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What’s happening in China is key for gold: Carmen Mpelwane – portfolio manager, Seriti Asset Management

Aveng needs ‘to look at projects that they are able to complete profitably’.

SIKI MGABADELI: A quick look at the markets. It has not been a very good week, but today we are ending up on the all-share, 0.4%, and the same with the Top 40 index. The all-share is at 50 977. As you heard from Tumisang Ndlovu, the rand is not doing too well. It looks like it’s within sight of breaching R13/dollar, and then we’ll be back at 2001 levels, levels we don’t want tor revisit. It is at R12.92/dollar, R20.19/pound, and R14.24/euro.
    Carmen Mpelwane is a portfolio manager at Seriti Asset Management and she has been watching the markets for us today. Carmen, what do you make of today’s moves? I mean, we’ve got a very strong gold index but obviously not enough to boost the market more than it would have in the past.

CARMEN MPELWANE: Thanks, Siki. I think one of the key things to remember for gold, especially, is that you have to look at it in a holistic way in terms of what’s happening in the global markets. And what’s happening in China is a key thing for gold. So the immediate reaction is people are pulling out of China with their yuan, and the automatic next investment normally would be gold as a safe haven. So when you do look at metal, I guess gold should be looked at in a different sphere compared to the rest of the metals. So I think that sort of answers why gold has seen a bit of an uptick.

SIKI MGABADELI: But we haven’t seen the same thing with platinum and so on, because those will probably trade more on the concerns around a slowdown in the Chinese economy.

CARMEN MPELWANE: That’s exactly it. China is the single biggest demand market for the other metals, specifically industrial metals. So you will see that impact being that. The concern is that there won’t be as much demand in terms of imports on the China side. So that definitely impacts what is happening on the other metals, for example.

SIKI MGABADELI: I talked about the rand and we’ve seen not just the rand but other emerging market currencies such as the Turkish lira or the Russian rouble – all of them taking some pain.

CARMEN MPELWANE: Unfortunately again – China has been the key factor behind all the emerging market moves, especially in currency. For example, Russia and the African continent as well are significant exporters to China. So that’s probably one of the key bases for the impact on the very similar emerging market currencies around the world.

SIKI MGABADELI: Lots of results out today. We are going to be speaking to Shoprite’s Whitey Basson, Graham Briggs of Harmony. Let’s start with Shoprite. A good performance, given what we are hearing about this economic slowdown.

CARMEN MPELWANE: A breath of fresh air, I would definitely say. If you look at the fundamentals, they’ve managed to maintain market share in South Africa and the key is growth, obviously, in the rest of Africa as well. The way that they’ve maintained that revenue growth, as you’ll obviously hear later, is through store growth, for one. And you have to remember that the focus for Shoprite has always been lower prices, to be basic about it. And that’s a function of them focusing on the lower- to middle-income consumer. And I think in the current environment and market that’s where people will be focusing and spending their money, saving on costs. So that’s a direct feed to Shoprite’s bottom line.

SIKI MGABADELI: And they have to, obviously, deal with their efficiencies as well, and make sure that their distribution network is absolutely as lean as possible to get the margins.
    Harmony, on the other hand – their stock has tumbled something like 38% so far this year and I suppose that is a function of what we’ve seen happen with the gold price as well.

CARMEN MPELWANE: Absolutely. It’s twofold. The one [aspect] is definitely the gold price and the impact of that. But the other is just a function of the company, unfortunately, and the assets that they hold. As they said, they are very, very disappointed in their results as well. They have discussed specific ways of how they are going to get around that, but the key things are that there will always be significant pressure in terms of production and every year, at the same time of the year, round about this time, you are going to see them going into wage discussions and that has an impact in terms of how long that drags on for as well. Then I think, just lastly on the Harmony side, you’ve got to focus on their cost structure.

SIKI MGABADELI: Ja.

CARMEN MPELWANE: Any mining company in the last two to three years, one of their key phases is looking at their cost structure. And unfortunately for Harmony, they’ve haven’t been able to contain costs as much as they would have liked, I assume. So that would have an impact at the bottom line.

SIKI MGABADELI: All right. Finally, Aveng? We had Group Five out yesterday. Those numbers didn’t look too good. Aveng out today – their earnings down, reporting an operating loss. I just wonder what the state of the construction sector is.

CARMEN MPELWANE: Well, if you listen to what they’ve been saying, especially with the results coming out the last two days, they key focus there is that there isn’t a very optimistic view of what’s happening in the short term. And you can see that coming out through the impairment cost that they are recognising, specifically stating that there are certain projects which have been a significant drag on their balance sheet. So the focus there is to look at projects that they are able to complete profitably, but also to get a strong order book – and we haven’t been able to see that as Aveng says they are down 22%. So it doesn’t bode well for them.
    I think the key thing for construction in general is to focus on what projects companies are looking at in terms of expanding, and also where they will be doing that – whether it will be in South Africa where infrastructure hasn’t been that big at the moment, or whether they will do that offshore.

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