A fairly lacklustre day on the JSE as profit taking brought share movement to a standstill.

Bruce Whitfield:
Welcome to Chris Steward from Investec Asset Management, our market commentator this evening, on what looked on the index level at least to be a bit of a lacklustre day but there was quite a lot of news bouncing about today, Chris, good evening.

Chris Steward:
Yes Bruce, I must admit I didn't spend a hell of a lot of time at my desk today. There was an awful lot going on, lots of companies reporting left right and centre and whilst looking at the Alsi 40 only off 0.2 percent one might think it was a fairly lacklustre day, within that you have got a range of nearly eight percent between the top performer and the bottom performer in the Alsi 40 on the day.

Bruce Whitfield:
Bottom performer in that Alsi 40 and I was surprised to see it, African Bank, and quite a complicated statement out today, talking about the NAV of the business post Ellerines transaction, and the share actually came under quite a lot of pressure.

Chris Steward:
Yes, I mean there is a couple of things out there I guess at the moment. People have been holding African Bank on the expectation of distribution of surplus capital and large dividends and while I have no doubt that that capital will be forthcoming in the fullness of time certainly the bond market at the moment is not conducive for raising debt funding in order to distribute surplus capital and restructure your balance sheet so I think that is one of the negatives impacting the share at the moment. The other negative I guess is just concern around the consumer in general and concern particularly around possibly that credit quality within the Ellerines book and just furniture retailers in general but you know I think if you look at today's update from African Bank I think it is commendable that they have come out with such extensive disclosure on the Ellerines transaction, this wasn't results, this was really looking at the historic accounting methodologies that Ellerines and indeed a number of the other furniture retailers have been adopting with regard to really the upfronting of recognition of income particularly on insurance contracts and the fact that African Bank will be reversing that out of the net asset value at acquisition of Ellerines which makes it look as though they are paying more money but I think what possibly some people are failing to realise is that a lot of that will wind its way back into income in the future. Really it is just a timing issue around the recognition of revenue.

Bruce Whitfield:
Perhaps less spectacular was the profit warning from Nedbank which came out today. It didn't give any specific guidance as to just how badly it has been impacted, it seemed to fudge things just little bit, what did you make of the Nedbank update?

Chris Steward:
Yes it was quite a lot worse than I anticipated it might be. Certainly it was a very different tone to the tone that we had out of management at the time that they released their full year results for 2007, in other words as recently as late February early March of this year, clearly the environment is deteriorating. I don't think Nedbank was expecting any further interest rate hikes this year, we have seen one of 50 basis points already, we have certainly got certainly the money market discounting at least another 50, probably another hundred basis points of interest rate hikes, and already I think Nedbank making some comments about the fact that consumer credit quality is deteriorating to worse levels than they expected which seems incongruous in light of the fact that they have certainly shown very strong growth in their consumer credit book in the first quarter of this year, you would expect that if they were experiencing deteriorating credit quality in the consumer book and anticipating that to get worse you would have thought maybe they would have closed the taps a little bit on the extension of consumer credit in the first quarter of the year.

Bruce Whitfield:
But the trouble is once you start closing the taps then the ratios go haywire and you begin to see a higher percentage of defaults so you have got to keep the credit tap going I guess.

Chris Steward:
Well I mean it is a little bit difficult to tap back extensively but you know I think one can pick one's fights and choose to gain market share at the appropriate time. So that was one of the surprises of the number. The other element of the number that for me was very disappointing was the non-interest income line where if you remember last year they had a fairly large trading loss of about R305-million as a result of the joint-venture with Mcquarrie, so that is in the base, and despite that trading income only group by about 6 percent. If you actually isolate for that trading loss in Mcquarrie the non interest, the none margin income side of the income statement actually went backwards, which I think in the current environment is quite a disappointing result.

Bruce Whitfield:
Chris Steward from Investec Asset Management, thanks very much indeed.

Bruce Whitfield:
Our market commentator this evening in our Cape Town studio is Chris Steward from Investec Asset Management. We were talking earlier about the Nedbank trading update which came out today, Chris distinctly unimpressed by that, but what was interesting Chris on the day though was that banking shares despite the negativity and the negative message being sent by Nedbank were actually quite strong on the day, Standard Bank, FirstRand which had been battered down recently actually recovered as well.

