Rates have only just started rising – retailers are already struggling

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[00:00:02]You're listening to the Moneyweb Now podcast series with Simon Brown.

[00:00:08]Live streamed every weekday at 6:30 a.m.

[00:00:13]>> [music] >> It's Monday, 1st of June. We've got local vehicle sales data for May due quarter past 2:00 this afternoon. I'm Simon Brown coming at you live and loud from the Moneyweb global headquarters in Johannesburg, South Africa. On the show today, Nick Kunze Sunlam Private Wealth.

[00:00:31]We have Dis-Chem results that saw revenue up but everything else red.

[00:00:36]Market not impressed. And an update from Spar, a horror update from Spar. That share price is back at 2010 levels.

[00:00:43]We're chatting with Quan Webster from emerging markets and how they've become more resilient to outside shocks. And then we'll be chatting with JoeTech. The Section 12J has hit its 5-year maturity mandatory maturity. Now we have the tax issues. What are options there for investors?

[00:01:06]This podcast is brought to you by Stanlib Asset Management. Invest in more global opportunities through their partnership with JP Morgan Asset Management. Winning headlines at Moneyweb, Glencore Marula P holds layoff plans as Nersa throws smelters a lifeline. The energy regulator approves electricity tariff of 62 cents per kilowatt hour for the ferrochrome industry. That's good for Afrimat.

[00:01:32]Business Day, S&P affirms SA's rating.

[00:01:37]An upgrade on the cards if South Africa continues to fight inflation and reduce debt.

[00:01:43]Morning markets, here's your screen. S&P Nasdaq higher on Friday. The East mostly green, Sydney the exception. Couple of points to the red. Turkey is up 1.1% Hong Kong higher and Tencent up 2.7% commodities mostly green. Gold futures 4,547 Brent 9307 platinum 1945 and palladium the red 1386.

[00:02:10]The rand is 1622 Bitcoin 73,800 and top 40 opening call green open 420 points with 0.4% higher.

[00:02:23]>> Money web now on the money.

[00:02:26]>> Also available on podcast.

[00:02:27]>> Chatting now with Nick Kunze Sunlam private wealth. Nick appreciate the early morning Dis-Chem results out early Friday. The revenue was up 9.3% but heaps and dividend both down 17% and some change. A lot of talk around evolving the group from retail pharmacy to integrated healthcare provider spending for the future. They talk around seeing the benefits in FY 27.

[00:02:54]Your thoughts because the market seemed unconvinced by all this supposedly good news but bleak numbers.

[00:03:01]>> Yeah, morning Simon and yeah, start of the second half of the year. Here we go.

[00:03:06]So, I mean look at yeah, looking at those Dis-Chem results. I mean as you said you know revenue up 9.3% income is up 9.6%.

[00:03:14]I mean that's generally sort of solid top line I kind of movement growth in in what is a constrained consumer environment yet to share down 8% dividend was cut as well but I think you know the group operating profit that was down 11.9 so it wasn't heavy. They talk about investing in the ecosystem and lovely jargon here not 350 million rand committed to I think they said the X Big League Labs innovation what they've quite used I don't know.

[00:03:41]But yeah, I guess I mean overall I mean this is basically like a a spin off for later stories so you know overall I think you got to you got to wait until results come out a little later the next time round because right now they they they look like it's a little bit of a bit of a value trap at the moment.

[00:03:59]>> Yeah, it does look good. Well, I just put up there the clicks dropping. Wow, I mean there's a stock that from 400 what beginning of last year down to 230.

[00:04:08]Yeah, yeah, yeah. And at 5-year lows.

[00:04:10]Talking around value or complete lack thereof was the Spar update.

[00:04:15]Here's a stock back at what 2010 levels.

[00:04:18]I mean they're expecting heps to be around 40 to 60% lower. I mean this was a I don't know that the market was expecting much, but you know, they didn't like it and it really was bleak.

[00:04:30]>> Yeah, I mean no easy way to put a horror story. I mean this was very very ugly.

[00:04:34]As you said, share price down 16% on trade on Friday. As you said, levels we lost for a decade and a half now. I mean this is down now 60% so far this year. I mean they they warned the headline earnings will roughly half, so you're right. I mean the market expected earnings to half. And and yet revenue actually grew a little bit, but I mean I mean this is pure margin pain, Simon. I mean this is a you know, Black Friday discounting cost them. You got ongoing problems in KZN. Management changes and a few other things.

