Sasha Naryshkine’s expert insights on oil, Sasol, gold and Africa

Top South African market commentator, Sasha Naryshkine joined Alec Hogg and Gugulethu Mfuphi on CNBC Africa’s Power Lunch to talk ‘markets’. The team got into the meat of the highly-debated oil price, and the role that shale gas plays in the game of its plunging price. To add to the high-brow agenda was the future of Sasol’s share price in light of the uncertain, and ever plunging oil price, as well as other commodities such gold and its investment outlook. Naryshkine and Hogg wrap up the show with expert insights into the world’s last investment frontier – Africa, adding words of invaluable wisdom for those watching for opportunities. – LF

GUGULETHU MFUPHI: Well to give us a more in depth view of how the market is trading today Sasha Naryshkine, a Director at Vestact, joins me at the desk. Sasha, maybe let’s pick up on the oil theme. We definitely heard Alec saying ‘well, it can’t go too much lower’. It is sitting at $48.00 a barrel…

ALEC HOGG: No, no… I said it will go…

GUGULETHU MFUPHI: What did you say? You said it will go lower.

ALEC HOGG: Exactly.

SASHA NARYSHKINE: No, he said, he thought that Investec had it wrong and Goldman had it right.

ALEC HOGG: Yes, but then Goldman did say, a few years ago, it was going to R200.00.

GUGULETHU MFUPHI: And they got that wrong.

SASHA NARYSHKINE: Yes, so these are… I mean, I have yet to see anyone stick their neck out too far on commodities prices, and get it right because the speed at which this downturn happened is absolutely incredible.

ALEC HOGG: But the key issue there is that Goldman said they’ve done their calculations on shale production, and $40.00 is when they start getting into trouble. Up to now, the estimates have been $60.00, even $80.00. If only at $40.00 the American shale producers get into, or start going bust, then there is still some downside because the beauty about this, with shale, is that you can close up the well and when the price gets above $40.00, open it up again. So I think lower for longer.

SASHA NARYSHKINE: I think what they also estimated, there’s a lot of the smaller shale producers actually hedge quite far out, as much as 12 months out, so the impact actually only won’t be felt on Capex spend, because remember that there’s a lot more oil rigs out there. I guess the key indicator to watch will be oilrigs in service, so when the big oilrig operators start getting a lot of recalls and you start seeing a drawdown in the number of jobs associated with that industry, and you know you’ve got a lot of people who pay attention to those things, so you’ll start to see. Then, I think that could be the turning point.

ALEC HOGG: But they are dropping and they have to be dropping because it was in a euphoric kind of situation that the orders were placed.   What was interesting, and it could be a good opportunity for Grindrod, is the shipping rates apparently are now rising, because a lot of people are stockpiling oil in these big tankers. So the oil tankers have been put to the side, full of crude oil, which means that those ships that are in service will see a lift, one hopes for the likes of Grindrod, in their profits.

SASHA NARYSHKINE: Yes, and obviously shipping is a very old business. It’s as old as the other old businesses that we know well.

ALEC HOGG: Such as.

SASHA NARYSHKINE: I don’t know. You know, Alec, but I was quite interested to note that out of, I think its Busan in South Korea, the world’s biggest ship ever, container ship, comes online tomorrow or maybe even today, called the MS Oscar. It’s massive. It’s huge but to see the amount of containers that a ship can carry, over a 50 or 40-year period, has increased more than twentyfold is, you know, shipbuilding unfortunately the cycle is even more notoriously cyclical because people place their orders when things are going swimmingly well, and then unfortunately. So it is a very marginal business because the cycles are always so tough but yet it’s so key to economic development to be able to move goods freely, across the world, and in fact, is responsible for world trade, the shipping cycle. It’s a pity, like airlines, that they’re so; the margins are so razor thin.

GUGULETHU MFUPHI: Just a sidestep back to that oil, as well as the shale opportunity there, how do you…?

SASHA NARYSHKINE: Good for the ship operators.

GUGULETHU MFUPHI: Exactly, but then when it comes to a stock like Sasol, how do you read that opportunity, given the fact that they are exploring the ethane cracker opportunity there, in Mississippi, I think.

