Magic Markets #205: A year of gold, bitcoin and the US

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The Finance Ghost: Welcome to episode 205 of Magic Markets. This is our last free show for 2024, so we are bringing the year to a close. It has been pretty manic. There have been a lot of elections, including in South Africa. There’s just been a lot of stuff. Actually, I’m almost too tired to even think about how much of it there’s really been! On this show we’re going to run through some of the major stuff that happened this year. Some of the big macro points, some of the big moves year to date, and maybe one or two surprises and perhaps a couple that were expected. Maybe a slightly shorter show than normal, I think, given where we are in the year.

Thank you for joining us this late in 2024. Hope December is going well for you so far. Moe, it’s always good to do this with you obviously as we bring the year to a close and look back on some of the gains that maybe were made and some of the ones that we wish were made.

 

Mohammed Nalla: Indeed. Ghost, I mean, a slight change in venue for me. I’m actually doing this recording down in South Africa. I managed to come down for a nice long awaited summer holiday. I’m enjoying the hadedas up here in Johannesburg. The lack of water, thankfully there’s a…

 

The Finance Ghost: Or Moberg as I call it now.

 

Mohammed Nalla: Moberg as you call it.

 

The Finance Ghost: I refer to it as Moberg while you’re there.

 

Mohammed Nalla: Moberg. Maybe the city should actually just work on storing water in the potholes in the road, that might give them some additional reservoirs. I’m going to stop complaining. The weather’s great.

 

The Finance Ghost: Sorry – fun fact for the listeners about how Moe does his South African trip. Because he moved to Canada, he needs to validate his decision every year. So what he does is he comes down, then he complains bitterly about the potholes, etc. He only visits Joburg where he has family. He doesn’t go anywhere else. And then on top of that, he always makes sure he needs to go to Home Affairs and he makes sure he goes on the off chance that he gets an appointment. It’s like playing South Africa on hard mode, so that by the time he leaves, he can go: “Man, it really makes sense that I moved to Canada” and then he can feel better for the whole of the next year while he’s shovelling snow. Does that sound like a fair summary, Moe, of your approach?

 

Mohammed Nalla: No, Ghost, that’s unfair. But I like the analogy. Playing South Africa on hard mode.

 

The Finance Ghost: Unfair, but reasonable. It’s like a corporate action.

 

Mohammed Nalla: I mean, at the end of the day, the family and friends down in Cape Town ask me why I don’t come down there, and I should. It’s just the wrong time of year. It’s expensive to get down to Cape Town. Joburg’s where most of the people I need to see are actually based, hence the Joburg – or Moberg – visit. That said, yeah, we know the challenges up here, but I was saying before you interrupted me and called it Moberg and my South Africa on hard…

 

The Finance Ghost: And Moan Affairs as opposed to Home Affairs because we had a long phone call the other day just about how terrible Home Affairs was for you.

 

Mohammed Nalla: Maybe that’s detail for another day. I mean, if it continues being bad, I might just put out a Twitter or X blast and I’ll just cc all the relevant people at Home Affairs, as you suggested Ghost. I know you’re quite good at that.

The weather’s fantastic. It’s hot. It’s been very hot up here. Thankfully, we’ve had some classic Joburg thunderstorms, which my daughters are not familiar with. Living up in Canada, we don’t get thunderstorms. I’m enjoying it. It’s a great trip. My arm’s been twisted twice to go and play some padel. We know how active I really am, so that’s been quite entertaining for the people who’ve managed to actually get me out to go and play padel. I slipped, fell, hurt myself, you know, the usual story. So, it’s been fun!

 

The Finance Ghost: I’m very sad to have missed all of this, I really am.

 

Mohammed Nalla: It’s been fun, it’s not been as fun as markets though Ghost. That’s what we’re talking about on the show. It’s not about my Joburg trip at the moment. That’s for another time. What we’re talking about here is the wrap on the year because we’ve got two weeks left before the year shuts down officially. We know in South Africa, everyone’s really shutting down by next week.

