Hello Voornaam,
Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.
We also welcome yet more new subscribers this past week who are taking advantage of our introductory special offer of either R105 monthly or R1100 per annum, both including VAT.
This past week featured the supplementary budget. When we issued the "2020 budget - backdrop to an outrageous prediction" on 28 February we had little inkling that what was already an outrageous fiscal situation would become .... even more outrageous, if that is possible. Is there an adjective that describes an even worse state of affairs? The German word schrecklich (dreadful) may work, it just so happens to be the Afrikaans equivalent of verskriklik. In any event, there are enough column inches doing the rounds on this nightmare in Church Square without us adding to the noise.
However, what this aaklige situasie does bring home is the warning shots we've been firing for months on how intertwined our financial system is and how deterioration in the sovereign has direct ramifications for the banking sector and thus banking shares. This has happened over several years, but we now see the chickens coming home to roost. In our daily email on Thursday we paraphrased Ernest Hemingway. How do you go bankrupt? Answer: gradually, then suddenly.
Our note this Thursday entitled "Tito's shocker less of a shocker for Capitec" explains why we think Capitec stands out from the big four banks in the context of Finance Minister Tito Mboweni's supplementary budget on Wednesday. As we say, whilst this may seem a counter-intuitive view, not least because of our long-standing bearishness to banks as an asset class, there are differentiators that make Capitec atypical. We'll be unpacking that theme in more detail in due course.
Ahead of the Minister of Finance's speech we issued "BA900 isn't a British Airways service to Jo'burg". Referencing an airline, all of which have been having turbulence, is perhaps an appropriate analogy. The newest data on the institutional and maturity breakdown of liabilities and assets in banking continues to throw up warning signals and shareholders had better continue assuming the brace position. We've got several financial themed notes on the website.
We mentioned on Wednesday that news out of the Lake Charles project does little to alter our view on Sasol (several notes are on our website to view). Even if Lake Charles does generate $100m in EBITDA this next year higher interest costs caused by the two-notch credit rating downgrade will swallow 40% of that alone. Sasol has $10bn in debt and we are sceptical that even if they do realise a partial sale of Lake Charles that it will be proportionate to the $13bn its cost the company.
Kumba ended the week weaker too at around R471, with our call "Kumba, qaphela!" playing out. BHP though has been somewhat perkier (see "New hands on the financial tiller") and that speaks to the fact that BHP is a more diversified mining play than Kumba, which is wholly iron ore, and share price volatility will remain less pronounced.
The JSE All Share has recovered by 40% from March lows. In US dollar that is 35%, which is respectable. Year to date the decline is 7% in rand but down 25% in US dollar - not so respectable. But the JSE All Share by market capitalisation is not representative of South Africa or the local economy.
Tencent has been a driver this past month, dragging Prosus and Naspers up with it. Tencent increased by 25% in Hong Kong dollar and hit HK$500 this week. This is too pricey. It was driven by rumours that Tencent and Baidu are in talks about a potential deal between Tencent and iQIYI, in which Baidu owns a 56% stake, and controls more than 90% of the voting power. The rumours are to do with a combination of streaming services.
Investors in Tencent (either directly or indirectly through Prosus and Naspers - see "Illusory value") should take note of the fact that time series going back to 2007 shows an average twelve-month forward PE ratio of 30x. We see a PE ratio as a good gauge as Tencent converts a large portion of profits to cash. At the end of May, Tencent was HK$400. This week is got to HK$500 - up 25% in a month, largely on speculation. The rolling exit PE increased to 47x from 37x - matching the 25% hike in the share price - whereas the forward PE to December was 43x. Based on our earnings estimates our one year forward target price is around HK$400 with a two-year target price of around HK$500 assuming FX remains at CN7.08/USD and HK$7.75/USD.