ALEC HOGG: In Louisiana.

SASHA NARYSHKINE: Louisiana, Lake Charles. So, remember that their big feedstock is natural gas, so I guess that’s one positive, but their ability to be able to borrow more, at the lower energy prices, they are going to have to pay more for that debt in a lower interest rate environment. So there are some positives and there are quite a few negatives too.

ALEC HOGG: No, their negatives way outweigh the positives for Sasol, because 90% of their profits, okay 80% of their profits come from the rand/oil price, so fine… Lake Charles… That’s down the line, but their profits must be under enormous pressure at the moment.

SASHA NARYSHKINE: They must be because remember that, I think it’s for every $1.00 move in the oil price, it is something like $70m worth of profits, so it is substantial. Then, obviously, for every ten-cent move, in the rand, it is somewhere closer to R960m and R970m, so if you work the two out and you do simple maths, and you say, well since last year, the end of the year. So, when the annual report was released, the oil price has weakened by $55.00 a barrel. Okay, and the rand has weakened by about R1.20 to the Dollar, so you don’t need to be very smart to work out that if you get a four or five percent volume increase they haven’t, necessarily…they are going to be down anywhere between 35% and 40%.

ALEC HOGG: Well we were paying R14.00 a litre, at the pumps, and we are now paying R11.00 a litre.

SASHA NARYSHKINE: Great time to push through a fuel levy, of some sort, to be able to pay for the roads.

ALEC HOGG: There’s no doubt that it’s going to, well it has to happen, because Government needs money from somewhere and they’ve probably been rescued by the lower oil price.

SASHA NARYSHKINE: Yes, and in fact, I think it was you on your website, you posted quite an interesting thing, about Cees Bruggemans, who also made some interesting points about the oil price but I think Magnus Heystek had also written an interesting article about how…

ALEC HOGG: Of the two, I would back Cees to be accurate, given that he is an economist and he used to work for Shell.

SASHA NARYSHKINE: Yes, so he would probably say he is better versed on…

ALEC HOGG: Certainly on oil. There are certain things that Magnus is better on, I guess.

SASHA NARYSHKINE: He’s your favourite retired economist, Alec.

ALEC HOGG: He is my favourite independent economist.

SASHA NARYSHKINE: Retired oil economist.

ALEC HOGG: Remember, if you are working for a big institution, it is always very difficult to be as independent as you are.

SASHA NARYSHKINE: Yes, well I suppose you can try and you can try your best, but those sort of people make names for themselves and, interestingly it was Jim O’Neill who had also made some interesting points about the Chinese economy and oil. In terms of how this is, obviously a net positive for them, and remember that also, the Chinese, own about $4trn worth of U.S. debt, so think of how much better this is for the Dollar, and by function of that, better for the Chinese.

ALEC HOGG: It is so complex.

SASHA NARYSHKINE: Also, did you see the Chinese motor vehicle consumer numbers? It’s astonishing at how low oil prices have a knock on positive impact for consumers, so whilst there are many countries and companies that tend to miss out, the consumer is definitely the winner in all of this.

GUGULETHU MFUPHI: Keeping with the overall commodity, Sasha, are you still worried about the likes of gold as well, moving forward, iron ore.

SASHA NARYSHKINE: Gold? I had a look at Anglo Gold’s price, so the gold sector as a whole, is up nearly 20% this year. What are we, on the 12th, so how many trading days…?

ALEC HOGG: What was the second best performing top 100-company share last year?

SASHA NARYSHKINE: Second best?

ALEC HOGG: Second best.

SASHA NARYSHKINE: Was it Telkom?

ALEC HOGG: The best was Telkom, 150%. What was the second best?

SASHA NARYSHKINE: I don’t know.

ALEC HOGG: Sibanye.

SASHA NARYSHKINE: Sibanye Gold.

ALEC HOGG: 83%.

SASHA NARYSHKINE: And they were supposed to, not be the good part of Goldfields, so ironically…

ALEC HOGG: I thought you’d know these things off pat, you know.