This is predominantly a global show, yes, but it’s got a predominantly South African audience. So we figured on the last free podcast for the year, it would make sense to look at what’s happened in markets. What’s really surprised me, what surprised you, what have been some of the highlights, some of the lowlights – so I’m going to jump right in and we’re going to jump in with gold.

The reason I’m going to jump in with gold is because everyone who’s known me for the longest time, Ghost, when we worked a long time ago at one of the South African banks, you probably knew back then I was a gold bug. I was happy to keep accumulating gold as a diversifier in the portfolio. Well, finally, guess what? Gold’s time finally came. It really shone this year. It shot the lights out. It’s actually been one of the best performing asset classes.

When we look at conventional asset classes, it’s actually outperformed equities. It’s beaten the S&P 500. That’s had a very strong move on a year-to-date basis. Guess what? Gold’s actually done pretty well on that count as well. It’s beaten most regional indices as well. When I say regional, you’ve beaten China, you’ve beaten Europe, you’ve beaten the emerging markets complex. I just want to highlight that, because that was a highlight for me as someone who’s had a reasonably sized gold position over the longest time, it’s really been pretty good to see that come through.

And why has that come through? It’s come through partially because when you have inflation, gold tends to do okay. It’s partially a hedge against all of the craziness that’s going on in the world at any given point in time. Gold is my tinfoil hat hedge and effectively on that basis, the world’s gone nuts. Well, thankfully my portfolio hasn’t gone nuts. But before I stop speaking, because I want you to jump in here, Ghost, before I stop speaking on gold, I’ll tell you what really shot the lights out. Here I’m partially disappointed because I don’t have exposure to this particular asset class at this moment in time. I have had it historically. I cut the positions and that is…. wait for it… drumroll – just last week we were talking blockchain, so now you can guess it: bitcoin!

Crypto’s gone bananas. If I said gold gave you 30% as we’re recording this on a year-to-date basis, Ghost, do you want to take a guess what bitcoin is up on a year-to-date basis at the time of this recording?

 

The Finance Ghost: No, I don’t. It’ll depress me. I don’t want to. It’s like going to Home Affairs, Moe. I don’t actually choose pain the way you do.

 

Mohammed Nalla: It will depress you. Maybe NVIDIA is something that will have challenged bitcoin’s rise. Bitcoin up almost 120% on a year-to-date basis. So unless you got your stock selection like 100% correct and you were choosing the one stock that shot the lights out, I’m actually pulling it up as we speak here and I think Nvidia is up like 130%…

 

The Finance Ghost: No, much more. NVIDIA is 187%. I also just checked.

 

Mohammed Nalla: So NVIDIA, unless you picked just NVIDIA, bitcoin’s done pretty respectably. Ghost, with your view on NVIDIA, I think I’m going to hand over to you. What were the surprises for you this year? What were some of the highlights, some of the low lights? Because I haven’t wrapped up yet. I’ve got China to talk about. I’ve got some of the low lights as well. But let’s move across to you. I can stop talking and have a drink of water in the very, very hot Joburg weather right now.

 

The Finance Ghost: Look, I think my lens remains quite South African. The positive surprise this year was just how well this year went for South Africans. The election, I kind of expected that it was going to signal genuine change – it just felt like it was in the air. I’m not sure that too many people expected to it to go the way it actually went. But be that as it may, the thing that I was very surprised about was the disappearance of load shedding. I don’t think anyone had that on their bingo card for 2024, especially not all of the solar installation businesses who were left absolutely high and dry, along with a few listed companies along the way who had invested quite heavily in renewable energy load shedding solutions. Suddenly there was no market for it left, or at least a very small market. That was a big surprise.

Then linked to that would be the performance of a lot of the stocks on the JSE because they really have seen a huge uptick in valuation this year. Now, admittedly, it was off quite a depressed base and those who have been beating the South Africa drum for a long time will obviously point that out and say, well, it was about time, it was due. Yes, all of that might be true, but the valuations really have moved up heavily, especially in stuff like the retail sector. They’ve moved in advance of major interest rate declines. They’ve assumed that these benefits from load shedding etc. will really flow through into consumer spending.

I think that’s going to be a big focus for us going into next year and we’ll probably talk about it in January, just the expectations in the market and where all that stuff has gone. That’s really been a positive surprise for me, in terms of the performance of SA Inc.

