David Shapiro from Sasfin joined Alec Hogg on CNBC Africa’s Power Lunch to share expert insights on the latest in today’s markets. Ā
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Letās start with ArcelorMittal. When Piet Viljoen of RECM, a deep value investor gives up hope, is there any hope left?
I looked at the market capitalisation, after those results came out, theyāre still making losses, which is a bad sign, even though they have reduced it.Ā I think we need to look at the numbers a little more carefully to establish how trading is going.Ā I donāt think it is going well but that market cap today is R11bn.Ā This was one of South Africaās biggest industries.Ā R11bn is the size of Super Group and itās the size of Famous Brands, so it gives you an idea of how poor profits and how this company has fallen from being a leading industrial company, to where it is today.Ā I donāt even think it makes the top 60/70 of top capitalised companies on the JSE.
It most definitely doesnāt.Ā It is way outside of that and down 37 percent in the past year.Ā It was interesting what Piet Viljoen said yesterday, because he is a deep value investor, so heās looking for those stocks that will improve.Ā He reckons heās sticking with platinum, and resource shares, but when I asked him for a mistake that heās made, he said, ArcelorMittal was one of them. Ā If a deep value investor is now losing confidence in your ability to turnaround, who would have confidence?Ā Ā Ā Ā Ā
Iām not sure who and the one thing that worries me globally, and more so in South Africa, is that as the oil price falls projects are pulled back.Ā As commodity prices fall, expansion is pulled back, so weāre not digging holes or weāre not making factories.Ā We are very circumspect about expansion and therefore how will that affect the demand for steel?
If you look at Sandton, youād say the demand for steel has got to be going through the roof with all these new buildings.Ā
Yes, but whoās going to occupy them?
Well, Discovery, Webber Wentzel – services businesses.
Yes, but it moves from one office to another.Ā Who then occupies the office of which they had?Ā Thatās what worries me.Ā I was even looking through the Redefineās results and the vacancies in the office are increasing, up to 11-odd percent, so Iām concerned about that.Ā I think these decisions are made well ahead of the actual building of these buildings.
So ArcelorMittal…
I’m reluctant… You asked me that question what about Libya and all these countries as they start to put more oil on.Ā Iām still cautious about that and Iām cautious about the amount of iron ore thatās coming onto the market.Ā We had a wonderful day in resources yesterday, against a background where the iron ore price is $62.00 a ton, which is the lowest weāve since seen before the financial crisis.
And sliding unfortunately.Ā
Yes.
Just to look at ArcelorMittal and its fall from grace.Ā Three years ago, it was a stock that many people thought that even then, at R65.00 a share, was offering some kind of value.Ā Today itās at R25.00 a share, and before those three years, it was even higher than that.Ā Piet is going shy of it, even at R25.00, itās not an opportunity.
You might have the Telkom effect, where it is so low that people come in and buy it but youāre buying it on the hopes of a bounce.Ā You are not buying it because the outlook is rosy.
What happens to the people that works for ArcelorMittal, all my old friends from Newcastle?Ā
Theyāre probably concerned and very worried about their jobs.Ā I think like most people in the manufacturing industry here.Ā Youāre not quite sure what tomorrow brings.Ā Things are very tough.
The CEO, Nkululeko Nyembezi-Heita, left there.Ā She is now the Chairman of the Johannesburg Stock Exchange. Sheās very astute.Ā She might have thought that even she canāt get it right, āso move onā.Ā How does that work David, when youāre sitting at the top?
I donāt know.Ā I donāt think South Africa helps them either.Ā I think you need an economy thatās going to help you.Ā With the Ford story, we have so many structural issues here that are holding us back, which need to be addressed.Ā Johann Rupert let off yesterday, at the Heritage Foundation, giving his views on this economy.Ā He was saying that the Trade Unions are bringing us down and things have to be done there.Ā We have to revise Labour Policy.Ā We have to address many issues here to help manufactures.Ā My big fear is that motor manufacturers, who make up a big part of our manufacturing industry, will also start to feel the noose tightening around them, as things and conditions here start to deteriorate and more demands come from the Trade Unions, such as higher wages.Ā Iām a little concerned about where weāre heading in this economy.
