South African Retailers at Most Expensive Headed for Fall

Investors speculating on rising African wealth are driving South African retailers to the highest valuations on record in a sign to Investec Asset Management and Renaissance Capital the shares are set to fall.
The FTSE/JSE Africa General Retailers Index (JGENR) has jumped 44 percent since Wal-Mart Stores Inc. (WMT) announced plans two years ago to buy Massmart Holdings Ltd. (MSM), South Africa’s largest wholesaler. The gains pushed the 10-member index to 18.1 times reported earnings, 55 percent higher than its 10-year average and above the MSCI Emerging Markets Retail Index (MXEF0RT), which trades at 15.2 times, according to data compiled by Bloomberg. Just eight months ago, valuations on South African retailers were lower than their emerging market peers.

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The FTSE/JSE Africa General Retailers Index has jumped 44 percent since Wal-Mart Stores Inc. announced plans two years ago to buy Massmart Holdings Ltd., South Africa’s largest wholesaler. Photographer: Nadine Hutton/Bloomberg

Investors are “overcooking” valuations on expectations of an African-expansion boost, said Diane Laas, an equity analyst at Cape Town-based Investec Asset Management, which oversees more than $90 billion. “I’m not convinced.”
Retailers including Cape Town-based Shoprite Holdings Ltd. (SHP), Durban, South Africa-based Mr Price Group Ltd. (MPC) and Cape Town- based Truworths (TRU) International Holdings Ltd. plan new stores from Angola to Nigeria to benefit from rising wealth in the world’s poorest continent. Africa’s swelling middle class may boost household spending 63 percent to $1.4 trillion 2020, according to a 2010 report by New York-based McKinsey & Co.

‘Avenue for Growth’

Aberdeen Asset Management Plc, which has 184 billion pounds ($293 billion) in assets, sees further gains for South African retailers. The Aberdeen, Scotland-based money manager has this year raised its stakes in Durban, South Africa-based Spar Group Ltd., Cape Town-based Clicks Group Ltd., Truworths and Massmart, according to data compiled by Bloomberg. Investec Asset Management hasn’t added to its holdings in the stocks, the data show.
“Over time there is an avenue for growth in Africa,” said Gabriel Sacks, an assistant fund manager at Aberdeen in London. “I know that’s a long way away for some of them, but we are long-term shareholders and if anyone will be able to play those markets, we believe its South African corporates.”
Foreign investors own about 70 percent of Truworths, South Africa’s largest clothing retailer, from 67 percent a year ago, and more than 90 percent of Massmart, data compiled by Bloomberg show. Almost 60 percent of shares in Mr Price and 54 percent of Woolworths Holdings Ltd. are owned by foreign funds, increasing from 51 percent for both stocks in May 2011. Aberdeen owns about 12 percent of Truworths and 13 percent of Johannesburg-based Massmart.

Cheaper Than Peers

Some South African retailers are cheaper than emerging- market peers even after the rally. Truworths, trading at 14 times its expected earnings for June 2013, compares with 18 times December 2013 earnings for SACI Falabella, Chile’s largest retailer by market value, data compiled by Bloomberg show. Shares of Lojas Renner SA, Brazil’s biggest listed clothing retailer, are equivalent to 17 times December 2013 earnings, while Massmart is valued at 19 times June 2013 earnings. Aberdeen also owns stock in SACI Falabella (FALAB) and Lojas Renner, the data show.
If the retailers aren’t able to spend their cash on an African expansion or their growth slows, the companies will probably pay out higher dividends, Sacks said in a May 4 interview.

Challenges at Home

South Africa’s economy isn’t growing fast enough for its retail companies to be trading at higher valuations than those in Russia or China, Investec Asset Management’s Laas said in a May 7 interview.
The nine-member MSCI China Retailing Index trades at an average 10 times 2013 earnings, while OAO Magnit, the only retailer on Russia’s Micex Index, trades at 16 times 2013 earnings.
South Africa’s economy expanded 2.9 percent in the fourth quarter compared with 4.5 percent in Chile, 4.8 percent in Russia, 8.1 percent in China and 4.7 percent in Turkey, according to data compiled by Bloomberg. South Africa’s unemployment rate, the highest of 61 nations tracked by Bloomberg, unexpectedly climbed to 25.2 percent in the first quarter, as builders and factories in Africa’s biggest economy shed jobs.

