David Shapiro’s expert insights on SA, oil and the latest in today’s markets

Alec Hogg, David Shapiro and Gugulethu Mfuphi unpack a wide range of hard-hitting topics on CNBC Africa’s Power Lunch. Shapiro shares 43 years of experience with us as he looks at the state of the South African economy in light of flailing public enterprises that could do with a strong dose of private influence. Looking at the markets the trio discuss retail results, the precarious state of the oil price and the mining sector in South Africa. SA’s favourite stock broker, David Shapiro can always be counted on to get the grey matter pondering the important issues with far more insight than before. – LF

ALEC HOGG:  Well let’s get an in depth view of how the market is trading today.  As promised, South Africa’s stockbroker, probably the longest serving stock broker as well, David Shapiro from Sasfin.  You’re going grey David it’s taken you long enough.  You know most people at about 65 go grey, but you’ve had a good innings.  You’re past that.

DAVID SHAPIRO:  I started the market, since 1972, so how many years is that, 43 years?

ALEC HOGG:  My mum wasn’t even born in 1972.

GUGULETHU MFUPHI:  Alec…

DAVID SHAPIRO:  They weren’t married.  The parents weren’t married.

GUGULETHU MFUPHI:  That is a while ago.


DAVID SHAPIRO:
  We’ve had a lot more downs than ups, and we’re having another down at the moment, which is fine.

ALEC HOGG:  No, you’ve had a lot more ups than downs.  The market, over that period…

DAVID SHAPIRO:  Oh no, over time it is but I think you feel the downs a lot harder than you enjoy the ups.

ALEC HOGG:  I got some ups today and I want to tell you about the big up.  We’ve been sitting here getting really grumpy about the development state and we had (Trade and Industry Minister) Rob Davies telling us don’t worry, he’s got all this money that’s coming into the country.  Of course, not of it has transpired.  No foreign investment is coming in.  South Africans are taking their money outside.  The development state had a big setback this morning.  I don’t know if you picked up on it but PetroSA was in the process of buying Engen.

DAVID SHAPIRO:  Yes.

ALEC HOGG:  And the idea was, take out of the Engen franchisees and give it to politically connected people, who would become the new franchisees and Treasury said, ‘You’re not going to do it.’  Now that is a huge blow, for those who are promoting a development state in South Africa, because there was a State owned corporation, massively going into the private sector.  Good news, Dave?

DAVID SHAPIRO:  It is good news and hopefully, it’s the first in a number of issues that we have to undertake here, to get our State back on track again.  I think, against the global economy we’re seeing commodity prices plunge.  We’ve seen copper come down, and oil coming down.  Yes, there may be benefits that we’re going to gain from a lower oil price but overall it’s not going to help our mining sector.  Our skill base is very low, so I think we have to really remake this country and I think the…  You were discussing in the introduction, the BEE shares, and that and I think we’ve got to start moving away from that, allowing people to come in with the right skills, to help us, and literally rebuild this economy.

ALEC HOGG:  You know what happens in, I don’t know what you do over the Christmas period, but certainly, there’s lots of engagement that happens off the record, between politicians and business people.   Maybe this is a result of what occurred there.

DAVID SHAPIRO:  Yes.

ALEC HOGG:  That finally the dogma, the political dogma, A) cannot be afforded and secondly there’s been some, you know, hard talking that, ‘Hey, let’s get this economy back on track and this is how we can do it, by stop being so idealistic.’

DAVID SHAPIRO:  You were talking about SAA, in the introduction and I think we’ve got to start there.  We’ve got to start with SAA.  Eskom is a major disaster that needs huge fixing.  SABC, we can’t continue with these debacles every day.

ALEC HOGG:  Well, just as well that Engen isn’t now also going to be…

DAVID SHAPIRO:  The private sector has been great.  The private sector continues head down and that, but it can’t continue.  It can’t carry on, if you haven’t got the infrastructure and you haven’t got a Post Office that delivers things, and you haven’t got an airport or the SAA is collapsing.  Sell it.  Sell it to someone who can make it.  SABC and so on, so I think that my big hope is that this year we will start to get back on where we should have been 20-odd years ago, and it’s serious.