[00:05:03]You know, is I guess the question is I mean is Spar cheap at these levels? I mean do you buy it?

[00:05:09]I mean it's it's against that to that value trap. I mean it's cheap for a I mean this this isn't a market that's mispricing a good business. This is a This is an operational turnaround, management instability. I mean there's a whole lot of things in the noise there.

[00:05:26]I mean I I guess if I was looking at it I'd I'd wait till the interim results are out. I think in a week or two's time. But overall this is yeah, this was ugly.

[00:05:34]>> I I thought it was cheap in the mid-60s.

[00:05:35]It's now so to be clear that was a March or in fact it was in fact it was early April. But then I mean to the Spar's got the winners, right? I mean Boxer and and and Shoprite surely and because I mean we've got Pick n Pay that's struggling as well and we are buying I mean consumers are buying their their groceries somewhere.

[00:05:52]>> Yeah, I mean exactly I mean Pick n Pay down in kind as well wasn't it about 7% I mean I mean it down 7% and you look at it because >> [laughter] >> it was the better fairing of the lot.

[00:06:02]Um but this I think this does tell firstly that that that you know there is pressure in the in the in this inflation's going to be a problem who gets to pass it on to the consumer. I would I would guess the the 800 pound gorilla in the room which is Shoprite with 4% odd margins. I mean they've certainly got the ability to to get a bit of a margin squeeze which looks like it's happening in the space right now. Certainly now with the our friends in Pretoria raising rates as well. This is this is going to get tougher for the for the smaller ones and it's going to get tougher for the guys like this who who don't have that margin sort of capacity to play with.

[00:06:36]>> Yeah, yeah and and the Boxer margins also at north of 5%. We'll leave it in the context.

[00:06:41]Finlam a private wealth appreciate the early morning time. Let your money benefit from experience with Stanlib Asset Management. Find out about Stanlib Global Select Fund which follows an investment discipline that has delivered results for three decades.

[00:06:55]>> [music] >> Moneyweb now on the money.

[00:07:00]>> I'm joined with Grant Webster. He's co-head of emerging markets sovereign and FX at 91. Grant appreciate the time.

[00:07:08]Historically if we look back over the last couple of decades in fact if we go all the way back to the 1998 crisis EM's really have sort of borne the brunt of shocks supply shocks whatever they might be but in more recent years we really have seen a fair bit of resilience coming out of the broader emerging market basket. Fair comment.

[00:07:29]>> Yes I Simon thanks a lot. Um I think it's very fair. I mean look over the last 20 plus years typically you see demand side shocks as we call them you know so that's where economies slow down and um you know there's less demand for goods and central banks have to react by cutting rates and in the reverse happens activity picks up inflation picks up and you go through this normal cycle. This supply shock is very different because it's hard to control it it comes out of nowhere. You know if you think of Russia's invasion of Ukraine or COVID, you know it was really damaging to economies and typically you wouldn't expect emerging markets in particular to handle that very well but they've been doing a great job in the last 5 years or so.

[00:08:14]>> And this really is I mean what we've seen is sort of improving fiscal policies. We've seen better looking current accounts. We've seen sort of more proactive central banks and I would throw out into that lot as well.

[00:08:27]It's not any one feature it's just kind of like a general feature of EMs getting relatively better at being economies I suppose.

[00:08:36]>> Yeah I think look we do generalize of course but on the whole these economies are doing very well.

[00:08:42]There's a few I can mention where there's still some worries but what happened was in 2013 and 2014 we went through this episode which we call a taper tantrum where the US started to consider you know tightening policy and at at that time emerging markets in general were running big current account deficits which means they were importing far more than they were exporting. They had big fiscal deficits and loose monetary policy so their interest rates were low and that's kind of a recipe for disaster if you if you don't have you know sort of the the rest of the global economy on your side and so the taper tantrum was really painful but it did mean that over the following four or five years emerging markets were forced to correct. I mean South Africa is a case in point here. If you think back to that period South Africa ran a 6% current account deficits in 2013 and by the time you got to 2019 that had reversed and South Africa was running an enormous current account surplus, which meant that we in South Africa were exporting far more than we were importing. And if you're doing that, then you're actually you're lending dollars instead of borrowing dollars. So, it puts you in a much uh a much safer and and and more secure position. And you could say the same now for many emerging markets. They really they really do look like the adults in the room when you're comparing uh to some of the developed markets out there, ironically.