I think what went much the way I expected was the performance of the property sector. That was one of my big rotations this year, going into the property sector based on decreasing interest rates. I was watching quite carefully as the property funds were releasing updates both locally and abroad and how they were talking about what was going on with valuation, yields, etc. – looking at stuff like vacancies, reversions, that’s a very important metric. That’s how the renewed lease has been priced relative to the expired lease. If there are negative reversions, it means the rentals went down, so the landlord got a bum deal. But if there are positive reversions, then it means there’s good demand and the tenants had to pay up for a lease renewal. Obviously the costs of owning a property go up every year, so you certainly want to see positive reversions as the landlord. Those were starting to slowly come through, so that’s been quite good. The property sector has been quite nice and rewarding this year. I actually had a look just before this show. The Satrix Property ETF is up 24% year to date and that obviously excludes the dividends.

I buy these things in my tax-free savings account so that I get that distribution from the REITs tax-free. It literally is just a pass through, because the REITs basically pay no tax. They collect the rent from the tenants, they pay their expenses, they get it into those funds and those funds then pay it off to their shareholders. If you do it in a tax-free savings account, there’s just no tax leakage along the way. So yeah, that’s worked out quite well.

In terms of other major surprises, I guess just the way the US market has continued to run. Where does this thing ever stop? Obviously where there are underlying earnings upticks, then that kind of makes sense. There really are some multiples that have just gone to the moon and it feels like it might be the same stuff driving the bitcoin price – it’s people seeking safe-haven type assets. In some ways I think people look at something like Walmart and Costco and they say, well, you know, maybe this is a better bet than the US Government. And maybe they’re not wrong at the rate that things are going!

Those valuations just seem to be going up and up and up. We covered Walmart very recently on Magic Markets Premium and yes, the business is doing extremely well. But you go and draw a 10-year chart of the multiples and it’s really just quite extraordinary.

So, it’s been a good year for a bunch of asset classes. And I guess the lesson there is if you are sitting on the sidelines and you are just sitting in cash because you’re too scared to own anything else, then you are going to get left behind over time on average. And in some years like this year, you will feel very sorry for yourself because you’ll have been left behind by a big margin.

 

Mohammed Nalla: I think that’s such an important point, right? Because like you say, if you’re actually sitting on the sidelines, sitting on cash, that’s actually very expensive. It’s the opportunity cost, it’s inflation that eats you as well.

You’ve mentioned a couple of stocks there and I don’t want to detract from what we will actually give to our Premium subscribers in terms of some of the best stocks that we looked at and covered this year, maybe some of the worst as well, because not everything can be a winner. But talking about this just broadly on a sectoral basis and I like what you’ve done, Ghost, because we come at this so differently. I come at it from a macro perspective. I started out with currencies, you know, cryptocurrencies and gold, you know, that’s very similar flavour. Then we kind of go into the indices and we look at what sectors of the economy have done well.

I like your point on property because I’ve liked property for a long time simply because of the yield underpin that it gives you. For the income part of the portfolio, that’s actually very valuable. I’ve liked property and I think property has done well not just in South Africa. If we look at how that’s done, listed real estate in the US, it’s also done remarkably well because they tend to act as these bond proxies. We actually had the US rate cycle kind of top out and then the market started pricing in hey, guess what, we’re going to start seeing rate cuts. As soon as the market anticipates that, you saw the property sector really unleash some of that juice that was maybe left in the tank. I like the property story as well on a sector basis.

Whilst we’re talking global stocks and I focus more on the global rather than South African because you get that dispersion of the various sectors. The thing that really worked out for me certainly in the latter half of this year was exposure to utilities. Utility stocks, Ghost, we raised some of these in Magic Markets Premium. I know that you managed to actually buy some of them based off the research that we had done and that you’ve actually done quite well.

Why that worked out so well for me is prior to the US election, you had this utility sector that was really doing relatively poorly compared to some of the other sectors, the consumer discretionary sectors. In the lead up to that election, you actually saw an unlock of value. Utilities and defensive start to come through. Now post the election, it’s been a somewhat different story. You’ve seen them give back some of those gains. They’re not down yet, they’re still doing well for the year, but everything’s doing well for the year.