GUGULETHU MFUPHI:  It’s interesting.  A moment ago, you said…

ALEC HOGG:  I’m not making a political statement here.  I’m a businessman I’m politically agnostic.  I don’t like any other parties.  I just want to see conditions ripe here, so that we can actually reach our full potential.  Potential means that it will help everybody.

GUGULETHU MFUPHI:  Is there a particular sector, which might help us bolster that new growth or development of the new South Africa…

DAVID SHAPIRO:  You know what this is…

GUGULETHU MFUPHI:  Because before it used to be resources?

DAVID SHAPIRO:  Resources, we can of course but we’ve got to learn to mine resources at a profit.  We can’t go on ‘wild-cat’ strikes all the time.  We can’t not go underground and work.  If you want to work then work and we’ve got to increase productivity and keep costs down.  It applies to the bosses as well, as the workers.

ALEC HOGG:  What do you hear from the gold sector?

DAVID SHAPIRO:  Not good.

ALEC HOGG:  I hear that AMCU have now managed to get a foothold, more than a foothold, and they’re going to do another platinum type strike, in five months coming.  Did you heard that?

DAVID SHAPIRO:  Yes, we’re hearing.  I’ve been having a lot of arguments about the gold, about gold shares because they’ve been the best performers over the last few days.  It still doesn’t mean that the mines are going to make a profit.  It almost seems to be a safe haven that investors have been going to, but I think broadly, our industry is under severe pressure.

ALEC HOGG:  But to answer Gugu’s question, surely it’s the services sector.  We were mentioning it yesterday.  Walk out of the door here, in the richest square mile, and what do you see, services companies with high-rise buildings, being built, and being filled, because of Africa, the Africa story.

DAVID SHAPIRO:  Yes, and tourism.  You know, I travel extensively, only because I have to, I’ve got family all over, but South Africa has got so much to offer.  Whether you start in Mpumalanga, whether you go to the game reserve or to Paternoster, where’s that, on the West Coast.  I mean it’s a magnificent country this for tourism but we’ve got to learn to service them.  We’ve got to up our service, make it cost effective, it’s always been part of our plans, and it’s one of the big benefits that we have here.  We are a good service sector.  We have a first class banking environment.  I mean, this is, well look at the Stock Exchange.  It’s a wonderful institution that’s been here for over 130, and it’s brilliantly run.

ALEC HOGG:  Number one in the world.

DAVID SHAPIRO:  It could be, easy.

ALEC HOGG:  Well it is.  In the World Economic Forum, I think it’s been number one in the world for three years in a row now.

DAVID SHAPIRO:  Yes, we used to have the best doctors.  We had the best lawyers.  We had incredibly good universities.

ALEC HOGG:  Talk markets.

DAVID SHAPIRO:  Okay.

ALEC HOGG:  How did the markets go today?

DAVID SHAPIRO:  Not good.

ALEC HOGG:  Did your clients phone you and shout at you, as their stockbroker?

GUGULETHU MFUPHI:  Of yesterday mainly.

DAVID SHAPIRO:  Yes, you know what happens, I think that we feel the brunt of the falling commodity prices and what’s quite incredible is that we have a number of analysts, and I’m saying ‘we’ as an industry, globally, have a number of analysts who spend their time analysing sectors, like oil, like commodities.  Yet no one has called the collapse in the oil price, or if someone has, I didn’t find that person and likewise with the collapse in commodity prices.  Everybody has been far too optimistic, so the falls that we’ve seen have taken investors by surprise.  Nobody has been able to actually hedge themselves against these kinds of collapses that we’re seeing, so it puts us in a difficult position and most of our market is made up of big resource companies.   The gold mines don’t even make it to the top 40.

ALEC HOGG:  Tell us about the thinking though, because yesterday we spoke with one of the analysts from Investec.  He told us he’s a petroleum engineer and he says, ‘These people from Goldman Sachs, who say a $40.00 oil price, they’re petroleum economists, so I know but they don’t.’

DAVID SHAPIRO:  Okay.

ALEC HOGG:  He says that the oil price is going to bounce back and he’s looking at an average for this year of $73.00.  Now, I don’t know what they’re smoking over in Investec’s Head Office in London, but everyone else is saying, ‘Watch out, $40.00 is, perhaps the new highpoint.  It could go even lower.’

DAVID SHAPIRO:  It could go.