[00:10:02]>> Well, that was going to be my next question. Developed markets with rising yields, uh sovereign debt levels in many cases plus 100% of GDP, uh in many cases higher volatility, that sort of traditional distinction between emerging market versus developed market risk is kind of fading away.

[00:10:20]>> Yeah, you know, in the past obviously emerging markets were viewed as far more risky than developed markets. And even today, you know, amongst the sort of developed market investors, there's that perception. And it is fair to say that developed markets have much more liquidity, you know, their markets are really deep. Uh they have huge savings pools. And they've generally got strong institutions and good policy making. But a lot of this has been tested, you know, because since the global financial crisis and in particular through COVID, they borrowed an enormous amount of money. And they did so at a time when interest rates were at the lows, close to zero in fact in many cases because of financial repression. I mean, the central banks drove interest rates lower by buying their own bonds and cutting in and cutting policy rates. And so, they they were borrowing at low rates. And that's all changed post-COVID and with uh energy prices rising, they've had to hike interest rates.

[00:11:14]Uh and now finding themselves at much higher levels and they've got these huge uh debt burdens. Um I mean, the UK is a case in point here. And what is fascinating recently, if you look at the UK uh yields, uh long end yields are now trading above where Hungary trades. Um and Hungary, you know, is not exactly a bastion of uh liberal democracy uh or liberal, should I say. They did go through an election recently where the opposition won, and it's been uh an amazing turnaround. But still, it's quite stark.

[00:11:45]>> But that then comes, and and I've chatted with many folks, colleagues of yours and others, who's been talking the the emerging market investment thesis.

[00:11:52]And and it talked a lot of it's been around the valuation. And there are absolutely that thesis stands. But this kind of gives sort of more credence to it where there's the valuation, but there's a structure as well, which is sort of adding yet more flavor to that investment thesis.

[00:12:08]>> Yeah, so um yields in in emerging markets on average, as I say, we do talk in averages a bit here, but they're about twice the level you get in developed markets still. So even though interest rates have been rising in developed markets, um on average, they're still relatively low if you compare it, especially to a country like South Africa. And if you adjust for inflation, um because inflation in in the emerging markets isn't that high, you know, there's a perception that it's going to be a lot higher than it is in the developed markets. It's really not, you know, look if you look at where inflation in the US and the UK is compared to emerging markets like South Africa, you know, maybe EM has slightly higher inflation. So once you adjust for that, um the real rates in EM are particularly high. And again, that's a source of strength because it gives them a buffer, you know, it means that they are attracting capital from abroad, from investors who want to have a return higher than the level of inflation, because that generally is going to protect you against any currency weakness. That's attractive, and so you're seeing inflows into emerging markets based on these um higher yields.

[00:13:15]>> Neville That's got Webster head of emerging markets sovereign and effects 91. Appreciate the time. The Stanlib Flexible Income Fund is designed for pre- and post-retirement income and capital preservation needs. Retire without regret with Stanlib Asset Management.

[00:13:32]>> [music] >> Moneyweb now, on the money.

[00:13:36]>> Chatting with Jonty Sacks, he's a partner at Jaltech. Jonty, appreciate the early morning. Section 12J essentially was sunsetted back in June 2021, but there was a 5-year period to wind down because of the duration of the various different funds. That now kicks in this month. And there are there are tax implications. We got a benefit on the way in, but there is potentially some pain on the way out for investors.

[00:14:03]>> Exactly, Simon.

[00:14:05]Investors, when they invested, they got a really handsome tax break. They could deduct 100% of the investment.

[00:14:11]But when they exit Section 12J, they need to account for all the investment value and any returns as capital in nature. So, assuming you invested a million, and let's assume you only got your million rand back, a million falls 40% of your million falls into a taxable income, and you'll pay tax on it. So, effectively 18% of whatever you invested, you pay back to the receiver. But there's a really nice arbitrage, so you got 45% on day one.

[00:14:41]The time value of money of that 45%, and then minus the 18% on your way out. Of course, still quite a handsome return.

[00:14:48]>> Yeah, I I I hadn't thought of that. Of course, you got 45 on on on on the way in. And and the 18% is assuming you're in that that that uh a top tax bracket top top tax bracket because now they're basically saying that the cost of the investment was zero. There are options out there. Talk to me. You've got the Section 12B solar investment, and I I I've heard around it. I've never really dug deeply into it because one could move into that. How would that work, and what is it?

