Timeless in China


Market Scorecard

There you have it, the third quarter of the year is done. The inevitable march of time. For the JSE All-share it was the worst third quarter since 2011, we were down around 6% for the three months. Kicking off the quarter was the NHI bombshell. If you look at a graph of either our currency, a share price or our government debt, you can clearly see when the news broke. It took markets a few weeks to get over the initial shock, and then we had three straight weeks of gains. Unfortunately, US and China trade tensions, Brexit, and Hong Kong protests spoilt the party. Even though we were down 6% for Q3, for 2019 the local market is still up around 5%.

Yesterday the JSE All-share closed down 0.70%, the S&P 500 closed up 0.50%, and the Nasdaq closed up 0.75%.

Our 10c Worth


One thing, from Paul

Chinese markets are closed today to mark the 70th Anniversary of the Founding of The People’s Republic of China. There was a huge parade down Beijing’s Chang’an Avenue earlier today.

The modernisation of China and the rapid development of its command-led economy has lifted a billion people out of poverty, but that came at a huge cost. For example, Mao Zedong’s ill-conceived farm collectivisation strategies led to the great famine of 1959 to 1961 and the death of 30 to 40 million people. Personal freedoms are not well established in that society, yet.

Chinese companies are heavily regulated, which makes them questionable to own directly. In theory, you could open an account and buy shares listed in Shanghai, Shenzen and Hong Kong. The largest Chinese firms also have offshore listings in New York.

The most attractive Chinese firms to own are internet giants Tencent and Alibaba. However, they both have complicated offshore variable interest entity (VIE) structures, where foreign shareholders enjoy economic benefits of ownership such as dividends, but do not exercise outright control of the Chinese operating company. If that sounds complicated, it’s because it is complicated. We like Tencent, and think that you should own them through Prosus and Naspers in Rand-denominated accounts here in South Africa.

We have long argued that the safest way to invest in the rapid expansion of the Chinese middle class is through global multinationals that have big consumer businesses there. The two best examples are Nike and Starbucks. In addition, consider Richemont which sells a lot of watches and jewellery in its stores and online ventures in China.

Nike recently reported sales growth of 27% in Greater China for its first quarter. Sales through digital channels grew by more than 70% thanks to partnerships with WeChat and TMall. Nike will also advance the launch of its own app in China. Nike has worked hard for many years to promote sporting events, athletes and associations at the grassroots level in China.

Here is an update on that roll out on Yahoo Finance: How Nike is surprisingly defying Trump’s trade war with China.


Byron’s Beats

Richemont may be very proud of the age of their brands but they have certainly stuck with the times when it comes to selling their goods. According to Tech Central the Richemont Alibaba joint venture went live yesterday.

The e-commerce site allows customers in China to buy 130 luxury brands. The launch campaign will start in the second week of October so that they will be ready for Single’s Day on the 11th of November.

The joint venture which will be 51% owned by Richemont and 49% by Alibaba will still use the Net-a-Porter brand for the website.

The deal makes perfect sense. The Chinese have embraced online retail with open arms and we know how much they love luxury goods. China is Richemont’s biggest region by sales. Richemont and Alibaba feels like a match made in heaven.


Michael’s Musings

Some people think that Elon Musk is nutty. You probably have to be a bit nutty to envisage colonising Mars and taking humanity to being a ‘space-faring’ species. Over the weekend Musk showed SpaceX’s most recent progress, where they are hoping to have a spacecraft in orbit within the next six months. You can read more here – Elon Musk outlines SpaceX’s Starship plans, aiming to reach orbit in six months and then fly people.

It is always amazing how quickly he and his team can engineer and then build new products. A recent example is how quickly the Gigafactory went up in China. Tesla is a minimal holding for some of our client portfolios. The reason that we own them is that we are effectively betting on Musk to scale that business much quicker than anyone expects. With his vision, and relentless work ethic, he has a good chance of proving the naysayers wrong. At his current rate, bringing the electric car to the masses might not be his only significant contribution to humanity. Anyone for a holiday on Mars?


Bright’s Banter

My friend Craig Gradidge of Gradidge-Mahura Investments and honourable member of the Beers And Small Caps group which is formally known as BASC, published an informative Phuthuma Nathi piece on Moneyweb yesterday. If you’re a Phuthuma Nathi investor or potential investor, this piece is worth a read.

Craig covers the basics of investing in Broad-Based Black Economic Empowerment investing and how the Multichoice South Africa and Phuthuma Nathi union has performed since inception. He also covers the pros and cons of staying with your Phuthuma Nathi shares over converting 5% of your holdings into Multichoice Group for better diversification at a cost of the lucrative dividend.

Before I ruin a good piece, it’s better you read it yourself here and drop me a mail if you have any questions.

Linkfest, Lap it up

Netflix paid $500 million for the rights to broadcast Seinfeld. Will it be worth it? – Paying a premium for nostalgia: Streaming services drop big bucks on old-school TV shows .

Oslo is planning to be a carbon zero-emitting city by 2030. To get there they have a very specific plan – How Oslo manages carbon emissions like it manages money.

Signing off

As Paul mentioned above, China is on holiday today. So expect a slightly subdued market. On the data front, there is manufacturing data and new vehicle sales data out. The JSE All-share is off to a negative start to Q4.

Sent to you by Team Vestact.

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