RYK VAN NIEKERK: Welcome to this Market Commentator podcast and as usual we talk markets and our guest today is Joseph Busha, he’s the managing director of JM Busha Investments. Joseph, welcome to the show, we are currently in one of the most definitive political chapters in South Africa’s political history and we may even see action taken against our finance minister. The rand has reacted negatively, as one would expect but the JSE did not, it actually has gained around 2.2% over the past seven trading days, why is this?
JOSEPH BUSHA: There used to be a tag that said South Africa Alive with Possibility, so anything is possible in South Africa and certainly I think the emergence again of the issues on the Minister of Finance is surprising. It’s surprising in the sense that if there is strong leadership they needed really to make sure that that is managed and certainly it goes away and is put to rest forever. But certainly it’s not and, hence, you saw the reaction on Wednesday when he received a letter that he must come and basically present himself to the National Prosecuting Authority or Hawks. So the rand weakened from about R13.45/dollar back above R14.00, which basically is negative for financial instruments, in particular your bonds and some financial shares. You saw the banking sector got hit yesterday, most of them on average losing about 4% and our yields have gone up about 60 basis points since the end of July. So certainly I think the volatility is not very good for the market but also it does not give confidence in terms of the economy as a whole. The Reserve Bank Governor, Ms Kganyago, said basically the growth expected this year is going to be zero, the IMF was expecting 0.1% and inflation has remained above the target band despite the fact that Wednesday’s numbers for July came in at 6% but that’s still very elevated. Given the fact that the rand is so volatile, petrol prices might go up again and, hence, that will push inflation to remain above the target band. Equities have remained very strong, as you know, if people are moving out of fixed income they have to find the money a home and the home will be equities and, hence, our equities have remained very resilient. The reason is that really your US has remained quite high, near the highest in terms of the equities, and certainly there was this prolonged change in terms of their interest rate policy, they’ve been on hold for a very long time and I think there are expectations that rates might go up in the US. You saw the dollar being strong but apart from that obviously we had our domestic Minister Gordhan issues on Wednesday.
RYK VAN NIEKERK: But we’ve seen political volatility in South Africa, we see it regularly and in most instances the rand appreciates quite sharply but then claws itself back, do you think in this case it could happen again?
JOSEPH BUSHA: Yes, it certainly is going to, it’s going to happen I think until we get the next government, which is in 2019, remember the ANC is going to have their National Elective Congress next year to elect the next president to succeed President Zuma. So that is going to happen but also I think after the August 3 municipal elections people thought democracy had spoken, there were a lot of changes within the municipalities and even though there was no outright winner between the DA and the ANC in Tshwane, in Ekurhuleni, in Johannesburg, they were very tight, they had to rely on minorities, smaller parties, to be able to push their mayoral candidates to elected. I think that’s going to continue for a while in terms of the lack of leadership uncertainty. We heard on Thursday morning the MD of the Banking Association, Cas Coovadia, saying basically that they are going to approach the government and as if almost to say leave your hands off the Minister of Finance. My view then is if business is getting involved in politics then we are setting ourselves up for a very dangerous precedence.
RYK VAN NIEKERK: Why?
JOSEPH BUSHA: In the sense that business mustn’t mingle with political issues, there is a legal case here, this is a legal case and in our view the Minister of Finance in my view and at least based on his statements he’s almost saying do not touch me, I’ve got a job to do and my job is to look after the economy, implying that the other guys are not. So there needs to be leadership from both sides, the prosecuting authority to say these are the charges and him to say, listen, let me answer all your questions so that we put this matter to rest for the benefit of the country. But I think we do not want one to appear to be the saviour of the country and not the other but what we need to do is get the truth and basically bury the whole case.
RYK VAN NIEKERK: But one of the criticisms against the private sector has been their lack of public criticism of the president and the management of the economy in recent times. We seem to see more of these CEOs actually speaking out now and I think if you see that in the context of the massive distrust between the government and the private sector that must be positive?