I had a very interesting interview yesterday with Jeff Nemeth from Ford, who said that when he goes to Dearborn (their Head Office in the U.S.), there is warmth towards South Africa and a desire to put more money into South Africa because it is much easier to manufacture on the Continent and export into Africa, but there are issues that are raised every time.Ā He said in his last meeting, he spoke about the obvious ones, power from Eskom, Labour Legislation, and generally the political stability in the country.Ā
I donāt think thereās a desire to work hard here.Ā I think thereās still a very strong attitude of entitlement and that we see in our labour, and you canāt understand that with 25 percent of our labour force or of our adults unemployed.Ā Iām concerned that one day someone is going to say, āhold on a second, it is much easier to produce somewhere elseā. Ā The biggest worry in manufacturing today is robotics.Ā Replacing labour with machines.Ā They do the job much more efficiently and 24 hours a day and I think weāre seeing huge advances, particularly in the motor industry.Ā In fact, I think in India, I think Tata has a plant, which is 80 percent robotic, so thatās the threat, if we donāt tackle labour.
My best story was sitting and listening to Matteo Renzi, the Prime Minister of Italy.Ā He said, āHere I am, a 40 year old man,ā heād actually turned 40 the week before, (this was only two weeks ago in Davos) and he said that, āIāve been appointed as Prime Minister because no one else really wants the kind of job that the whole of Italy knows we need to do.Ā For 20 years weāve had inflexible labour legislation.Ā The country has not grown in 20 years, so our Government debt is up threefold, now we have to fix it.Ā Weāve got to fix labour legislation and that is unpopular.Ā You need a Cyril Ramaphosa to grasp the nettle and say, āfor once, let economics overcome the partiesā.Ā
That is 100 percent right and thatās the same thing in Europe.Ā I always say that Europe is a giant Ponzi scheme because how it operated was that the young people who came in, they paid for those who were leaving, the Socialist System.Ā What happens when the young people are not coming in anymore or when you have a population thatās not growing?Ā Whoās paying for the people that are going out?Ā Very simply, that is what Italy faced and they did it at a time where there was a lot of credit being given and people were living off credit (thatās why the debt is going up) and it has to be reversed.Ā The whole of Europe lives in a system of entitlement, whether it is medical health or pension and so on, and they have to change their attitudes.
What do you make of the European quantitative easing, this stimulant into the system?Ā I ask this because Laura Tyson, who I also managed to talk to in Davos, said, āIt’s only breathing space.Ā Unless they fix the structural issues youāve referred to then the QE is going to be a waste of money.āĀ
Absolutely right, and Draghi openly says it.Ā You hear it from the IMF.Ā If you donāt change labour legislation.Ā If you donāt make it easier to do business.Ā If you donāt address those entitlement issues, Iām afraid Europe is going to atrophy.
Iāll tell you a little bit of hope on both of these issues.Ā South Africa hasnāt gone down the track as far as Italy, not by a long shot.Ā Secondly, the CEO of ADECCO made a very good point.Ā Supposedly, young people donāt want to work in Europe.Ā He said that, on average, their research shows a young person sends out their CV 11 times in a month, so they want to work.Ā The entitlement might be there with their parents.Ā However, the younger generation wants to get into the market, but theyāre being blocked by the labour legislation, which keeps older people, who are bored, tired, and stale in jobs.Ā Thatās not right.
No, it isnāt but how do you get the older people out because you canāt.
More of them are devoted to politicians.
Yes, itās not easy.Ā I certainly donāt have the solution for you.Ā Why is America doing well?Ā Itās because they donāt have those issues.
Yes, they donāt have structural issues that they need to address but thatās why you need a Matteo Renzi.Ā You need, almost a politician to come into the ANC in South Africa and say āokay, Iām not going to be a politician for very long (maybe four or five years), Iām going to do the unpopular things but it will fix the economy.Ā At the end of that I will probably never be re-elected again, but weāll have a thriving countryā.Ā
Youāve not only got a young Premier in Italy, youāve got the same in France as well.Ā Thereās some young blood there also trying to get in.
Theyāve got Alexander Stubb, who is also 40 years old, so theyāre another country with six years, no growth, in Finland.Ā
I want to tell you something though.Ā If you want to make money this year go to Europe.Ā Thereās some fabulous companies.Ā The Euro has fallen, making them a lot more competitive.Ā There are brands like LVMH, BMW, and Daimler you name them, their pharmaceutical companies who are selling out into a global environment.Ā In fact, Europe probably looks as the most attractive area to go into, on a selective basis.
If you made an investment today in S&P500 or the Euro Stoxx…?
Iād go Euro Stoxx.
I do think that sometimes in South Africa our problems look insurmountable to us but judged next to the problems as many other countries in the world.Ā We can manage them.Ā We can break them and sometime the penny’s going to drop…Ā