SASHA NARYSHKINE: Sorry Alec, I was close enough.

GUGULETHU MFUPHI: He can always just get it off your website.

ALEC HOGG: But you are close enough, talking about gold. Although gold shares have got a bad rap…

SASHA NARYSHKINE: Yes, I had a look at the ten-year performance, of AngloGold Ashanti, down 43% in rand terms, over ten years, so whilst it might have been good as a trading instrument, over a very short period of time, I think it is way too tough to call for investors.

ALEC HOGG: You should never invest in gold shares. Gold bullion are fine.

SASHA NARYSHKINE: All gold? Why?

ALEC HOGG: Trade. It’s the most wonderful trading opportunity…

SASHA NARYSHKINE: Well then, it’s a trade. It’s probably not an investment. It’s probably a trade.

ALEC HOGG: If you traded it last year in Sibanye, you’d be smiling today.

SASHA NARYSHKINE: Yes, but I don’t know anyone who makes those calls right.

ALEC HOGG: Would you be trading them today?

SASHA NARYSHKINE: No.

ALEC HOGG: Well, Neil did.

SASHA NARYSHKINE: We tend to avoid both gold, as an instrument, and gold shares.

ALEC HOGG: All right, so you’re not a trader in gold shares and you certainly wouldn’t even be looking at it as an opportunity this year.

SASHA NARYSHKINE: No.

ALEC HOGG: So what would you be looking to trade this year?

SASHA NARYSHKINE: Look, I think trade and investing, they are two different things, and a lot of people talk about them. We’re looking at the same companies that we’ve owned, year-in and year-out. There obviously are a few interesting ones, like take, for instance how the impact of a lower oil price is actually impacting on MTN and their share price, because of their Nigerian revenues. So that will be an interesting one, I think, to watch this year. We still own a lot of MTN, and have owned them for the better part of a decade, in fact…

GUGULETHU MFUPHI: Is the African story though, in jeopardy perhaps, especially when it comes to the Nigerian economy, with the oil price taking a dip?

SASHA NARYSHKINE: Yes, it depends how you look at Africa, as an investment destination. I once had a look at revenues from the S&P500, and what percentage comes from Africa? It was less than two percent, so you could argue, in terms of where we are. It is probably the last frontier market. Whether or not Africa, in terms of all the States, can get their house in order and improve on infrastructure. It is easy in China, where you’ve got an autocratic Government dictating to people and saying ‘we’re going to build highways and roads here. This is how we are going to industrialise’. It is less easy when you’ve got 54 different States in Africa and they are not all equal, so when people talk about Africa as an investment destination. Follow the Shoprite’s of the world and you will see where they’ve invested heavily.

They are obviously, taking risks in places like the DRC, where it is pretty close to Zambia, where they’ve already got a pretty big rapport.

ALEC HOGG: Walk outside of the building here, at the Stock Exchange, and look around and you know the Africa story is ready and working because if you look around you, you’ll see services businesses putting up huge high-rise buildings, EY, Alexander Forbes, ENS, a big legal firm, Discovery, around the corner…

SASHA NARYSHKINE: And Sasol next door to them, yes.

ALEC HOGG: Webber Wentzel…Services businesses, and where is their business coming from, the services business? This is the place, if you are operating in Africa. You’d much rather live in Sandton than, probably Lagos.

SASHA NARYSHKINE: Well, 80% of all capital markets are still in South Africa, so until that changes it will remain the same. That if you are looking for access to capital to do business in the rest of Africa you still have to come to the financial capital of Africa.

ALEC HOGG: I’ve got to, just support you on one of the things you said earlier about ‘it’s better to invest than to trade’.   John Paulson, a big investor in AngloGold Ashanti, a billionaire hedge fund guru lost 36% on his portfolios last year. He bet on resources stocks and energy stocks, so Sasha, I think a long-term investment in the likes of MTN, is going to treat people and your clients a lot better than they are trading.

SASHA NARYSHKINE: I hope so Alec.

GUGULETHU MFUPHI: We know what your favourites are then, Alec. Thank you so much to Sasha Naryshkine, Director at Vestact.