Following the formation of the Government of National Unit (GNU) in June of this year, South Africa’s markets and economy appear to be enjoying a new era of positivity highlighted by an event earlier this week where business and government joined hands to launch ‘phase 2’ of a compact they launched last year. Business leaders and government representatives – including President Ramaphosa – at the launch set themselves the ‘stretch goal’ of adding 3% to GDP by 2025 and adding 1 million new jobs to the economy.
The partnership represents 140 companies, with those that are listed having a market capitalisation of R11 trillion. It aims to unlock R23 billion in private sector investment into the energy sector, boost renewable generation capacity to 4 gigawatts, and construct 1,000 kilometres of new transmission lines. It will also seek to attract around R28 billion investment in rail infrastructure.
While the compact between business and government isn’t new, the relationship between the public and private sectors seems to have strengthened since the elections in May this year. Following the loss of the ANC’s majority, the formation of the GNU has proven to be surprisingly stable, although it remains early days.
These developments lean towards the domestic economy being more positive than we had outlined for South Africa ahead of the election. It is certainly worth celebrating the GNU, which includes more market-friendly parties such as the Democratic Alliance (DA) and excludes radical left-leaning parties that espouse economically dangerous policies.
There are also some other unique local developments at play. These include the introduction of the two-pot retirement system, which has boosted the economy by enabling South Africans to dip into their retirement savings, and the apparent end of load shedding, due to the Kusile plant coming back online together with a reduction in energy demand, which is at least partly due to private sector investment in solar.
We welcome some of the positive developments we have seen since May, which include consumer confidence surging to a five-year high, similar improvements in business confidence, the rand strengthening from R18.28/$ at the beginning of the year to R17.53/$ as at today, a dramatic turnaround in the load shedding situation, and the JSE surging around 16% for the year-to-date.
However, there are also global factors at play that have contributed to South Africa’s improved economic sentiment. In particular, South Africa is benefiting from lower fuel prices and the start of a global rate-cutting cycle.
The overall situation has created some breathing room for the GNU, but there is still plenty of work to do. Major structural reforms are required to grow employment and start weaning South Africans off the 26 million social grants that are paid. And now that the JSE has rerated, we will need to see earnings come through to justify higher share prices, which depends, in turn, on sustainable economic growth.
At Dynasty, we are pleased to note that South African markets and the rand have outperformed our more conservative scenarios. However, despite the improvement in South Africa’s fortunes, we believe that offshore markets offer superior opportunities. What’s more, investing offshore enables clients to protect their global purchasing power in US dollars, no matter what happens to the volatile rand.
We also believe that South African markets remain vulnerable to global macroeconomic and geopolitical headwinds. A large spike in the oil price and flight to safe-haven assets due to the heightened risk of a major conflict erupting between Iran and Israel, for example, would have near-immediate impacts on the rand and inflation. Local political risks are still also in play, with South Africa’s good news story depending on the GNU enduring for the rest of the electoral term.
As such, we maintain a cautious outlook for South African assets. The current gains are influenced by a confluence of favourable global trends and temporary local factors, but significant risks remain.
“Political stability – including positive sentiment about the government of national unity – normalised inflation and reduced interest rates promote economic confidence and set the scene for future growth.”
– Gerrie Fourie, CEO of Capitec Bank
“Our strong view is getting the cycle to turn is the focus on jobs, growth, and narrative,” Gore said. “Getting over three percent is very important. The question is, can we do it. We think we can, and that’s the stretch. I hope phase two is setting out stretch goals. The prize is big. We are committed to doing it.”
– Adrian Gore, CEO of Discovery
Global News
- Treasuries slid and the US dollar climbed on Wednesday after the stronger-than-expected jobs numbers dampened Wall Street’s confidence that the Fed’s next interest-rate cut would be a big one. Ten-year yields closed in on 3.8% after hitting a low of 3.69% in the prior session amid more tensions in the Middle East. The dollar reached nearly a two-week high after the labour readout as traders pondered the scope of the Fed’s next move.
- The dollar is also gaining ground against both the yen and the pound, fuelled by changing investor expectations regarding monetary policy in Japan and the UK. The yen weakened on Thursday after Japan’s new Prime Minister, Shigeru Ishiba, stated that the economy isn’t prepared for another interest-rate hike. Meanwhile, the pound has been sliding following remarks from Bank of England Governor Andrew Bailey, who hinted at a more aggressive rate-cutting cycle, prompting investors to increase their bets on upcoming reductions.
