The Ingham Analytics Weekly Letter on Sunday - 15 November 2020

Sunday, 15 November 2020

Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa and around the world. And not too seriously, there is enough of that about.


A tumultuous week in the markets. Initial exuberance over a COVID-19 vaccine was then stunted as realisation dawns this is no instant panacea. Tech burst and value was back in favour. But overall indices ended higher than the previous Friday. The Chinese government weighed in by flagging new ecommerce guidelines with the fact that it comes so soon after the Ant Group listing was nixed not entirely coincidental. And then the goings-on in US politics but we won't dwell on that, you'll have seen enough elsewhere.


We mentioned in our previous Weekly Letter about the growing influence of China, where the commercial centre of gravity has shifted. This week we learned that Chinese President Xi Jinping personally decided to nix the listing of Ant Group. Jack Ma had publicly criticised the government - if you can't get away with that in Hong Kong these days you aren't going to get away with it on the mainland.


Since 2012 under Mr Xi the Chinese government has taken aim at several private firms and big names in business. Whilst the Communist Party couldn't care less about how much money you amass it does care about there being alignment between business and the interests of the state.


With this in mind, we introduced another thematic analysis called China Tech this week with the first note entitled "Anti-Trusted." In the note we unpack the regulatory amendments intended to create a revised dispensation for China's tech sector. As Prosus and Naspers are dominant on the JSE only because of Tencent and we see a growing interest in investing directly in Chinese tech companies. This is a huge and growing sector - on Thursday, Tencent reported 32% growth in quarterly non-GAAP attributable profit.


China is this odd combination of state-sanctioned capitalism and authoritarianism. Frankly, it is none the worse for that and has had a rapid ascent with strong growth in per capita income. In the previous week, the Communist Party released a document explaining President Xi's thinking on the 14th Five Year Plan. Xi said that it is entirely possible to double per capita income by 2035.


Four decades ago, Deng Xiaoping took a different path from Mao, with Japan as the role model, taking its cue from the Income Doubling Plan of Japanese Prime Minister Hayato Ikeda in 1960. China's economy increased five-fold between 2000 and 2020 alone. If Mr Xi is targeting a doubling in fifteen years, we estimate it would require an average annual growth rate of almost 5%.


The recent Communist Party Plenum targeted China becoming a high-income country by 2025 and a mid-level advanced country by 2035. Forecast should generally carry a health warning but if we assume this is plausible then that would still leave China poorer than the small number of advanced countries today which have a per capita income of $50,000 or so. But from sheer scale of GDP it will be ahead of the US by some distance.


In our note "Anti-Trusted" we do point out that whilst opportunity beckons in China there are pitfalls. One should be aware of the variable interest entities structure or VIE that has the potential to prejudice minority foreign owners of companies like Tencent and Alibaba, which are incorporated in the Cayman Islands. Furthermore, whilst we welcome recent regulatory measures such as in micro-lending and in ecommerce, part of a strategy we believe for Shanghai to eventually become a securities centre to take on New York as an alternative, it does show that the state looms large and can act swiftly and sometimes surprisingly - so far benign but that may not always be so.


This week we also introduced a Securities Strategy themed analysis entitled "US bounce" in which we say that there are signals from both equities and bond markets of a rotation that would be supportive of value stocks in the US. We cautioned about volatility spiking again, as it did during the week, and false dawns. The VIX has moved within a 20% range this past five days. But we also point out that earnings estimates are already factoring in a rebound. Aggregate MSCI estimates have earnings per share rising by around 30% in 2021 followed by 15% to 16% in 2022, with global markets back to 2019 earnings by the end of 2021.


Gold hasn't reacted much to the US election or even the Pfizer/BioNTech announcement on a vaccine breakthrough although it has eased back to just under the $1,900/oz mark. Consumer demand we think will start to recover, there is still net investment demand especially for gold ETFs, and with ultra-low interest rates the opportunity cost of holding gold remains low.


Newsflow on the JSE remains largely gloomy, be that trading updates or results. A half-decent interim result from Telkom didn't get the punters clapping and we'd not be investors even though it appears cheap on the surface. Be cautious of the SOC tag - anything remotely associated with government doesn't inspire confidence. The government owns 40.5% of Telkom and the PIC another 15%, with future intentions (and interference) unclear.


The beleaguered local mining industry could do with some good news, so it was nice to see that a vexatious and baseless class action against Sibanye-Stillwater was dismissed with prejudice by a Brooklyn, New York, Federal Court on Tuesday.


Unsurprisingly, foreigners continue to be net sellers of South African equities and bonds. For the year through 6 November foreigners sold a net R120 billion in shares, up 23% from the same period last year even though the rand isn't that different relative to where it was a year ago. Net sales of bonds have more than doubled despite the second highest government interest rates in the world.


We've previously referenced Tesla and Volkswagen and we were interested to note that the German car giant has plans to invest about $80 billion in development of electric vehicles over the next five years. The newly launched ID.3 all-electric car has had some glitches but so far seems to be selling. VW has deep pockets, so the ingenious entrepreneur Mr Musk has some competition on his hands.


And finally, for those of you who enjoy a tipple, Sotheby's Hong Kong is offering a Black Bowmore whisky collection in a live auction. Five bottles are in the collection. The whisky was distilled in 1964 and initially released between 1993 and 1995 with further bottles in 2007 and 2016 as the last cask. The auction estimate is a cool HK$4 million, which translates to US$500,000 so $100,000 a bottle. If we take a 750ml bottle, assume each tot is 25ml or one-sixth of a gill in Imperial measure, then each bottle holds 30 tots, which implies that nightcap will knock you back $3,333. We'll raise a glass to that!


Chinese President Xi Jinping is the big deal for us this week.


 Thank you all for visiting us.