Arthur Buchner: JSE Report


BROADCAST TRANSCRIPT: Arthur, market today dominated really by the fact that the rand has strengthened so nicely and the fact that, from that, gold shares took a bit of a tumble.

ARTHUR BUCHNER: Yes, really the afternoon session which was dominated by rand strength. This morning it was pretty flat. In fact, we had a positive opening to the market, but the rand strength brought in sales on those resources. Mixed day if you look at all the sectors, though. We had paper up, with steel up, mining exploration up, small caps were up, the retail sectors were up – but your big guns, your ones that actually come through onto the news, your Anglo Americans, your gold stocks, they were all under quite a lot of pressure because of the rand.

BRUCE WHITFIELD: It is interesting to see that phenomenon though, because a lot of smaller investors would be far more interested in the bottom end of the market. Is there a sign that perhaps a lot more interest is going into the small cap shares?

ARTHUR BUCHNER: I think that people are looking at value and they’ve looked at these resources that have a big run and they are saying to themselves, where else can we put our money? And I don’t think it’s the small investor as such, I think that institutions for that matter are looking at where value is. It is shown on the financial sector, where we’ve had a run over the last three days. Money has been flowing in there, they are on low PEs in comparison to some of these resource stocks which are trading on 40 PEs. It actually reminds me a lot of the internet bubble where these things were trading on 40 PEs and finally fell.

BRUCE WHITFIELD: Interesting point you make there, though. We’re having a man later on this evening, Dirk Kotze from Coronation Resources Fund, and he’s the manager there. He is going to tell us that there’s still a lot of legs left in the resources sector. Do you agree with that view, or are there signs that this is all coming to an end?

ARTHUR BUCHNER: Some of the producer earnings, they are great, one or two of them just ran ahead of themselves and they needed this pull-back. Anglos, for example, is a classic. From R214-odd at the high to R163, I think it’s a classic one-third pull back of the gains that it’s made and I think it will attempt to make newer highs. If you look at the components of Anglo American, for example Amplats and AngloGold, they’ve hardly fallen. Yet Anglos has taken the brunt of the whole smack. So a little bit oversold on the Anglo side of things. But some of them offer value. I think just some of them have totally gone past – and I think we’ve really got to look at what the forward earnings are going to be on these stocks before I actually pile into some stock-picking is what it’s all about.

BRUCE WHITFIELD: Financials – today we saw those that had a very, very nice couple of weeks indeed, especially this week, added a lot of value there. We saw BoE jump up nicely on Monday, when that offer from Nedcor came out. Nedcor has gained nicely, a couple of the other ones as well. But today, after Tito Mboweni suggested last night that the interest-rate cycle, rising interest rates were far from over ? it would seem as if the banks took fright?

ARTHUR BUCHNER: Yes, his comments surprised me, I think, because 90% of this inflation has come through import inflation and it’s not domestic demand that is fuelling it. And, by increasing rates, he’s not really assisting in dropping this inflation as such. Yes, the rand has strengthened, it may be short-term flows of funds, guys in the foreign market saying, well look, we can get 13% in South Africa, let’s put our money there. But the minute that he starts to drop rates again, these guys take their money out of the country. So I think his comments are surprising, at the least. The fall-back in the financials is, I think, something which has to do with guys really not liking to look at the papers and see suddenly asset managers come out and say, financials is where you’ve got to go. First of all, we have a three-day run, 12% up by financials, then suddenly someone from an asset management comes out and says, now you must be in financials. Well, that smacks to me that someone has been buying for three days, then he issues a positive thing on the stock, and the professional traders, the guys that are trading in and out over a week or two weeks, they get a little bit scared by that, and that would also have had a negative effect on the financials as such.

BRUCE WHITFIELD: Arthur, you know about these sorts of things – we’ve seen resources running for the last two and a half years, financials have had a dicky 18 months or so, they’ve had a nice hard run now. Is it the time, perhaps, to take a few profits in financials, sit on a bit of cash for a while, wait for things to settle down a little bit?

ARTHUR BUCHNER: I think ,in terms of mergers and acquisitions, financials offer a lot of upward prospect. If you look on the PEs and the fact that they actually generate consistent earnings over the period – because me and you, we give our money to them, they put it on deposit, they give us 8% and they charge on the other hand some 11%. They will continue to make money. They were oversold. And I think that a couple of people have got underweight of financials and therefore this sudden surge which we’ve seen. Everyone was resource, resource, resource. I think that there is upside, I think there is just a little bit of a pull-back. I hate people buying and then tipping, and I think that that’s all we saw today – people suddenly saying, hold on, someone is tipping it, we are not going to be piling in, let’s take a little bit of profit – 12% in three days is a great return. I mean, it’s better than what you can get in the bank, and you’ve made it in three days, and then, if it does go up a little bit higher, then we will look at getting in. But let’s first see if it will consolidate or not.

BRUCE WHITFIELD: I did ask you two weeks ago what the talk around the water cooler was, about a possible merger between Nedcor and BoE, and you told us that certainly the sense was that Nedcor was sniffing about. Now that the market seems to think that the deal is done – is the chat around the water cooler a little less frenetic and people are focusing on work once again?

ARTHUR BUCHNER: Oh, 100%. And I know form our corporate finance and from our private equity side, within BoE, it’s a relief, because this hanging over – no one wants to do business with you until everything is sorted out. It isn’t 100% sorted out, but I can tell you it’s 99% sorted out, from what we can understand, and I think that now suddenly the guys are getting those deals which they had on the back burner together, and starting to go forward and making profits again.

BRUCE WHITFIELD: Interesting stuff indeed. Arthur Buchner, head of derivatives at BoE, thank you for joining us.

Posted in Market commentary

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