Chris Steward:
Yes I'm glad you came back to this Bruce it was a point I wanted to mention. You know what you're seeing is earnings numbers in all likelihood coming through lower than certainly the sell side brokers out there are forecasting but the shares seemingly acting relatively resilient to this bad news which indicates I think that a lot of the bad news is already built into the price. I urge you to look at a couple of charts, if you look at the price-earnings ratio of the banking sector relative to the market or in fact the dividend yield of the banking sector relative to the market you know we are at all-time lows, lower than the 1998 emerging market crices, lower than 2001 when the rand blew out which tells you the market is already factoring in, I don't know if it is factoring in $200 a barrel of oil, but certainly already factoring in some bad news and earnings downgrades on the back of incremental bad debt. So I think some of the bad news possibly in the price already similar to what we have seen in offshore markets, we have seen some of the UK banks announcing, and the US banks, announcing very large rights issues indeed and at the same time rallying on the back of what would otherwise be considered very bad news. So I guess there is a difference between what news flows coming out and what is already built into the share prices and I think there is quite a lot of bad news already built into the share price.

Bruce Whitfield:
But at what point and we have been talking about this probably for the better part of the last year where you look at the valuations, the valuations look stupid, you say to people you should be buying these things because the valuations look good, the valuations continue to look good, and we talk about things called value traps where although the valuation looks compelling nobody just wants to drive these prices up. At what point do we see that happen? Do we need to see a turn in the interest rate cycle or at least an indication that Tito Mboweni has had a better lunch better lunch?

Chris Steward:
I think we need to see a fairly convincing top to the interest-rate cycle. As long as people think the next time the MPC meeting meets they are going to raise rates again and guess what that is no longer going to be the last rate hike as everybody thought three months ago there is very little reason for these stocks to rally purely because despite attractive valuations the earnings momentum is going to remain negative and there is going to be further earnings downgrades. You know if there is even an inkling of fear that commodity prices are going to continue to rally the currency may continue to weaken or the oil price may God forbid go to $150 a barrel why would you not buy Sasol and why would you rush out and buy an Absa or a Nedbank which is going to experience further earnings downgrades and really be on the receiving end of incremental consumer stress in the face of further interest rate hikes. So I think we need some convincing that we have reached the top of the interest-rate cycle, some convincing that the inflation numbers are going to start to look better and I have a feeling when that situation arises you are going to have to be very quick on the trigger because these things are going to rally hard.

Bruce Whitfield:
Absolutely, we live in hope and we are very patient about these things. Reunert a good trading update today, at least it looked quite good, earnings around R3 a share. Is that what you were expecting? The market didn't seem too excited.

Chris Steward:
Yes I mean they did release an update after their AGM a couple of weeks ago and I think this guidance for normalised earnings up five to 10 percent, I think you have got to look at the normalised numbers, there is a big IFRS two charge for BEE in the base which kind of distort things. Up five to 10, it's okay, and you know they expect a better second half with a pick up in real growth for the year so I guess earnings growth of more than 10 percent for the full year which would imply a quite significantly stronger second half so it is okay but you know not without their problems and I guess a little bit disappointing relative to the Altron results we saw recently where earnings growth was significantly stronger than this.

Bruce Whitfield:
Absolutely Altron had spectacular results yesterday with Powertech being the big generator, can we call it that, of profit within the Altron group. We saw the results from Sappi yesterday you know looking healthier but digging down a little bit deeper a bit underwhelming. The Mondi trading update looked a little bit healthier and especially in Europe where Sappi is struggling Mondi in that packaging sector seems to do rather well.

Chris Steward:
Yes they are doing okay. I mean again it is an industry that is not without its issues, you know the packaging, corrugated paper industry, the stuff they make cardboard boxes out of again quite a competitive industry and there is input cost price pressure, not a huge amount of pricing pressure, so some of the similar maladies I guess impact in the coated wood free paper to which Sappi is more exposed. I guess you know it depends on your risk profile, Sappi possibly has a greater degree of earnings volatility given that they are a little bit more marginal. You know their earnings sensitivity to let's say strengthening dollar against the euro or further weakening in the rand or an increase in coated wood free prices particularly in Europe you know the sensitivities of earnings are very large both on the upside and the downside so you might get more gearing if things go right or Sappi however if things go wrong for Sappi you know that gearing works against you. You've certainly got a more risky balance sheet, Sappi has got a hell of a lot more debt on their balance sheet, so it is a far riskier proposition, Mondi looks much more solid, it has more exposure to emerging markets where demand is remaining more resilient and they are less exposed to the export market out of Europe so in the event that the euro continues to strengthen against the dollar and other world currencies Mondi is certainly going to be less negatively impacted by that than is Sappi. I would probably go for Mondi at this stage myself.

Bruce Whitfield:
Chris Steward, thanks very much indeed, from Investec Asset Management.