- BlackRock CEO Larry Fink said the market is pricing too many interest-rate cuts from the Federal Reserve given the US economy continues to grow. On Tuesday, he said: “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate.”
- Oil rose for a third day on Thursday as traders assessed supply risks in the Middle East, with Israel expected to make a retaliatory strike against Iran following Tehran’s missile barrage earlier this week. Brent crude has climbed to $78 a barrel, on course for the longest run of daily gains since August, while West Texas Intermediate was above $71. Israel has threatened reprisals against Iran, though US President Joe Biden has said the country should hold off from attacking its nuclear facilities.
- Notwithstanding increased geopolitical risks, investors remained unrelentingly bullish earlier this week bidding the US stock market further into uncharted territory. The S&P 500 has scored 43 record highs so far in 2024. The latest milestone on Monday left the benchmark index up 20.8% on the year, the strongest start to a year since 1997, when the US economy was surging during the dotcom boom under President Bill Clinton, according to FactSet. This is despite a massive port strike threatening America’s delicate supply chains, the Fed rushing to prevent unemployment from spiking, and the pending elections.
- Enthusiasm for AI stocks appears for now to have dampened. Gone is the first half of 2024, when investors’ passion for AI drove the market skyward even as stubbornly high inflation dashed hopes that the Fed would begin cutting interest rates. Investors are now questioning big tech companies’ heavy spending on AI. Fatigue among the big tech stocks tends to weigh on the S&P 500, which gives greater influence to companies with large market values. But gains by a wide range of other stocks are helping push major indexes higher.
- Chinese shares listed in Hong Kong jumped the most in almost two years on Wednesday as stimulus-induced euphoria swept through the city’s $5.8 trillion market. The Hang Seng China Enterprises Index climbed as much as 8.5% before closing up 7.1%, the 13th straight day of gains. Property developers led the rally, with a gauge of the sector surging as much as 47%, while an index of brokerage shares jumped 35%, both record intraday moves. Stockbrokers in Hong Kong are having one of the busiest periods in their careers, with many having cancelled planned holidays. Mainland Chinese markets remain shut until 8 October for a week-long holiday.
- OpenAI has raised $6.6 billion in new funding, with investors valuing the startup behind ChatGPT at $157 billion, a total that puts it on par with the market capitalisations of publicly traded household names such as Goldman Sachs Group, Uber Technologies, and AT&T. OpenAI was last valued at $86 billion early this year, when employees sold existing shares. The funding round is one of the largest ever for a private company, save for the $10 billion OpenAI itself raised from January 2023. Earlier this year, Elon Musk’s AI startup xAI raised $6 billion.
- The demand for lithium-ion batteries (Li-ion) is set to soar dramatically over the next decade, with projections indicating the market will exceed $400 billion by 2035, according to a recent report by IDTechEx. This is due to the increasing use of Li-ion batteries in consumer electronics, electric vehicles and the widespread adoption of renewable energy sources reliant on efficient energy storage solutions.
- French luxury powerhouse LVMH has secured a 10-year sponsorship deal with Formula 1, covering its Louis Vuitton, Moet Hennessy, and TAG Heuer brands, replacing long-time sponsor Rolex, the company announced on Wednesday. The agreement, set to begin in 2025, signals a renewed focus by LVMH on sports. Led by one of the world’s wealthiest individuals, Bernard Arnault, the company paid approximately €150 million ($166 million) to become a premium sponsor of the Paris Olympics.
- Mark Zuckerberg has become the world’s second-richest person, with Meta Platforms’ shares reaching a record high of $582.77 on Thursday. This surge elevated his net worth to $206.2 billion, marking the first time he has surpassed Jeff Bezos in wealth, who he now leads by $1.1 billion, while trailing Tesla’s Elon Musk by nearly $50 billion, according to the Bloomberg Billionaires Index. Meta shares have climbed 23% since the company reported better-than-expected second-quarter sales. (Meta is a holding in the Fundsmith Equity Fund, one of Dynasty’s preferred actively managed funds).
- As at Thursday’s close the S&P 500 was 0.67% down for the week.
Local News
- Business and government came together on Tuesday to kick off the second phase of their compact, informally referred to as “the renewing of the vows” by insiders at the presidency. Over 150 top CEOs reaffirmed their commitment to the initiative, which in its first phase tackled South Africa’s energy and logistics crises. The second phase of this partnership aims for a “stretch goal” of creating 1 million new jobs and boosting GDP growth by 3% by 2025. Key focus areas remain logistics, energy, and crime, with a target of adding 4GW of renewable energy to the grid. JPMorgan senior equity strategist David Aserkoff says the country needs two years of 2% economic growth to get long-term value investors to pay attention, and 2025 will be the first of those two years.