Valuation Reasons

Mr Price, the clothing and linen retailer that trades at 22 times earnings, may fall 23 percent in the next year to 83 rand, according to Jeanine Womersley, a retail analyst at Johannesburg-based Renaissance BJM, who rates the stock hold. The stock fell 1.5 percent to 103.07 rand as of 1:33 p.m. in Johannesburg.
Woolworths, a Cape Town-based food and clothing retailer, may decline 20 percent to 40.60 rand, Shamil Ismail, a Cape Town-based retail analyst at BNP Paribas Cadiz Securities Ltd., who rates the stock a sell, said in a March 30 note. Woolworths slumped 2.9 percent to 48.23 rand in Johannesburg.
“The South African retailers are priced for perfection,” Chris Gilmour, an analyst at Johannesburg-based Absa Investments, said today by phone. “Even so, there are reasons for the valuations. These companies are managed on a par with first-world peers, but at the same time can benefit from emerging-market growth.”
Clicks, Massmart, Woolworths and Mr Price declined to comment on valuations of their stocks, according to e-mailed comment from Woolworths press office and spokesmen Graeme Lillie, Brian Leroni and Lynette Lambert.

Fond Foreigners

Progress in expanding into sub-Saharan Africa is stalled by power shortages, legal and regulatory differences, poor telecommunications and a scarcity of formal retail space such as shopping malls, Truworths Chief Executive Officer Michael Mark said in an e-mailed response to questions on May 11.
Foreign investors are “quite fond of South African retail because of their successful history,” Mark said, adding that local investors see the stocks as expensive. “It depends on your perspective.”
After opening a store in Botswana more than 20 years ago, Truworths has 21 of its 552 outlets outside its home market, including Namibia, Swaziland and Mauritius. South Africa accounts for 98 percent of sales, according to data compiled by Bloomberg.
To mitigate risks, Truworths follows an “incremental expansion plan” which allows the company over time to better understand the operating environment and market potential, Mark said.

‘Next Asia’

Shoprite, Africa’s largest supermarket chain with 1,730 outlets, opened its first store in Namibia in 1990 and has 123 stores in 15 countries outside South Africa that accounted for about 10 percent of fiscal 2011 sales. Shoprite may spend 1.5 billion rand over the next three years On Nigerian property to help build sites.
Mr Price said in 2009 it is looking at Nigeria for an expansion and opened a test store in Ikeja Mall in Lagos in March 2012.
“Retailers are tending to look at Africa as the next Asia and considering enormous growth that could come out of there as it formalizes,” said Jeanine van Zyl, a retail analyst for Cape Town-based Old Mutual Investment Group of South Africa, which manages 472 billion rand from Cape Town. Investors “are pricing in Africa way before it actually happens because Africa is a very slow story,” she said.

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Euro Falls to Four-Month Low as Spain’s Debt Costs Rise

The euro fell to a four-month low as Spain’s borrowing costs rose at an auction, stoking concern that the region’s financial contagion is spreading from Greece.
Europe’s shared currency declined to the weakest in three months versus the yen. The European Central Bank said it will temporarily stop lending to some Greek banks as President Mario Draghi signaled it won’t compromise to keeping Greece in the euro area. The Dollar Index extended its longest string of gains since its inception in 1973 as a report showed U.S. jobless claims for unemployment benefits were unchanged last week before another report forecast to show manufacturing in the Philadelphia region expanded in May.

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Pedestrians pass in front of the European Central Bank's (ECB) headquarters in Frankfurt, Germany. The ECB said in an e-mailed statement yesterday that it will temporarily stop lending to some Greek banks to limit its risk. Photographer: Hannelore Foerster/Bloomberg

 

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May 17 (Bloomberg) -- Geoff Kendrick, head of European currency strategy at Nomura International Plc, talks about the prospect of a Greek exit from the euro and the impact on his foreign-exchange strategy. He speaks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

“European tensions are showing few signs of subsiding,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “We’re going to watch the Greek polls over the next couple of weeks. What is worrisome is that the left-wing, anti-European Union party appears to be leading some of the latest polls.”
The euro fell 0.1 percent to $1.2702 at 8:54 a.m. New York time after touching 1.2667, the weakest level since Jan. 17. The shared currency declined 0.3 percent to 101.85 yen. It earlier fell to 101.60 yen, the lowest since Feb. 7. The yen was 0.1 percent stronger at 80.24 per dollar.
Spain’s 10-year yield difference, or spread, over benchmark German bunds widened 10 basis points to 493 basis points and the Stoxx Europe 600 Index (SXXP) dropped 1.1 percent.

