My China, Keep Calm

“Cheaper oil means more money in my pocket after a visit to the garage, cheaper iron ore means more infrastructure projects are viable and cheaper coal means cheaper electricity. The end result is that society has more surplus resources to spend on other things, the better that society is doing the better the companies that service society will do. Over the short run there will be volatility and some pain as things find a new equilibrium, which highlights the reason why you need to be a long term investor and avoid being rattled by short term shocks.”


To market to market to buy a fat pig. Okay folks, I want you to think of your happy place. Mine is in the mountains somewhere with a great view of a green valley and river below. Moving on to the markets, globally it was a very red week. The Dow was down 3.1% and finished off the worst week since October 2008, it is now also down 10% from its highs. For the S&P 500 it was a similar day, down 3.2% to close the day below the phycological 2000 points level. The Asian markets this morning are following on from where last week left off, the Shanghai is down over 7%, the Nikkei is down over 4% and the Hang Seng is down 4.5%. These are huge numbers! Normally a 1 – 2 % move on a day for the market is a big day.

How has our market done? It closed Friday down 1.5% to be slightly above the 49 000 mark. Do you remember the huge sell off that occurred last year October? Most people have forgotten about that correction already, I would say most people forgot about that correction by the time that Christmas rolled around. Our market is still around 6% from the lows that were reached in October last year, would you say that we have some breathing room until we reach that a phycological number? Do you think now is a better time to be buying stocks than last year? What level do you think stocks will be next year this time? Many of the companies that you own and will buy going forward will still be growing and in some cases are growing by solid double digit numbers. Why are their share prices going down then? It comes down to the value which investors are willing to pay today, for tomorrows profits. When there are jitters in the market, people are willing to pay a lower multiple on tomorrows profits than they previously were willing to pay. The result is what we call a rerating and a share price drop, even though the company hasn’t fundamentally changed and may even still be growing.

So why this huge sell off? Concerns over Chinese growth, which then has a ripple effect onto commodity prices, the companies that mine them and then a knock on effect on consumer numbers. Well that is the ‘official’ reason anyway. What normally happens is that markets drop, people then look for explanations why they dropped. Given that we now live in a global village, more so now than at any other time in our history, I can understand that China growth slowing will impact other countries and industries. I am not convinced that the sell off that we are seeing is justified though. I have seem many Tweets this morning basically describing the end of the world or saying that this sell off is way overdue. I think we have reached the selling out of fear stage, which is driven by the very powerful emotion of fear. This is the reason that when markets sell off, it happens very quickly but recovers at a slower rate. As the saying goes, “The bulls take the stairs but the bears takes the window”.

Where will the market head over the next week or the next month? There is no way of knowing. If anyone knew where the market was going they would borrow as much as they could, plus more and then stick it all in the market and then go sip cocktails on some exotic beach somewhere. Over the next month you will hear of people who claim to have seen the dip coming but don’t make any money out of this dip (talk is cheap) and then there will be people who do make money out of this dip but are still playing catch up from the bull market that we have seen over the last 5 years. Very, Very few people make consistent money out of shorting stocks because it is so hard to swim against the current of human innovation.

So what to do about markets being ‘expensive’ and China’s slowing growth? Markets by historic standards are expensive but interest rates and inflation are very low by historical standards, so relatively speaking markets probably aren’t expensive. Interest rates will climb going forward but at a slow rate, markets will probably grow slowly and then in 5 – 10 years time they will be closer to ‘historical metrics’ but at higher prices. The main casualty of China not growing at 10% or 7% are commodity prices. For the vast majority of people on the planet, low commodity prices are a good thing. Cheaper oil means more money in my pocket after a visit to the garage, cheaper iron ore means more infrastructure projects are viable and cheaper coal means cheaper electricity. The end result is that society has more surplus resources to spend on other things, the better that society is doing the better the companies that service society will do. Over the short run there will be volatility and some pain as things find a new equilibrium, which highlights the reason why you need to be a long term investor and avoid being rattled by short term shocks.


Company corner

The Mediclinic Rights issue has finally concluded. You would have seen that the Mediclinic rights had a zero value on your statement on Friday. Not to fear, all it means is that you will be following your rights. The cash has flowed out of your account and the new Mediclinic shares have come in. On your statements this Friday you will see that the transaction has gone through.


EOH put out a Trading Statement this morning. HEPS are expected to be up between 20 – 30%, this company has done really well over the last few years. The stock is down 8.9% which would indicate a miss on market expectations. Part of the drop would be part of the broader market drop, where higher multiple stocks like EOH are being hit the hardest.


Linkfest, lap it up

It is mind blowing what technology can do! Still hard for me to wrap my head around how electricity can be transferred without having a connection – Roads that can charge your electric car as you drive it? They may arrive sooner than you think. The roads probably won’t become wide spread due to the cost of redoing roads and given that batteries are getting better by the day.

Some studies have shown that too much information makes us bad investors. Too much information triggers fears that are not worth worrying about, media has a way of focusing on the things that stir the most emotion even if it is an obscure side point – Don’t Read this Post. Given our survival bias, when the market goes down we get into irrational territory, fear takes over and we make bad investment choices. Keep your eye on the big picture and dips like these become non-events.

This blog piece from the WSJ sums things up nicely – 5 Things Investors Shouldn’t Do Now.

Here is something totally off the subject of markets but is cool anyway – World’s ‘Oldest’ Message in a Bottle Found in Germany


Home again, home again, jiggety-jog. Our market is currently down 2.5% recovering a bit after being down over 3% shortly after the open. The only index in the green at the moment is gold, which is up 1.4%. The Rand last night apparently reached R/$ 14.00 (might have been a really small volume), the graphs that I use show the low/ high as R/$ 13.61. Currently we are sitting at R/$ 13.20, not great for our imports. The one bright side to the weaker Rand is that many of our big companies have operations offshore, so when they bring back those profits they will be inflated. In the short term though, our dual listed stocks have not sold off as badly because their prices are set in the overseas markets. Stay calm and carry on.


Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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