JOSEPH BUSHA: Certainly but there has to be basically to say what is the role of business and what is the role of government. The role of business is obviously to create enough jobs, production and so on. So they need to be able to engage business on issues of productivity and policy matters. So if government policy does affect business negatively, if government policy does not promote economic growth certainly business must be able to voice its disapproval through the right channels. But what I’m saying is that if it becomes then personal on an individual basis, I’m thinking possibly that becomes a bad precedence because one of the key issues you don’t want in any economy is collusion between business and government.
RYK VAN NIEKERK: What would happen if Mr Pravin Gordhan is removed from his position?
JOSEPH BUSHA: I think it would just worsen, I think if he is removed you are going to see what happened to Minister Nene or the Nenegate, as it is now called, that the rand will plummet further, I remember it touched R18/dollar. So currently I think everything was looking very good because inflation was coming down, rates were going to remain low for longer, obviously given that America had kept its rates and also we are just waiting to see what happens in November when Americans go to the polls to elect the next president. So if Minister Gordhan is just removed summarily I think certainly the reaction is going to be worse, given the fact the market has already taken a decision or chosen sides to say, if you touch him this is how we are going to react.
RYK VAN NIEKERK: What should investors do in this environment?
JOSEPH BUSHA: I think you have to be very cautious but I think it’s more of a long-term position. I think economically if we start basically moving towards the NDP and making sure that the construction sector also starts picking up, there are infrastructure investments, possibly you’ll start seeing the economy coming out a lot better. We had seen earlier this year a little bit of recovery from a commodities perspective in terms of gold, platinum prices and so on, and those shares are also responding to the strengthening commodity prices. But certainly I think we are not 100% out of the woods, so that’s why I’m saying it requires then leadership both from government and the private sector to be able to say this is how we can steer the country forward. Whether everything becomes clear after the next National Elective Congress we basically have to wait and see then. But certainly I think we need to be able to say how do we make sure that jobs are preserved and we create more jobs, how does the economy grow because if anything happens, given obviously the indebtedness of households, or the debt that households are carrying, and rates go up and inflation does not come below 6% it’s going to be painful.
RYK VAN NIEKERK: But as you say, investors need to be cautious, what do they actually need to do, move from equities to cash or other asset classes?
JOSEPH BUSHA: Cash is still giving quite good returns in asset, compared to obviously the rest of the world, in particular your developed world because when we’re sitting possibly on a massive 5% risk premium, if you had to compare yourself to the US, which is almost near zero, so most of our yields in terms of the long-term bonds you’re still looking between 9% and 10%. So that’s quite attractive for foreign investors who want to pick up yields and basically get a bit of sovereign risk. But certainly given the fact that the economy is not pumping equities have remained quite strong, given last year obviously it was a lackluster performance, I think equities we got about 5% return and all the different asset classes underperformed cash last year. So it certainly bonds were ahead, I think equities were up about 16% for year to date and fixed income not far behind at about 15% year to date.
RYK VAN NIEKERK: Let’s talk about bonds, I don’t think you can fault any investor who likes to park money there and just to see what is going to happen but the biggest trend in the bond market currently is the massive inflow from developed markets into our bonds, obviously chasing yield, what is the impact been of that inflow?
JOSEPH BUSHA: The impact basically is both positive and negative. Positive in the sense that as the foreigners choose to get some sovereign risk or pick up some credit spreads, as you know, the ECB cut their rates and if the cut the rates to near zero, so if you are invested overseas you are basically getting nothing for your money, whereas here you are able to pick up 8% to 10% coupons on your fixed income. So the positive is that it’s good for us but the negative is what we call hot money, it’s for a short period. But also they basically tend to focus on key government holdings, which is your ten-year bonds and so on and what happens when the government pays coupons or interest on these holdings then they have to sell the rand and, hence, you see that there is always pressure when your big coupon payment dates occur, which is usually in August and December that the rand tends to weaken. This has happened also when most of your bigger stocks on the JSE move their head offices overseas, Anglo, Old Mutual, SAB, so they would be paying dividends in foreign currency and, hence, if they are the biggest shareholder you find that there will be pressure on the rand because you have to sell the domestic currency to get your obligations out.
