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‘Those resources are bleeding’: Maudi Lentsoane – MD, Lehumo Capital

Many expect a massive correction is coming, but Maudi doesn’t think so.

SIKI MGABADELI: A look now at financial markets. The all-share down 1.64%, at 50 140, the Top 40 index down 1.72%. The rand is at R12.94/dollar, R20.22/pound, and R14.32/euro.
    Maudi Lentsoane, MD of Lehumo Capital, has been watching these markets for us today. Really, if you look at the over 2% drop in resources, for example, you can just see the sell-off intensifying.

MAUDI LENTSOANE: Good evening, Siki. It just continues. In line with the global sentiment it’s all negative in Europe, it’s all negative in the US. That’s the story of the market, which is obviously under pressure. A lot of uncertainty and we are finishing just over 1.6% overall in the all-share index.
    But the resources – those resources are bleeding. Look at Lonmin, just over 19% – 19% down the last time I checked. It’s just one-way traffic. The gold mining index, I think, was the one that was bucking the trend, up just over 5%. I think what is happening there is the currency providing a bit of support. That rand weakness is helping a little bit for those gold mining companies.

SIKI MGABADELI: And the price has been holding up pretty well.

MAUDI LENTSOANE: That is correct. The gold price has also held quite steady. We’ve also seen today a bit of dollar weakness as a result of some of the numbers that came out from the US, the CPI data. That came out slightly negative and that dollar weakness, I suppose, helped some of those commodity prices. But it’s just a big concern – one way traffic, which is down.

SIKI MGABADELI: I was going to ask about rand hedges but it looks like just a sea of redness. SABMiller down over 2%, British American Tobacco down 1.3%, for example. When the currency is weaker, you see people piling into those shares – but they are not.

MAUDI LENTSOANE: Naturally they should, but sometimes the sentiment just overwhelms them. Even the rand is not able to assist. And I think we’ve seen it with some of these rand hedges. The gold stocks, as well as our rand-hedge stocks, were all bleeding. I think the fundamentals there are quite significantly negative and it’s not helping. Sometimes the rand will help you and some days it won’t help you.

SIKI MGABADELI: Absolutely. So let’s look at the news out. Massmart closed down 8.5% but it did hit some record lows early in the day, down over 10% at one point after its trading update. And they expect a drop in first-half headline earnings of as much as 29.8%.

MAUDI LENTSOANE: Big disappointment there. I think it closed around 8% [down] where it finished. But Massmart is under a lot of pressure operationally. If you look at the particular impact of the rand as well, the numbers are not so bad if you take out the rand impact. But after accounting for the rand weakness those numbers are quite disappointing. I think this is because they obviously import a lot of those washing machines that they sell – the retail stocks – which are obviously under pressure.
    The economy is under pressure and many of these retailers are under pressure with the electricity shortages and their having to utilise some generators, which are obviously using diesel, which is expensive. So the costs are increasing. Over and above that, Massmart has to import some of those goods that they sell, and it’s just pressure all round.
    But if you look at it there are reasons why some retailers are performing better. I looked at Shoprite yesterday – a much, much better picture there. It just depends on what type of retailer you are and which market you are catering for.

SIKI MGABADELI: Glencore also under pressure. Yesterday they came out – disappointing half-year results also, hitting record lows. Down another 7.5%.

MAUDI LENTSOANE: It’s all bad news. That sector is bleeding. It’s just bleeding blood. I know that they’ve had issues with Optimum Coal – problems there. I know they are going through a process of closing down the mine, and just yesterday they also mentioned the possible selling of Eland Mine. So they are already running against time to try and cut the costs – and obviously those commodity prices, oil, copper are all under pressure. So the pressure is continuing there and there is just absolutely no ending, with all the problems that we have, with China slowing down and everywhere else – it’s all against them.

SIKI MGABADELI: Fed minutes due out a little later this evening. What’s expected, especially given what we saw with the CPI data from the US?

MAUDI LENTSOANE: The Fed minutes – I think if you look at the meeting that took place, a whole lot of events such as China and the devaluation of the yuan came after that. So I almost want to say don’t read too much into the Fed minutes because it really doesn’t account for a lot of things that took place after that. But CPI continues to weaken because the oil price is coming under pressure. Basically what I think it means is that we are still on course to have an interest-rate hike this year, because the Fed needs to normalise their interest rates, move away from a zero-interest-rate environment and just normalise it. That’s not a problem. And I think also they’ve been very open and transparent in saying when they start increasing interest rates they will do so at a slow and steady pace. So the minutes will come out and they will probably talk about the same issues they talked about previously. I don’t think there is much to be surprised about.

SIKI MGABADELI: And then finally – investors watching this market, what would you say to them? Ride it out?

MAUDI LENTSOANE: For some reason I’m not really concerned, Siki. A lot of people are saying that there’s a massive correction coming through. I don’t think so. We are still in an environment where cheap money is still circulating and when the Fed starts hiking, I don’t think they are going to do so at an aggressive pace. China has devalued the currency. The intention there is very clear. I think a lot of people are looking at it in a negative way but I think that move is a reasonable move to try and stimulate the Chinese economy, which is under pressure. I don’t think the Chinese could afford to have the currency continuously decline because, remember, they’ve got massive depth which is delimited in dollars. An exaggerated depreciation of the yuan would be negative for them. So for some reason I’m still happy with the way things are. There will always be volatility. There are certain sectors that we need to look at which will still be beneficial, I think, going forward. There are certain sectors, of course, that you can avoid. Stay out of resources. But I think there are still one or two opportunities that you can look at in the market.

SIKI MGABADELI: As they say, one man’s sell-off is another man’s buying opportunity.

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