. She spoke yesterday, as you mentioned, to an economic club in Washington. As we broadcast now she is talking to Congress and answering questions by Congress. I didn’t pick up the conversation but I think it’s more or less in the market that she will raise rates. What we watch for now is the pace of rates.

Tomorrow we also get job numbers coming out of the United States, which will also give you an idea of how strong the US economy is, particularly in job creation. If that goes down to 5% unemployment, that’s virtually what they call in economic terms full employment, and that would mean that there would be upward pressure on wage rates – and inflation could kick up. So we’ll watch that carefully to try and understand what the pace of her rate increases will be. So that could be a force. These are all little bits of information that come out every day, creating the ups and downs in the market that we see, and they can cause major, major swings.

HANNA BARRY: Also out tomorrow of course – the credit ratings agencies will announce whether they are going to downgrade South Africa or not. Fitch and Standard & Poor’s both will make those announcements after our markets close, quite late tomorrow night South African time.

Now, just to update our listeners, Standard & Poor’s currently has South Africa at BBB‑, which is one notch above a junk investment grade rating, on a stable outlook. And then Fitch has got us at BBB on negative outlook. So some expectation that perhaps one of them might move.

But perhaps you can weigh in here, David. I was chatting to someone from JP Morgan earlier today. He was saying if they downgrade us – and JP Morgan doesn’t think, the house view is that they won’t downgrade us – it’s not the end of the world because South African corporates and government have got a lot of debt in local currency, in the local markets. They don’t hold a massive amount of external debt.

DAVID SHAPIRO: That’s not the problem. The problem is that we are not a saving nation, so we rely heavily on foreigners to provide the finance for us to grow. And if we are junk – and it’s not really “junk”, it just means we are below investment grade – a lot of pension funds, provident funds, institutions cannot invest in non-investment-grade debt. So it means that a lot will have to be sold by a number of people, putting pressure on rates. And if we do want to raise money, we have to increase the interest rate at which we do so, because we are non-investment grade. So it is serious. I think the outlook statements will turn to negative. We will be on watch. But I don’t think we are going to get the downgrades to junk. I think that’s already in the market as well.

HANNA BARRY: Absolutely. But, just on that, with global capital markets where they are, with perhaps some excess liquidity in global markets, is there not appetite for some investment-grade debt out there, or at least…?

DAVID SHAPIRO: Not at a time when the US is starting to raise rates. So as they raise rates they will become probably more attractive. Money will go there. Also it means that as rates go, the carry trade, which they borrowed at low rates and came here, will also start to swing around and it’s going to hurt them little bit more. It reduced margins. It’s very hard to swing.

But Hanna, a lot has to do with who we are and where we are heading. I think, more than anything else, that’s the worry. We’ve got a drought, we’ve got lower commodity prices, and we are also from a governance point of view sinking fast. We are right at the top of the corruption list. There are so many factors that are hurting our sentiment outside there, and I think these are the things that we have to address. Don’t take us lightly.

HANNA BARRY: Finally, any thoughts on Old Mutual’s announcement that Trevor Manuel, the former finance minister of South Africa, will become the non-executive chairman of its emerging-market holding company sometime next year? Did you focus on that?

DAVID SHAPIRO: No, I don’t know what that means.

HANNA BARRY: Old Mutual Group Holdings Limited, I believe, is the official name. Currently Paul Hanratty, who has been at the group I guess for at least two decades is chairman of that.

DAVID SHAPIRO: But he has resigned.

HANNA BARRY: Trevor Manuel has been appointed to the board in a non-executive capacity – to groom him, essentially, to take over that role.

DAVID SHAPIRO: Well, look, he’s a good man. I’d like him to be president of the country, but I don’t think he is going to get that job. So if Old Mutual is a second-best option, that’s fine.

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