If the JSE All Share Index is lopsided so too are the main US indices. It got more so this past month on momentum plays. PE ratios are inflating ahead of earnings - yet again. Tech is the driver. The Nasdaq is 8% higher than at the start of the year and more than 40% up from its low in March. If you have exposure to the US, including through an ETF, it is worthwhile bearing this in mind.
Apple and Microsoft both makeup about 9% of the S&P 500's market value - higher than the weightings for the energy, utilities, real estate, and basic materials sectors combined. Only five companies account for a fifth of the S&P 500 market cap with Apple, Microsoft, Amazon, Alphabet, and Facebook together accounting for about 40% of the Nasdaq by weight and there are 2,700 stocks listed. Think about it, 0.185% of all the 2,700 stocks make up 40% by weight. Only Apple and Microsoft are in the Dow Jones Industrial Average.
In the past, when certain sectors or types of stocks dominate for a while (financials, energy, tech) it usually doesn't end well.
In the Nasdaq, tech is 50% by weight, followed by consumer services at 20% and healthcare at 10%. Consumer goods are 6% and financials 6% whilst the entire industrials sector is only 6%.
Even in the S&P 500, tech is 27% by weight followed by healthcare at 15%. Communication services follows at 11%, communication discretionary at 11% with financials at 10%. All industrials are a mere 8%. Real estate is less than 3%.
The three sectors of the S&P 500 that contain FAANG stocks--information technology for Microsoft and Apple; consumer discretionary for Amazon; and communication services for Alphabet and Facebook--are the only groups in positive territory for the year. The energy, financial, industrial, and utility segments are down by double-digit percentages. That means tech in one shape or form is almost half of the S&P 500.
The Dow comprises just 30 stocks--many of which are economically sensitive--and is weighted by price, instead of market value. So, the likes of Boeing, Caterpillar, McDonalds, IBM, JP Morgan, or Dow Chemical feature. Only eight of the 30 are up for the year and most of their gains have been wiped out by the slide in shares of Boeing. Boeing's fall has knocked almost 1,000 points off the index year to date, erasing most of the contribution from Apple, Microsoft, Home Depot, Visa, UnitedHealth, Walmart, Nike, and Intel.
It is unlikely stocks like Amazon and Alphabet would be candidates to join the Dow because their high share prices would skew the index. The Dow is calculated by adding the prices of the 30 stocks and dividing by a factor that accounts for changes like stock splits. This means that companies with a higher share price hold greater sway, regardless of their total market value. The S&P 500 and Nasdaq are weighted by market cap, so larger cap companies have greater influence.
The equal-weighted S&P 500--which gives the same status to both the smallest and largest companies in the index--has underperformed the S&P 500.
Latest data shows the Nasdaq's advantage over the Dow and S&P 500 is the biggest since 1983. The gap between the S&P 500 and the Dow is the widest since 2002.
The iShares Russell 2000 which is an index composed of small-capitalization US stocks is a better gauge of heartland US and that is lagging for the year.
The takeaway is that neither the JSE nor the major US indices are representative of their respective domestic economies. The real economy is shrinking, fiscal deficits are spiraling, jobs are being lost, companies are closing. We may all have to cope with COVID-19 longer than we thought. Stock markets indices overall are in a parallel universe - but there is a good reason why.
Thank you all for visiting us. |
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| Latest research notes published this week |
| Of the listed JSE banks, which would you regard as having a lower risk profile, ABSA or Capitec? The first of the two is one of... |
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| | In Ingham Analytics latest note entitled BA900 isnt a British Airways service to Joburg the latest South African Reserve Bank statistics are succinctly analysed. If you... |
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| Which JSE listed mining company has a market capitalisation 40% larger than Anglo American, almost half as much again as Glencore, and larger than AngloGold Ashanti,... |
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| | On 14 May, in Iron ore and steel defies COVID-19 macro gloom, Ingham Analytics advised that they could see value in BHP and Kumba for the... |
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| Volatility returned with a vengeance to US and world markets this week. This is fertile ground for traders seeking short-term in and out trades as pricing... |
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