Bruce Whitfield  00:00

Market commentary now. Meryl Pick, Portfolio Manager at the Old Mutual Investment Group is with us. Meryl Pick, I'm curious to hear from you this evening as to whether or not you think Noel Quinn at HSBC is right, because it seems very, very ambitious.

Bruce Whitfield  00:20

Meryl?

Meryl Pick  00:22

Good evening, Bruce. Good evening to your listeners. I missed the first half of that question, unfortunately.

Bruce Whitfield  00:30

Noel Quinn, the CEO of HSBC, he's saying that the Chinese property crisis is probably over. Would you agree?

Meryl Pick  00:40

Oh, Bruce, what an interesting question. I think to understand that, and answer that properly, one probably has to look at the underlying demand for property and what would drive that. Now, we know that China's population peaked, I think sometime in the last year. If you look forward at the expectations for population growth, they do not look too exciting. They're starting to resemble what we see in developed markets. And we know that demand for property is driven by number of family starts, you know, young couples buying new homes typically. So, I would think structurally, we could still see headwinds to the property crisis for some time to come. What we could see is perhaps some intervention in terms of the government's aggressive intention to burst that bubble, perhaps just trying to cushion that impact, but I think structurally, underlying demand remains a problem.

Bruce Whitfield  01:43

Exactly. But if we can get the property sector in China sorted out, at least that's one step closer to a way further away from a full blown crisis. Talk to me about the problems that MTN is having in Nigeria. Perpetual problems in their biggest market, this one is to do with some calculations they did on exchange rates betwe

Meryl Pick  02:09

Yes, absolutely. So, MTN Nigeria fundamentally should be such a strong business for the MTN group. They are the leading telco in that region, by far the market leader. In constant currency, they are still experiencing strong top line growth, meaning there is demand for the product. But we know that the naira has weakened against the dollar some 80% over the last 12 months, the big move started in June. And being many of the costs are dollar based, when converting those costs, it's impossible to pass through such a big move to customers overnight. So, that has caused massive margin pressure, not to mention converting any naira cash reserves at that rate. Now, the black market rate for the naira is still somewhere north of what the spot rate is. Different estimates put that around 1000, which means that in our framework of theme and price, this has been a negative theme. Perhaps it's reduced somewhat with the naira close to 800. But there is still room for this to weaken further and we have most likely not yet seen the bottom.

It obviously has an inflationary impact as well; we've seen Nigeria print inflation numbers of about 26%. So, if we think, you know, four and a half percent is bad, if we think 8% in the UK is bad, try 26%. All of these things point towards pressure on the Central Bank of Nigeria to raise rates. Now, a month ago, they've got a new governor, new DG is in place, no action as yet. But with inflation where it is, with the spot rate quite a gap from the black market rate to the dollar, it would suggest that they should raise rates and that might resolve this issue. But that would obviously be quite a painful decision to make, more painful for consumers in the short term, and perhaps then more pressure on telco demand.

I think the silver lining here could be the oil price. So, Nigeria's oil production volumes have still not resumed where they were pre-Covid. Government has announced some very aggressive plans and intentions to get oil production back up to at least 2 million barrels. And with the oil price where it is, this could be a boost to the fiscus and perhaps offset some of this pressure on the dollar if the oil price stays higher for longer. But all in all, this is going to have about a 8 to 10% impact on MTN group earnings, which is why I think we saw that share price reaction today.

Bruce Whitfield  04:58

Share price fell about 6.5% and I'm wondering here, Meryl, when we look at the calmer waters that are presented by Vodacom versus the more volatile option presented by MTN and the valuations on both of these companies. If I gave you 50 bucks and I said, you know, either MTN or Vodacom, where would you put it?

Meryl Pick  05:20

That's an interesting choice. Definitely Vodacom, stable and steady. However, we've got inflation and a weak consumer in the South African market as well. They are also investing offshore and having to invest in other markets. A reasonably stable dividend yield, I would put probably 30% of that money into Vodacom and 70% into MTN. I think a lot of this bad news is now placed into MTN. So, it's all about what's in the price at the end of the day.

Bruce Whitfield  05:54

And if I said, would you put a portion of that 50 bucks - let's make it 100. So, 70/30, MTN, Vodacom. If I chuck Pick n Pay into the mix, would you put it all into Pick n Pay over the next two years? Or would you just ignore Pick n Pay all together?

Meryl Pick  06:11

I am still staying on the sidelines of Pick n Pay at this point in time. I look at the competition and I see a very strong footing. I think, again, a lot is in that price. But I've observed turnaround after turnaround in this market and turnarounds are quite tough to execute. So, ask me that question again in 12 months' time.

Bruce Whitfield  06:36

Okay, I'll make a note. That's what I will do. Meryl, thank you very much indeed. Meryl Pick is a retail specialist, that's her primary job within the Old Mutual Investment Group, she's also Portfolio Manager within that particular investment business.