- South African stocks are having their strongest third quarter for 11 years, and investors see the gains extending. The FTSE/JSE Africa All Share Index is up around 10% over the three months, notching 13 record closing highs in the process and outpacing a rally in MSCI’s gauge of emerging-market equities. China-exposed tech investor Naspers has led the advance as Beijing takes steps to stimulate the economy. Banks have also driven the main index higher, driven by optimism that falling interest rates and a market-friendly broad coalition government will boost growth.
- The rand has strengthened by an impressive and unexpected 6.1% against the USD for the first 9 months of 2024, making it the third-best emerging market currency for that period.
- Deputy President Paul Mashatile is in London in a bid to woo UK investment in renewable energy and mineral beneficiation sectors as he leads a delegation of ministers at the government’s London Investment Week, which opened on Monday evening. The event aims to strengthen trade and investment ties with the UK, which has traditionally been one of South Africa’s largest trading partners and biggest source of foreign direct investment. It also showcases small- and medium-sized enterprises, providing a platform to pitch for funding from potential investors.
- Deputy Finance Minister David Masondo has toned down expectations of how soon South Africa will be removed from the Financial Action Task Force (FATF) greylist, saying October 2025 is the most realistic timeline to achieve this. Expectations were that the country could be removed from the list as early as February next year. However, he said South Africa may not have addressed all the remaining 14 deficiencies identified by FATF by then.
- The first poll on the GNU shows broad support for the coalition among ordinary supporters of the ANC and DA, though the research indicates South Africa has not yet warded off the threat of sliding into populism. The Social Research Foundation, whose polls ahead of the 2024 elections had accurately tracked voter sentiment until election day, found 60% of the population believed the GNU was working well. While support for Jacob Zuma’s MK party holds at 12%, support for the EFF has declined to just 6%.
- A BusinessLIVE editorial states that the removal of Cilliers Brink as Tshwane executive mayor is a stark reminder of how much South Africa needs a durable legal solution to the political instability plaguing cities and towns. Changes should include raising the threshold for motions of no confidence. Business Day editor-at-large, Natasha Marrian, writes that Brink’s downfall was engineered by ActionSA, which joined the DA’s governing coalition after the 2021 election.
- The South African Reserve Bank (SARB) plans to implement a Payments Ecosystem Modernisation Programme, with governor Lesetja Kganyago saying that this was “the largest and most ambitious initiative by the SARB, in the payments space, since the launch of the South African Multiple Option Settlement system more than 30 years ago.” He has urged South Africans to move further away from cash on the road to digital payments.
- Old Mutual has seen 170,000 applications worth R2.2 billion in two-pot savings withdrawals, more than twice the early fund withdrawals it usually sees in a year. A survey conducted by Old Mutual before the implementation of the system showed that 60% of its members planned to access their retirement savings to pay off debt. Alexforbes said it had received more than 250,000 withdrawal claims worth over R4.5 billion in the last four weeks, of which about 70% had been successfully processed.
- Capitec grew headline earnings per share by 36% to R6.4 billion in the six months to 31 August as it continued to draw new business from its digital, product diversification, and client-centric solutions. The digital bank now has 23 million customers. Active banking app clients increased by 21% to 12.4 million, now 54% of the client base clients, while digital and card payment volumes increased by 24%, representing 89% of total transaction volume. Capitec’s new life cover has taken off with its clients, having attracted nearly 40,000 policies in three months, valued at R25.5 billion.
- Woolworths has awarded CEO Roy Bagattini an open-ended contract. Bagattini’s fixed-term agreement has been extended without a specified end date, with a six-month notice period, reducing to three months in specified instances. Bagattini, 60, has been in the role since 2020, replacing Ian Moir, who was criticised for the value destruction caused by the purchase of Australian operation David Jones for more than R20 billion. The retailer continues to review succession plans, including that of the CEO.
- Truworths says competition from Chinese companies Shein and Temu, together with increasing competition from online and traditional retailers, are the biggest risks facing the business. It is investing in fashion intelligence capability through the in-house fashion studio to identify relevant fashion trends to counter the threats and would also invest in its own brands.
- As at the time of writing, the rand was 2.2% weaker against the dollar, and the ALSI was 1.2% down for the week.
Sources: Dynasty, Business Report, AFP, BBC, IOL, BusinessLIVE, CNN, Bloomberg, Wall Street Journal, NYT, eNCA, etc.