I think as we head into 2025, the world’s really going to have to look critically at the hubris on the United States versus the reality on the ground. For me it’s still quite unclear. I’ve probably got to still digest some of that once I’m done with the holiday. We can do a whole new show in the start of the new year in terms of the outlook for 2025. I actually want to do that Ghost because I will have digested a lot of the quarterly numbers for my clients in the macro space and that will make for a very powerful discussion. But before I move off that one last point just on regional exposures, I wanted to bring in China.

This is because I’ve been what I call a long-suffering China bull. I’m not outright bullish on China, but I did believe that valuations – like in South Africa, where valuations were very cheap on South African equities – valuations on Chinese equities were similarly cheap. And then what we saw is the Chinese start to deliver that stimulus around Q3, Q4 of this year. That literally was the firecracker. We had China move from being the worst performing major global market to the best performing. It shot out the lights. It actually outperformed the S&P 500, it outperformed gold very briefly and then started to give some of that back. When you look at China, just as we’re recording this today, it’s another down day. I think the index down around 4% and thereabouts, which now moves it below the S&P 500 on a year-to-date basis. But guess what, for a very brief period, it was actually ahead of the S&P 500.

And why is this important? Ghost, just looking at the longer-term story. We know the US is big, a strong economy there, some geopolitical pressures coming through there. China on the other hand, is the challenger to the throne. Again, be sensitive to the price you’re paying for the underlying assets. US assets are in many sectors priced for perfection. China has a very large risk premium priced into it, either correctly or incorrectly. This is going to lead to very divergent parts over the longer term. Last point, then I’ll hand back over to you to maybe wrap this up. Ghost, I am concerned around US markets because of how stretched valuations have become in certain sectors. Quite often it’s the buy the rumour, sell the fact – there’s seasonality that comes into play.

This is the Santa rally, right? They call it the Santa rally. Picture Donald Trump dressed up as Santa – it’s the Trump rally as well. We’ve had an election. Novembers and Decembers are generally good months from a seasonality perspective. Then as we head into the new year, you start to see an uptick. If you look at VIX or volatility, seasonality that starts to tick up in January. You start to see the markets start to struggle a little bit at the start of the year, specifically in election years as well. So I’m going to be watching some of those seasonal aspects.

I am concerned. I’m not deploying capital at a furious pace right now. I’m being a lot more selective in terms of what companies I buy, what valuations I buy them at, and last point here, Ghost, you and I differ a little bit on this – I’ve actually been trimming positions and I kick myself, yes, because some of the stuff I sell continues to go up. But I’ve been trimming positions as a means of managing my overall risk in my portfolio, simply because when a stock that you bought for just two or three quarters is up 45%, guess what? That for me is an outsized move. I’m going to take some of that money off the table, maybe look at redeploying to better ideas.

 

The Finance Ghost: Look, that’s a high-quality problem when you have returns like that, definitely. So that does make sense. I think one of the things I’ll be watching going into the new year and what was definitely a feature this year, Moe, was Europe and just how bad it’s really been. Just the story on the ground, if you read a lot of companies that have exposure to the European – not the listed markets, I mean the actual underlying markets – so anything that touches the automotive sector, for example, and that’s really quite broad, if you think about the strength of Europe historically in that sector, stuff like logistics in Germany, a lot of that has been built around the automotive sector. If the automotive sector is gently falling over, or not so gently as the case may be, then the knock-on effect is severe. I actually saw something online the other day. I hope it was real, although I kind of hope for the European market that maybe it wasn’t real, but it was a BYD ship carrying BYD vehicles to Europe. It was basically just this massive, massive ship that looks like it practically rolls out the factory like that, carrying all these vehicles to Europe. It just summarises exactly what the Europeans are dealing with – the monster that has been created that is the Chinese automotive sector.

It’s everywhere in South Africa. There’s a new MG dealership in the Cape Town city centre that I saw the other day. And believe me, MG has nothing to do with the UK company anymore. That’s long gone. The brand has been bought up by the Chinese. I don’t know much about it, I should probably research it, but in the window there was this very cool looking supercar with these scissor doors. This is impressive stuff coming through.