Spanish Sale

Spain sold bonds due in January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were last auctioned in April. Investors bought bonds maturing in July 2015 at 4.876 percent, compared with 4.037 percent on May 3 and bonds due April 2016 at 5.106 percent.
Borrowing costs in Europe’s most-indebted nations are rising amid speculation that Greece will leave the 17-nation euro area as political parties opposed to the terms of two international bailouts polled strongly in inconclusive May 6 elections. A fresh vote has been set for June 17.
Draghi acknowledged for the first time yesterday that Greece may exit. While the bank’s “strong preference” is that Greece stays in the bloc, the will continue to preserve “the integrity of our balance ECB sheet,” he said in a speech.
“The market is still mainly driven by developments in Europe -- we are going to be in a prolonged period of heightened uncertainty” and euro weakness, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Investors are fearful that Europe’s firewalls aren’t enough to protect against contagion. We still favor the more defensive currencies like the yen and the dollar.”

Corrective Snap

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, advanced for a 14th consecutive day, rising 0.2 percent to 81.55.
Jobless claims were unchanged at 370,000 in the week ended May 12, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News called for a drop in claims to 365,000. The Federal Reserve Bank of Philadelphia’s general economic index increased to 10 in May from 8.5 the previous month, economists forecast before today’s report.

Additional Action

Several Fed policy makers said a loss of momentum in growth may warrant more stimulus to keep the recovery on track, according to minutes of the Federal Open Market Committee’s April 24-25 meeting released yesterday in Washington. Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years.
The Dollar Index (DXY) may be set for a “corrective snap back,” MacNeil Curry, head of foreign exchange and interest rates technical strategy at Bank of America in New York, wrote in a report yesterday. “However, against 80.38 trend-line support, the larger bull trend remains” and the gauge may see resistance in the 82.59 to 83.36 area, he wrote.
Resistance refers to an area on a price graph where sell orders may be clustered, while support is a level where there may be an accumulation of orders to buy.

China May Surpass India as Biggest Gold Market, WGC Says

Gold demand in China may surge as much as 30 percent this year as rising incomes boost consumption, helping the country topple India as the world’s largest bullion market on an annual basis, according to the World Gold Council.
Demand, which rose to a record in the first quarter, may gain to between 900 metric tons and 1,000 tons this year, from 769.8 tons in 2011, Albert Cheng, Far East managing director at the producer-funded group, said in an interview. Indian usage may drop to 800 tons to 900 tons, from 933.4 tons, he said.

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When gold reached its record Sept. 6, it was moving in tandem with the VIX as Europe’s debt crisis and mounting concern about the U.S. recovery spurred investors to buy the metal to diversify their assets. Photographer: Dhiraj Singh/Bloomberg

 

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May 17 (Bloomberg) -- Nick Holland, chief executive officer of Gold Fields Ltd., talks about gold production and prices. He speaks from Johannesburg with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)

Higher demand in the world’s largest gold producer may help arrest a slump in prices, which have plunged from last year’s record as investors favored the dollar amid concern Greece may quit the euro. Global gold demand fell 4.6 percent to 1,097.6 tons in the first quarter, the council said in a report today.
“We are confident China will become the largest source of demand for gold this year,” Cheng said in Singapore, restating a council forecast made earlier in 2012. “Over the next two to five years, China and India will go neck to neck and may account for more than 50 percent of world demand.”
Immediate-delivery gold traded at $1,548.19 an ounce at 4:03 p.m. in Singapore. That’s down 1.2 percent this year, and 18.5 percent from the record close on Sept. 5. The price touched $1,526.97 yesterday, the lowest level since December as the Greek debt crisis sent the euro to a four-month low.

‘Seek Cash’

“Investors are selling gold now to seek cash and rebalance their investment portfolio because of concerns about the euro- zone sovereign-debt crisis,” said Cheng, who’s been in the gold industry since 1985. “The fundamental reasons for investing in gold remain very strong, so these investors will return.”
Bullion has rallied for 11 years, gaining through the financial crisis that started in 2008, as investors bought the metal to protect their wealth from currency debasement and inflation. Goldman Sachs Group Inc. (GS) said in a May 9 report the precious metal remains the so-called currency of last resort.
Demand in China totaled 255.2 tons in the three months to March 31 from 232.5 tons a year earlier, the council said in the report. Investment demand gained 13 percent, while jewelry demand increased 7.9 percent to 156.6 tons, making China the world’s largest jewelry market for a third quarter.
The council’s outlook for increased consumption in China this year contrasts with the view from Lao Feng Xiang Co. (900905), the mainland’s biggest gold-jewelry maker, which said this month the country’s demand growth may stagnate in 2012.

