Adversity is Not New


Market Scorecard

Yesterday we saw markets move like one way traffic, from low to lower. The US market has now dropped over 20% from its all-time high, meaning that we are officially in a ‘bear market’. As some bright spark noted on Twitter last night, if we are only down 19.99% we still is call it a correction, but if we are 20.00% then we call it a bear market. Who made these rules? They are just technical terms. What is does mean is that the longest bull market in US stock market history is officially over after 11 years and 2 days.

Overnight the US government announced that they are suspending travel from the EU to the US tomorrow for the next 30 days, due to the risk of Coronavirus infections. Less demand for aviation fuel will lead to lower oil prices.

Global governments are now moving into high gear, injecting both fiscal and monetary stimulus into economies to soften the impact from the disruption. It seems that many nations will tread a path similar to China, with a spike in infections followed by a social shutdown, and then a drop off in new cases and a return to normal. In China, the storm lasted for around a month. If that is the case, we are still in for a very unsettling period in the weeks ahead. From a social perspective, the worst may yet be to come.

What does that mean for the stock market? It is hard to know, because stock prices are forward looking, and traders have already factored a lot of bad news into their valuations. What we can’t forecast though is how fear will affect the market on a day to day basis. As ever, we advise you to remain calm and not to do anything rash.

Yesterday the JSE All-share closed down 0.79%, the S&P 500 closed down 4.89%, and the Nasdaq closed down 4.70%.

Company Corner


Bright’s Banter

MTN released a good set of full-year numbers yesterday, thanks to great improvements in some of their businesses units. As Paul mentioned a few weeks ago, MTN Nigeria has toned down its fight with the Nigerian regulatory authorities. That will definitely help MTN to focus more on operational excellence in their largest market.

MTN’s group service revenues grew by 9.8% to R141.8 billion in constant currencies, after adding 18.2 million new subscribers. MTN Ghana showed exceptional performance as it grew by 22.9%, followed by MTN Nigeria which grew by 12.6%. The overall group growth in data revenues was 22.4% to R35.1 billion, while Fintech revenues grew by 27% to R10.1 billion. By the end of December, the mobile operator had 251 million total subscribers in their network. That’s just over a quarter of a billion people!

The home market, South Africa, was a little disappointing as subscribers went backwards from 31.2 million to 28.9 million. We saw negligible services revenue growth of just 0.4%. This is due to a lot of competition on pricing and promotions by all local networks. If it’s any consolation, these problems sent debt laden CellC to an early grave.

MTN Ghana grew its subscribers by 12.3% to 22.6 million, with data revenues growing at 32.5%.It would be very interesting to find out how much impact the 1.8 million odd people who visited Ghana for The Year of the Return event (me included) contributed to this growth. Remember Ghana is now the blueprint for MTN’s Mobile Money (MoMo) business, where MoMo contributes 18.6% to services revenues thanks to 15.1 million registered MoMo clients.

MTNs share price of just R62.80 doesn’t really reflect the true value of the mobile network giant, in my opinion. Keep in mind that the company continues to ease its debt burden and improve its network by investing back into the different markets they operate in. This will help the company benefit from the wave of increased use of mobile phones which drives more data usage/traffic.

CEO Rob Shuter announced that he will not be seeking to renew his contract after it ends in 2021, giving the board enough time to find his successor. He inherited a very hard job at MTN and he prevailed, successfully negotiating with Nigerian authorities. Operationally, he has improved the company in many ways. He will be missed!

Our 10c Worth


One thing, from Paul

In the northern hemisphere, people are being told to stay at home, work remotely and go out less. What are they doing with their time? They are working online, and then spending the evenings watching digital media. They are chatting to their friends on social media apps, all day and all night.

A friend of mine was arguing recently that over the next 50 years, the importance of the physical world will diminish relative to the importance of the virtual one.

According to him, in the span of the last 200 years the percentage of the US economy went from about 98% edible to 2% edible. No one who lived two centuries ago could have imagined that happening. He’s a smart guy (forecaster, skinny cyclist, likes to drink Diet Coke) and his punch line is that “over the next 150-ish years the economy will go from maybe 80% atoms to maybe 98% bits”.

Anyway, we shall see. If the analysis above sounds compelling, today would be a good time to buy shares in Facebook, Apple and Netflix.

Thanks to the Coronavirus outbreak humans are getting a little frazzled. Remember to keep calm, maintain a balanced perspective and stay invested. Let us know if you have any questions about your portfolio by writing to <>.

I saw a good line in a note from the boss of JP Morgan Private Bank, “adversity is not new to people, economies or financial markets. History tells us the human response always rises to the challenges faced — this time will be no different”.


Michael’s Musings

Over the last week, I have had a number of friends ask me if they should buy Sasol now, because it looks so cheap. For companies that have a strong balance sheet and operate in a growing industry, a share price drop is normally a good buying opportunity. A strong balance sheet protects a company against unforeseen threats. In the case of Sasol though, their balance sheet is weak. It is carrying too much debt from its recent capital expansion in the US. Their credit rating, as measured by agencies that look at their balance sheet closely, was downgraded to junk status over the weekend. Debt is like a magnifying glass – when things are going well, debt makes those results even better. On the flip side, when things go badly debt makes it much worse.

The current situation for Sasol is that they might have to raise equity from shareholders to help strengthen their balance sheet. When companies raise money from shareholders they issue new shares, normally at a discount to the current market price. The implication is that as the Sasol share price lowers, it makes it harder for them to raise new money, which pushes the share price down even more, and so the cycle repeats itself. Who knows where the bottom will be?

A broader point that I want to make now is that under the current economic circumstances, we are likely to discover that many more companies have been ‘swimming naked as the tide goes out’, in other words, with too much debt on their books. Many of the Vestact portfolio holdings are companies which are sitting on piles of cash, meaning that they can easily ride out this storm. In time they may even consider using that cash to do share buy backs. That would be hugely beneficial to shareholders, once this storm passes.

Linkfest, Lap it up

Apple’s future growth will come from its software sales. In this case $5 a month for access to over 100 games sounds like good value for money – Apple Arcade is perfect for families.

Here you can see the rise and fall in Coronavirus infection rates in South Korea. Will this be the same shaped graph for the rest of the world?

Infographic: Has South Korea Stabilized Its COVID-19 Outbreak? | Statista You will find more infographics at Statista

Signing off

Global markets are down this morning, and the Rand is currently trading weaker at $/R 16.41. The European Central Bank (ECB) are meeting today, and will have their press conference at 15:30 our time. Markets will be paying close attention to what what Christine Lagarde has to say. The JSE All-share is down this morning.

Sent to you by Team Vestact.

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