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The rand bounces around: Wayne McCurrie – Momentum Wealth

Lewis adamant it has done nothing wrong.

SIKI MGABADELI: We are talking markets with Wayne McCurrie of Momentum Wealth. The all-share index is down 0.86%, Wayne, to 52 014 points.
    Quite an interesting day because that US jobs report came out bang on the money. The US economy added the expected number of jobs in July – 215 000 jobs. The rand weakened immediately after that, but has since strengthened to R12.61/dollar right now. The market is down. What’s going on?

WAYNE McCURRIE: Look, the US jobs data I think disappointed the market slightly. But initially the rand collapsed and then it strengthened like crazy. So it was quite a volatile last little hour of work there today, I must say. And of course the moment the rand strengthens, the rand-hedge shares – SA Breweries, etc – come under pressure and that’s what brought the index down. Mining shares did okay, Anglos was up. But yes, it was really that that caused it, so Richemont, Steinhoff, etc, were down.
 Financials were mixed but there was a lot of corporate news out today.

HANNA BARRY: There was indeed. You mentioned financials. We saw Liberty, the insurance group – that share price came under a little bit of pressure. It ended down about 1.5%. I think the market was slightly disappointed about those operating earnings.

WAYNE McCURRIE: You are correct there. Those were single-digit increases. There was nothing wrong with the results; they just weren’t exciting when you look at what the market did when Old Mutual brought out their results earlier in the week. So the results were reasonable – they certainly weren’t great. Liberty did say that they are planning two big acquisitions in Nigeria, so they obviously are continuing with that strategy because the SA market is a tough place. It’s highly competitive. Everyone who has a job has already got 1.4 policies somewhere, and you’ve got to look outside of the border. Maybe now is the time to buy in Nigeria because you are probably going to get it quite cheap, currency-wise, economy-wise. It’s always best to buy at the bottom rather than buying at the top.

HANNA BARRY: Absolutely. And that exposure is something that Thabo Dloti, the CEO of Liberty, did speak to. I interviewed him earlier today and asked him about how Liberty’s exposures have impacted its results.

THABO DLOTI: Our operating earnings are driven by in the main what we are able to generate out of our retail affluent market. That market has been capitalised from our book. Strong flows have come through not quite at the levels we obviously expected because the flow … [static] … that the environment is fast catching up with that market.
    But, having said that, we are continuing to manage our book well. What we talk about is managing tomorrow. In essence we are managing persistency within our functions, we are getting positive expense variances and we’ve had good mortality experience coming out of the book. So clearly those things have contributed positively in an otherwise difficult market. That a big driver of our earnings.
    The other driver of our earnings is obviously growing into the corporate and the rest-of-Africa. We have achieved operating earnings of 14% year on year coming out of that market, but that portion of our business remains small in relation to the large retail affluent business … [unclear].

HANNA BARRY: That’s was Thabo Dloti, the CEO of Liberty there, just commenting on the fact that really the group’s exposure to the South African consumer, to the retail affluent market, has put its earnings somewhat under pressure. If you’d like to listen to the full interview, click here. He comments on its plans, as Wayne mentioned, for acquisitions in Nigeria. Liberty has about R1bn to spend there and it is looking at corporate acquisitions.
    Other corporate news out today – Sasol, Sappi, which one would you like to discuss, Wayne?

WAYNE McCURRIE: We can discuss Sappi. Unfortunately these were very poor results. They were negatively affected by planned maintenance shut-downs, but they are being squeezed really, really hard by the strong dollar. In America, where they make fine paper, the dollar is so strong we can import very cheaply. So they have to cut their margin there. Then in Europe, where they manufacture, they’ve got to import everything and it’s all dollar priced. So it’s really squeezing them. Look, Sappi is 60% glossy paper, 20% wood pulp cellulose, and then the rest is various other businesses, packaging businesses. And the glossy paper industry has been under threat now and had a terrible time. It’s a bit like the fixed-line telephone industry. It just declines every single year as more and more people go online. You buy fewer glossies, people print less because it’s online, and the whole magazine market has just proliferated into numerous titles, but with very small circulations. So there are not mega-magazines any more like we used to have 15 years ago. And there just aren’t that many printed. Thirty years ago Sappi decided to become the biggest glossy paper manufacturer in the world – I bet they regret that decision. And Mondi decided to go into paper packets, which was a far better decision.

HANNA BARRY: Absolutely, And Sappi’s share price is reflecting that.

WAYNE McCURRIE: It got pounded.

HANNA BARRY: It did – down 6.5%. Sasol issued a trading update, really just warning the market that it anticipates headline earnings per share for the year to June to be between 14 and 19% lower. That share price is also coming under pressure. But I think it’s to be expected in a very low price environment.

WAYNE McCURRIE: Undoubtedly. The market was probably expecting worse than this. Look, their results are based on an average for the last six months of $74/barrel. Remember, the current price is $49. So in the next six months are going to see as big a fall – the rand shields them a little bit – obviously because of the lower oil price. Unfortunately there are so many adjustments for staff share schemes and the reversal of the Competition Commission fine, and so on that it’s hard to actually get down to the bottom. But the thing is, at $50/barrel Sasol is probably fairly priced. If you think the oil price is going to fall another $10, sell, if you think it’s going up another $10, you must be a strong buyer of it. So it will be very dependent on what the oil prices does.

HANNA BARRY: On the upside, one share price that surprised me with just how much it climbed is Lewis – the beleaguered furniture retailer – up more than 11% after it announced that it’s going to essentially take on the National Credit Regulator, which has transferred Lewis to the National Consumer Tribunal for supposedly mis-selling insurance policies to pensioners, so selling pensioners loss-of-employment cover and selling self-employed consumers disability cover. It’s all quite confusing, but essentially mis-selling insurance policies.
    Lewis is saying that’s not what we’ve done, we can prove it. We’ve got an answering affidavit. We are going to take you on. And the market seemed to like that. I am sceptical.

WAYNE McCURRIE: And they were vehement, hey! They said we are fighting this, we are very confident that our position is correct. So it’s really about mis-selling and mis-pricing of product. The share price has been pounded since this story came out. They say there that the National Credit Regulator and the authorities who investigated them did a terrible job, and they say they are going to prove this – that there was negligence in the investigation, they didn’t do all the things, they didn’t stick to their own legislation and what they should do and how it should be done. So they said they are going to fight them. Let’s see what happens.

HANNA BARRY: This is where I would just like to step in, because I did read their results and of course the unsecured lending industry and debt is something I follow very closely. It seemed to me that Lewis could catch them out on a technicality, so it could be that the regulator didn’t follow the rules technically correctly, which of course is important. But whether or not the substance of its investigation and the findings of its investigation are much different from what they found is something that I would like to see. I would like Lewis to actually prove that they didn’t sell those policies…

WAYNE McCURRIE: Look, I don’t think Lewis would just go and catch you on a technicality because then they just start again and do it properly. If Lewis is doing something wrong they are going to be caught out at some stage. Whether they might not be caught out this time, because of a technicality, they’ll be caught out next time if everything is done correctly. But they are adamant that they are going to fight this, they are not going to pay the admission of guilt fine or some sort of administration fee. Let’s see exactly what happens on this. Of course, it takes a long time – these things always do. But you don’t see this often, actually.

HANNA BARRY: I know. And I think it’s very interesting. They did say that they looked back at some of the policies that may have been mis-sold as a result of human error, not as a result of Lewis’s policy but perhaps mistakes made by their staff. And, having looked at those, they think they may have to refund their customers R69m in premiums and in interest, which is not an insignificant amount.


HANNA BARRY: But, as you say, we’ll keep watching it.

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