The Europeans have been gently sleeping on this and it’s gonna get worse, I think, before it gets better. I still think there’s a lot of denial in the market around this. We are finally seeing a change in management at Stellantis. We are seeing all kinds of industrial action at Volkswagen because the workers unions just refuse to believe that this is the new reality and this is how bad it’s going to actually get. It’s rough out there.

Base German cars are R800,000 or R900,000 and I don’t mean little Polos but if you go and buy a relatively basic Audi for example, or anything like that, those are the sort of prices you need to be paying. It’s just ridiculous. I can’t really see how it survives in the current world with where things have gone. Watch out in 2025. I do think that the European story is going to get worse before it gets better. You’ve got to change years and years and years of this bureaucratic slow-growth mindset. This is a region that is now dealing with inflation, which is not something they necessarily have a great understanding of.

Again, it’s not every country in Europe. If you go and read South African property funds and where they’re investing, places like Portugal, Spain, Poland are still popular, those high-growth, the sun is shining, the less developed countries. Shame, Italy never seems to really come up unfortunately! Those sort of places are actually quite popular at the moment, whereas the powerhouse places like France, those properties are struggling. Germany, we know what the story is there with the automotive side. Keep an eye on that I think as we head into 2025 because I think it caught a lot of people off guard this year.

 

Mohammed Nalla: Europe’s probably a great place to end off on the show. My few thoughts on Europe are that it’s actually surprised me, like you, to the downside. I’m surprised at how bad it’s been simply because you could see that it was bad – I mean if we had this conversation a year ago, it would have been the same story on Europe, so surely policymakers, politicians, they can see the economic picture. You know, the writing is on the wall, there’s got to be an intervention and Europe’s just been really slow on those interventions and I don’t think they’ve realized the economy of the future. I just spoke to someone 2 days ago who just returned from a very lengthy investor trip to China and the stories coming out of China will blow your mind.

I live in North America so I can see the other side of that coin. You’ve got these two global hegemons, China, the US, going at it. And you’ve got Europe sandwiched in the middle. You’ve got Canada arguably also sandwiched in the middle, because Canada is not the United States. These countries have not realised the competitive dynamic that is at play here. That’s reflected in asset prices. It’s reflected in equity markets. My parting point is usually there’s a fairly strong correlation between, for example, the UK, you know, the FTSE, the UK equity market and the JSE. Pay attention to that. The UK hasn’t been all doom and gloom. They were doom and gloom for a while. I think they went through that massive political change around last year this time, three or four different prime ministers within the span of three or four weeks, you remember this.

Now, I get the sense that the UK is arguably on a better footing than Europe in general. That’s specifically also because Europe has always had this mosaic approach. They’ve got this uniform policy, monetary policy, one currency, but the economies underlying that are so disparate in terms of their labour dynamics and growth dynamics. That has always been the European challenge since the advent of the euro and the region as a whole.

Unfortunately, that’s where we’ve got to leave it. I think that’s been a decent wrap on the year. We’ve got the US shooting the lights out. We’ve got gold shooting the lights out. Guess what? It’s monetary debasement. That’s a topic for another day, that’s something that we can maybe discuss as we look to the year ahead in 2025.

With that as the backdrop, I certainly hope that our listeners have had as fantastic a year as we’ve certainly had at Magic Markets. For those of you that are not subscribers to the work that we do in Magic Markets Premium, go and check that out. It’s only R99 a month for detailed on-the-ground research of global stocks. We cover a different stock every single week. It’s a podcast, it’s a report, lots of detail in there. I promise you it’s the best value you’re going to find out there in terms of detailed investment knowledge.

And we hope you’ve enjoyed your time with us. We hope to see you back with us back in 2025. Ghost. I’m going to wrap it there. We wish everyone a fantastic festive season. Stay safe over the holidays, and we’ll see you in 2025. Cheers.

 

The Finance Ghost: Ciao.

This podcast is for informational purposes only and is not financial or investments advice. Please speak to your personal financial advisor.