Best of Ghost Mail - That luxury feeling

Companies in the luxury sector are trading at luxury valuations. The Finance Ghost also takes a look at the banking sector and the buzz around copper.

That luxury feeling

Luxury is in fashion. Investors seem to have put the sector on a pedestal of note, seeing it as a (relatively) safe haven at a time when safe havens have been hard to come by. You might recall Silicon Valley Bank ending in disaster after buying US Treasuries at the wrong time. Yes, even fixed-income instruments backed by the US are far from being a safe haven in a volatile interest rate cycle!

But the rich? They don’t worry about trivial inconveniences like the fuel price or school fees. No, in that part of the market, it’s all about being invited to own the latest limited-edition Ferrari. Yes, you get invited to be a customer for certain models.

Locally, Richemont plays in this part of the market. The share price has been on a charge this year, though you’ll have to be careful when drawing a chart as many data providers haven’t adjusted for the collapse of the depository receipt structure. One Richemont share on the JSE didn’t used to be equivalent to one Richemont share overseas. That has now changed.

Data issues aside, Richemont has been on a charge this year. The most important luxury market in the East has awakened, with Chinese consumers using a post-lockdown environment to splurge on the world’s most overpriced items. Although the wealthiest people in the world may not care about inflation, even they couldn’t avoid lockdowns. With China emerging from that dark time in history, demand is strong. That’s great news not just for Richemont, but for global companies like LVMH and even the likes of Anglo American thanks to its ownership of De Beers.

And even in the more affordable end of the market, companies like Nike benefit greatly from improved demand in China. Look out for the automotive manufactures as well!

You can bank on our banks, but should you invest in them?

For all our faults in South Africa, our banks are rock solid and apply risk management standards that are arguably better than world class. If you consider the economic backdrop of the past decade, it’s remarkable that our financial institutions have done so well.

Unlike global counterparts like JP Morgan and especially Goldman Sachs, our banks are reliant on traditional sources of banking revenue. You know: the good old-fashioned approach of taking money from a depositor and lending it out at a higher rate to a borrower.

The global giants get involved in all kinds of exotic things, leading to headlines like the recent mess at Credit Suisse. Or is that Debit Suisse?

Accounting jokes aside, being a solid institution doesn’t necessarily make a company a good investment. It all comes down to the valuation vs. the reliability of cash flows and the growth prospects. The past couple of years have been kind to banking, with a rising interest rate cycle and high inflation as powerful drivers of earnings.

This seems odd at first, doesn’t it? Why would tough economic conditions be good for banking?

The trick to remember is that rising rates are good to a point. Have you noticed how your bond repayments are at a higher interest rate, yet your current account still earns practically no interest? This is a perfect (or is that prime?) example of net interest margin expansion. Simply, the bank lends out at a higher rate when interest rates increase, yet depositors don’t necessarily receive the same increase.

The other benefit in these conditions is that inflation has created larger balance sheets. If the value of inventory goes up, a retailer needs more money to keep goods on the shelves. Where does that money come from? Bingo – the banks!

The music stops when impairments more than offset the benefit of higher rates. I’m not sure that we are there yet for most banks, but we aren’t miles away. When the banks were trading at heavy discounts to net asset value, they were a solid punt. The ship has possibly sailed by now, particularly given the level of load shedding in our economy.

The one to really be careful of is Capitec’s valuation. Undoubtedly a great business, the gains in market share will taper off at some point. In the latest earnings, impairments increased sharply and income net of credit losses showed very little growth year-on-year. It was only because of tight cost control on staff costs that HEPS managed to post solid growth. That’s not a sustainable way to increase earnings.

Is copper the new gold?

Copper is all the rage at the moment. There’s been a lot of newsflow around this “transition metal”, with mining houses fighting to get access to this commodity. 

You may have been following Glencore’s attempts to woo the board of Canadian mining group Teck Resources. Glencore proposed a massive merger and subsequent demerger, splitting the “dirty” fossil fuels and “clean” transition metals into two businesses.

Teck was having none of it, seeing Glencore as being dirty overall. Glencore’s ESG track record (and reputation) came up as one of the reasons why the Teck board told Glencore to ‘tsek. It’s great to have a ghost in your inbox, but not skeletons in your closet. Bad behaviour has finally caught up with Glencore, though it remains to be seen how much money they will throw at this problem.

We also saw the successful listing of Copper 360 on the JSE, raising R152.5 million through a private placement that was 1.3 times oversubscribed. That’s a solid outcome, with trade on the JSE scheduled to begin on 21 April 2023. Although this wasn’t an IPO (a private placement isn’t an offer to the public), it’s great to see new assets on the JSE.

And finally, we are reminded of just how big Anglo American is. As noted earlier, the company is exposed to the luxury market through De Beers. Anglo seems to be everywhere, with news on the copper front as well. Authorities in Chile have finally granted an environmental permit application for Los Bronces, one of the world’s largest copper mines that Anglo wants to develop further.

Is copper the new gold? Based on recent performance of our local gold miners, perhaps I wrote gold off too quickly. It has finally started to perform, though I still believe that the miners are best treated as tactical punts rather than long-term positions.