‘Increasing Wealth’

“The increasing wealth of the middle class is very important in China,” Cheng said. “In the past 10 to 15 years, it had reached first- and second-tier cities such as Beijing, Shanghai and Hangzhou. We expect such wealth to reach 600 million people in third-tier cities such as Dongguan, Zhuhai, Mianyang and Tangshan.”
In India, demand fell to 207.6 tons in the first quarter, from 290.6 tons a year ago, after the government hiked taxes and import duties, the council said. Investment demand dropped 46 percent and jewelry demand fell 19 percent, it said. A drop in annual demand this year would be the second straight fall.
“Consumers will adjust to the changes over time,” Cheng said, adding that purchases in India are improving this month. “In India, people buy gold for cultural and religious reasons - - that won’t change.”

Pound Falls as UK Economy Threatened by Europe’s Crisis

The Great Britain pound slumped today after the Bank of England trimmed its growth forecast as the crisis in Europe escalates. Positive employment data did not manage to help the weakening currency.
BoE Governor Mervyn King said at today’s press conference that the central bank cut its growth forecast. The Governor explained that the European debt crisis remains a main threat to the UK economy as the eurozone is the main trading partner of the United Kingdom. King stated that it is impossible to estimate results of the worst-possible outcome of the crisis and added:

But even the threat of those more extreme outcomes is enough to affect the outlook for the UK, through its effect on bank funding costs, asset prices, including the exchange rate, and the confidence of households and businesses.

BoE chief was not completely, pessimistic, though and voiced belief that the Great Britain will recover from the current problems.
Employment data showed that King’s optimism may be justified. The unemployment rate unexpectedly fell by 10 basis points to 8.2 percent in the first quarter of 2012 and the number of people claiming Jobseeker’s Allowance provided a pleasant surprise, falling by 13,700 in April from March. Alas, the positive report did not help the pound.
GBP/USD was down from 1.5992 to 1.5915 as of 23:31 GMT, touching 1.5888 today — the low not seen since April 17. GBP/JPY slid from 128.24 to 127.90, reaching 127.65 intraday — the lowest level since April 17. EUR/GBP rose from 0.7956 to 0.7991.

Loonie Weakens as Europe Hits Commodity Prices

The Canadian dollar yesterday as the crisis in Europe escalates, damping demand for commodities and commodity-dependent currencies. The loonie trimmed its losses today on good fundamentals in Canada and the United States.
Talks about Greece leaving the eurozone intensified after the European Central Bank paused lending to some Greek banks. The ECB said it would resume borrowing after the banks boost their capital:

Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations.

The central bank explained that it does not want to see Greece exiting the currency union, but the bank cannot break the rule to lend only to reliable financial institutions. Anyway, markets reacted negatively to the news. The Stoxx Europe 600 Index fell 0.6. Crude oil, the key export of Canada, declined to the lowest level in six months.
Fundamentals besides the European woes remain positive for the Canadian currency. The United States continue to show signs of recovery and Canada itself is doing well. Canadian manufacturing sales increased 1.9 percent in March, demonstrating the largest advance since September 2011. Many analysts say that Canada’s dollar would be a very strong currency in absence of the European crisis. Unfortunately for the loonie, the crisis in Europe does persist.
USD/CAD fell from 1.0124 to 1.0109 as of 1:47 GMT today after reaching 1.0130 yesterday — the highest level since January 25. CAD/JPY was up from 79.27 to 79.39. EUR/CAD rose from 1.2873 to 1.2886.

NZ Dollar Near This Year’s Low | Reymount Investment

The New Zealand dollar erased its earlier gains today as the potential Greece’s exit from the eurozone continued to spoil mood of Forex market participants. The currency traded near the lowest level this year.
Greece faces a new election on June 17 and traders are worried that it may result in the country leaving the euro-union. The announcement of the European Central Bank that it stopped lending to some Greek banks was not helping market’s mood either. Earlier, the kiwi rallied on speculations that recent losses were excessive. ANZ National Bank reported that the number of job advertisements fell 2 percent in April, following the March’s 0.9 percent decline.
NZD/USD fell from 0.7642 to 0.7634 as of 12:27 GMT today, near yesterday’s low of 0.7623, which was the lowest level since December 20. NZD/JPY slipped from 61.32 to 61.23, while the daily minimum of 61.15 was the lowest since January 17.