ALEC HOGG:  Are we getting caught in, sucked in by the emotion or, as he’s saying, ‘My goodness, we’ve got these big positions; we’d better start talking them up.’

DAVID SHAPIRO:  I think we’re talking our book.  I don’t…  History and I’ve been around a long time, when markets collapse like this, they take a sucker punch.  They don’t bounce back straight away.  It takes a long time for them to get back.  Where’s the demand going to be?  Where’s the demand going to come from that’s going to lift it to $70.00?  You’ve got the Saudis pushing out oil.  You’ve got the United Arab Emirates, who say they are quite content to hold onto their share.  You’ve still got the frackers pushing out.  We don’t know whether they’re going to stop flows.  They might stop further investment but no one has given us a demand supply curve, to say ‘this is where supply is going to stop’.  I think, as we’ve seen in the past, people continue to, as we saw it with steel in China, people continue to produce until it becomes really uncomfortable and that could become, you know before they run out of cash.

That could take a long time, so we’ve seen with iron ore.  Just to give you an idea.  If you looked yesterday, China’s import of iron ore, copper and oil, were the highest on record, and yet it had no impact on the prices at all.  They’re very shrewd.  They’re not going to go…and they’re restocking, so where’s the next stocking going to come from?  So I remain very cautious and I think we have to adjust ourselves to these lower prices, and learn to mine at these lower prices.  Instead of making claims that things are going to be $70.00, I don’t know.  Hopefully he’s right.

ALEC HOGG:  Hopefully he’s wrong.

DAVID SHAPIRO:  No, that it’s going to bounce to $70.00.

ALEC HOGG:  Do you want to pay more for your petrol?

GUGULETHU MFUPHI:  Of course not.

DAVID SHAPIRO:  No, of course not.

GUGULETHU MFUPHI:  But as David mentioned, it’s looking for that new demand, but the question is, where’s it going to come from?  But coming closer to home, David, if we take a look at some of the retailers, Truworths published an update yesterday, Massmart also out with one today, following the December sales, your analysis of it?

DAVID SHAPIRO:  Not good, and yet the markets have just brushed it aside.  I mean the Truworths number; I’ll give Truworths the benefit that they’re suffering from competition.  Cotton On and Zara at the top-end, and maybe it hasn’t affected the Mr. Prices as badly as that, but it wasn’t a good result.  Overall, there was no real growth in that and inflation was five-point-eight.  I think their sales were five-point-two.  They increased capacity there.  They increased floor space, and didn’t get the benefit, so it’s a bit of a concern.  I am…and when you look the evaluations on some of our retailers, they’re pretty high.  You have the look at the evaluation of Pick ‘n Pay.  It’s building in a huge turnaround, in an economy that have the potential to grow only at two, two-point-four.

ALEC HOGG:  Run by Richard Brasher of Tesco.

DAVID SHAPIRO:  Yes.

ALEC HOGG:  Just to close off with, Glencore down eight-and-three-quarter percent today.  That’s a massive move Dave.  What’s going on there?

DAVID SHAPIRO:  Same, the copper price.  It’s all to do with the oil prices, and the problem is that the markets don’t give you and we’re caught in the headlights.  They’re saying, ‘Should we get out or shouldn’t we get out?’  In fact, I wanted to.  I haven’t got huge exposure to resources at all but I do have some exposure.  I was discussing today, ‘should we abandon it or not’.  I still haven’t made up my mind and I’m just trapped in the mud.  I don’t know what to do.

GUGULETHU MFUPHI:  Can you imagine what’s happening to deep-value investors then?

DAVID SHAPIRO:  This is not deep-value.

GUGULETHU MFUPHI:  This is not.

DAVID SHAPIRO:  This is not deep-value.

ALEC HOGG:  No, but Gugu has got a point.  The deep-value investors are big in resources.

DAVID SHAPIRO:  I believe so.


ALEC HOGG:  And the resources sector has just…it had already fallen out of bed before.  They started telling us it was…

DAVID SHAPIRO:  They had better get those PR people onto your show to explain why they hold those resources.

ALEC HOGG:  That’s not a bad idea.

GUGULETHU MFUPHI:  Exactly, but that’s where we leave it.  Thank you so much to David Shapiro from Sasfin.

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