RYK VAN NIEKERK: So at the end of this month we will see an outflow as coupons are paid on bonds like the R186?
JOSEPH BUSHA: The R186 pays basically in June and December but currently you’ve got your R214, R213 that are also quite strong in terms of their overall weight in the bond index.
RYK VAN NIEKERK: How much money are we talking about here?
JOSEPH BUSHA: I can’t really quantify now off the top of my head but I think if you say what is the constituency on the bond index, your government constitutes almost 95% of the [12:50] and you can see basically the effect of that.
RYK VAN NIEKERK: Let’s talk equities, we spoke in November last year before Nenegate, you said the market was very volatile then, I think it’s a lot more volatile now. You also said that it was a stock-picker’s market, you need to go and find the hot stocks, where do you see value currently on the JSE?
JOSEPH BUSHA: Very difficult, I think the construction sector has failed to pick up, purely because the resource sector also has been very volatile. The industrials were the darling of the last few years, led by Naspers and Steinhoff, which has basically just been going into the international markets, a lot better off is the health stocks as well, so that basically has been the mainstay of the market. Early this year for the past six months it has been the resources and the last two months it has been the banking sector, which might be just reversing, given now this, I don’t know whether we can call it, Gordhangate event but certainly it has been a stock-picker market, those guys who’ve managed to pick up stocks quite well like Naspers I think have already seen quite good returns for investors this year. But your insurers haven’t really moved, Old Mutual is down about 19% year to date. So ja, I think it remains a stock-picker’s market.
RYK VAN NIEKERK: The banking sector is an interesting one, we’ve seen on Wednesday the banks reacting negatively on the latest political developments, they will be hit if we do see a ratings downgrade but they are cheap.
JOSEPH BUSHA: There are two issues that happened on Wednesday, the Kenyan government also has announced a cap on interest rates that can be charged. That affects Standard Bank, obviously they have operations in Kenya or any of the South African banks that are operating in Kenya. That’s number one. Number two is if rates were to go up the probability of bad debts increasing becomes higher, which means they need to put more money for provisions to make sure that they cater for the non-performing loans and so on.
RYK VAN NIEKERK: Do you expect rates to go up?
JOSEPH BUSHA: I think if the rand remains now or progresses towards R15/dollar and if the oil price increases to $55 to $60/ barrel and America increases rates before November certainly I think rates will go up but I think for now the view is that the Reserve Bank is going to keep rates on hold but the market has been so dynamic, so many changes have been happening.
RYK VAN NIEKERK: There are a lot of ifs in that qualification.
JOSEPH BUSHA: That’s true.
RYK VAN NIEKERK: Okay, back to banks, are you using money to buy banks at the moment?
JOSEPH BUSHA: A couple of them were looking cheap, we were buying Nedbank, I think if you look in terms of the PE ratio both Nedbank and Absa over the last two months, the PE ratio was basically about 7% or 8%, so they were the cheapest of the banks. The dividend yields are also quite attractive, 6% for Barclays, about 5% or close to 6% for Nedbank as well. So they’ve done very well but they’ve had a massive rally over the last two months, so this could be a correction basically for the banks but it’s more of a reaction to obviously what happened on Wednesday with the currency.
RYK VAN NIEKERK: Are you buying anywhere else or are you buying other specific stocks?
JOSEPH BUSHA: I think if you want to buy long term then Steinhoff possibly will start producing good returns, it has been stuck for a while. We also believe that Sasol has been punished badly because everybody looks at the oil price, although that’s not the only source of their income. So our view is that possibly if the Sasol share price comes below R3.60 it’s a good buy as well.
RYK VAN NIEKERK: Thank you Joseph. That was Joseph Busha, he’s the managing director of JM Busha Investments.
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