Charles Graham: Market Commentator

MONEYWEB, BY BRUCE WHITFIELD, 20 DECEMBER 2001

BROADCAST TRANSCRIPT: Charles Graham joins us now. Charles, I don’t know if you had a chance to listen to Sean Summers, but the man is I think pretty frustrated with the way things are going with the currency?

CHARLES GRAHAM: Definitely. Sean was saying that the rand has in actual fact depreciated in steps. Unfortunately of late, those steps have become a vertical slide, and I think that’s the very worrying thing and it is time for the authorities to make a definitive statement as to how they are going to rectify the situation.

MONEYWEB: Am I being naïve that I think it’s a fairly simple process, the way Juergen Odenius at Commerzbank spelt it out ? it does seem remarkably simple. All you have to do is spell out your plans.

CHARLES GRAHAM: That’s definitely what you’ve got to do, and certainly we need an interest-rate hike and a fairly substantial one. Hopefully it will be a short-term hike and then we can get back to normality.

MONEYWEB: Again, the point we raised earlier was that interest-rate hikes do raise the prospect of growth slowing dramatically. Already growth next year? Perhaps we will be lucky to make 2%. That is the risk, if the tactic doesn’t work.

CHARLES GRAHAM: That is the risk, but if one can in actual fact raise interest rates for a short period of time, yes, you will have a period where consumers will run for the hills, but hopefully once your currency is stabilised, you drop the interest rates, you can get back to the situation where you were prior to this debacle.

MONEYWEB: Right now, though, anyone invested in anything with a vague hint of rand hedge is benefiting very, very nicely indeed. There have to be some long-term consequences of the currency as well, don’t you think, in terms of the rand hedges that can only run so far before people start taking profits and these shares have got to start coming back?

CHARLES GRAHAM: Yes, the unfortunate thing, especially with the local rand hedges ? a lot of their capital equipment is imported and eventually, when that is replaced, obviously it’s going to cost you. The benefit of rand hedges is those that in actual fact are domiciled offshore, because obviously they are not affected by the weakness in the rand.

MONEYWEB: Interesting to see, Arthur Buchner pointed it out earlier, that a lot of the rand hedges that are gaining in rand terms over here, in fact, are weakening in London. If you look at SAB, I think that was down slightly today, Richemont was down in Switzerland, yet today 7% up in Johannesburg.

CHARLES GRAHAM: Yes, and that’s truly because of the rand. Obviously, in their markets, there’s a weakening off, people a bit concerned about consumption expenditure in the rest of the world.

MONEYWEB: Harmony, 16% up today ? was that just due to the fact that the final details of the Hill50 deal were announced?

CHARLES GRAHAM: Yes, I see that they have now paid their R1.36bn for that, and obviously that is contiguous to their other operation, Hampton, over there. Certainly they are getting their act together. It’s one of the counters, as you know, I have been punting, I think they’ve got excellent management and it’s a wonderful growth counter. It will return you at least 30% earnings per annum for the next few years.

MONEYWEB: So, even at these levels, above R90 ? would you still be thinking that it’s worth buying, or have you missed the Harmony boat to Australia?

CHARLES GRAHAM: I started punting this thing when I think it was around R55, R56. I think at these sort of levels, and especially bearing in mind that is in the Alsi 40 and there was a bit of manipulation with the futures closeout today, I would be a little bit sceptical in pushing it too much. But I think in the long term, I think this thing is going to break through the R100 barrier.

MONEYWEB: Energy Africa today announcing it’s raised a $50m revolving credit loan ? does it make sense for a small cap South African listed company to be borrowing dollars right now?

CHARLES GRAHAM: I’ve got no problem with it, because its assets are in the main externalised. I know that they used security with their North Sea assets for this facility, and one must bear in mind that they are exploring for oil in Equatorial Africa, etc. They are selling a commodity based in dollars. I’ve got no problem with that.

MONEYWEB: But it is impressive, is it not, for a small cap JSE listed company to be able to go to Europe and say, I would like $15m please, and actually get it?

CHARLES GRAHAM: Yes. Bear in mind that you will be speaking to the MD later, but I think we must bear in mind it is a very impressive little company.

MONEYWEB: Consumer shares today, Pick ‘n Pay and Nando’s, up very, very nicely indeed, but then you have the likes of Metcash, Profurn, those lost heavily ? is this a sign of things to come?

CHARLES GRAHAM: Yes, certainly those consumer companies that are very import-intensive, and I mean Profurn obviously is very worrying. If one looks at the products they sell, a lot of them like hi-fis, which are imported from the Far East. In the New Year, it’s going to cost a lot more. Obviously their sales are going to come under pressure. Whether they will be able to pass on those costs to the consumer is debatable ? I don’t think so. And yes, it is a sign of the times.

MONEYWEB: And looking at Discovery, I did bounce this off Arthur earlier as well ? the market seems to be taking notice of the fact that perhaps it’s not going to win its fight with the Registrar of Medical Schemes?

CHARLES GRAHAM: Yes, that is very true and and, as an aside, what really worries me, and I don’t know how you would correlate this, but Discovery has been involved in terms of Vitality for its members in certain things like the Health & Racquet Club, in actual fact its overseas flights were with Swissair, and we know what’s happened to those particular companies. I hope that this is not going to be a reflection on Discovery.

MONEYWEB: Because there’s also the fact, that with the rand as weak as it is, medical tariffs next year are going to be affected and there’s no way we can duck it, any imported medical equipment, any medicine. Unless we get some sort of correction in the rand in the not too distant future, there’s trouble on the way.

CHARLES GRAHAM: Yes. All the pharmaceutical companies are international companies and they price their products in dollars.

MONEYWEB: And Pick ‘n Pay’s 15% gain today ? was that related at all to the fact that it’s a case of if you are going to buy a consumer stock, you might as well buy the one the people are going to have to support. People have to eat, they don’t necessarily need a new radio?

CHARLES GRAHAM: It’s very difficult to say this 15% rise is specifically due to that. A lot of that rise is obviously that, because it’s a very stable counter, we know that their product mix is very much the basics, and people have in actual fact to go out and buy, and that is the company that they buy from. But I wouldn’t attribute the whole 15% rise to that.

MONEYWEB: Any final sage words of investment advice for 2001 before we head into the uncharted waters of 2002?

CHARLES GRAHAM: I seriously think that next year we are going to find that the rand will improve. Because if it doesn’t really we have problems ahead. But I think in actual fact, if one looks at the normalised trend line of the rand, we’ve overshot on the downside so dramatically that we must start reverting to the mean. And we are extremely, extremely oversold and I see that that rand will in the new year start appreciating. So I think there is some good news ahead for us.

MONEYWEB: Do you see it anywhere near the single digits, that some people are saying we might get to if we do get some sort of sensible policy statement coming out?

CHARLES GRAHAM: No, definitely not. We certainly won’t see it below R10.

MONEYWEB: Charles Graham at Mawenzi Asset Management.

Posted in Market commentary

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