[00:15:13]>> So, what it is is similar to Section 12J. It's a it's a tax deductible investment, but but the capital can only be used for solar. So, um uh uh what we do as a business is people invest with us. Uh we take their their capital and we acquire solar assets. We fund them and then we sell electricity to uh to businesses. And by doing that, they they get a tax deduction of 100%.

[00:15:39]If you add some gearing, you can get a tax deduction of 200%. So, effectively, you invest a a million and you get a deduction of 2 million. Uh depending on the fund. But what this does for a Section 12J investor is you have this tax responsibility when you exit the 12J. Well, if you invest a small portion of your original capital into a 12B, [clears throat] it squashes the tax. In most cases, up up to all of it.

[00:16:05]>> Yeah. Yeah.

[00:16:05]>> Um >> I I I got you on that. And and then how is this So, it's investing into solar.

[00:16:09]We get the demand from that. Is this fixed term? Is this a a a sort of a an income flow coming from the solar?

[00:16:17]Cuz obviously, as you're producing, you're you're selling. How does that fund that then effectively work?

[00:16:22]>> Yeah, so effectively, we as a business, if you look at at a whole as a whole, we have got 2 billion rands worth of solar assets under our administration or management.

[00:16:33]>> Mhm.

[00:16:34]>> And and and then we charge businesses monthly or quarterly for for electricity that we've produced and they've consumed. This This electricity in almost all cases is cheaper than Eskom, so that they love doing business with us. But that's revenue. And that's revenue that's been brought into different type of partnerships, uh which is profitable. And then we pay out those profits to investors on an annual basis.

[00:16:56]So, you're in for a long term. You're in for 10 years, um or 8 to 10 years. You receive annual income every year. But being in for 10 years is largely irrelevant because of the high upfront tax benefit. You know, in many cases, investors invested 100,000 and they got the 100,000 back in the same year because of the tax benefit.

[00:17:15]>> Yeah. Yeah. if >> in for 10 years, but you got your money out, um and you're deriving those benefits. But so, we're seeing a lot of section 12J investors investing into our section 12J exit income fund, where portion goes into a 12E investment, a portion goes into a private debt fund. They get a lot of diversification, really nice income over the next 8 years.

[00:17:36]And it's just a nice way to just in a smart way lower your tax responsibilities.

[00:17:42]>> Got you. Got you. And I hadn't realized you got you've actually got a a product effectively for this. Do we have any sense of how much 12J money is is coming due this month? I mean, I imagine it it it must be I mean, it must be billions.

[00:17:54]>> Yeah, so The estimation is around 14 billion rand was invested into section 12J. Um at the end of the month, every section 12J fund that still exists has reached its maturity. Investors will start getting exited, I hope.

[00:18:11]Some will be in for much longer.

[00:18:13]But I would estimate of the 14 billion, a few billion have already been exited over the last few years because they were able to We're looking in the region of 10 billion rand being exited at the moment, I would estimate. And that's about just around 1.8 billion rand in revenue that SARS will be collecting, you know, assuming everyone's in the highest tax bracket.

[00:18:33]>> Yep, yep.

[00:18:34]The num- the numbers are the numbers are are are giant. We won't go into details, but of course, you can do a section 42 rollover. You can also do RA contributions. We'll leave it there.

[00:18:43]Jean Tease. Partner Jean Tease, we really appreciate the time this morning.

[00:18:48]And that's our poll today. Did you have a 12J product?

[00:18:52]I really like the idea. I thought they were great, and then Treasury effectively sunsetted them 5 years ago.

[00:18:58]But let us know what your experience was. Have your vote. Have your say.

[00:19:02]LinkedIn.

[00:19:06]That's it for today. On Friday, we were chatting with Schalk Louw, PSG Old Mutual, talking Lewis result. Strong growth across all the numbers. We asked you if Lewis was a good investment at these levels. Was pretty much even in split. A third of you saying great business, another third saying you needed to take a look, and the last third saying with these current rising rates you worried about the risks.

[00:19:32]This podcast is brought to you by Stanlib Asset Management. Invest in more certainty to navigate volatile market conditions. We live with you every weekday morning. The Moneyweb website and the app 6:30 a.m. podcast just after 7:00. Thanks to my team Eddie and Nobukhosi and Nicole and Sibulelo to you for listening. My guests for their time.

[00:19:51]My name is Simon Brown. This is Moneyweb Now. We'll chat again tomorrow. An Ke Capital issuing two active ETFs.

[00:20:00]>> [music] >> You've been listening to another Moneyweb Now podcast posted every weekday at 7:00 a.m. on moneyweb.co.za.

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