In recent months, we have often faced questions from clients around the likely duration of the currently depressed equity market conditions and what the prospects for a meaningful market recovery may be. Of course, we are not able to address these concerns with any degree of conviction. However, we have previously written about markets being forward-looking, how the rate hike trajectory will be data dependent, and how the S&P is now priced at a discount to its long-term price/earnings mean. Furthermore, geopolitical factors will also be at play in the months ahead.
Nevertheless, the overriding question in today’s financial markets remains whether or not global inflation has peaked, particularly with reference to the US. Sitting at 9.1% in June, some say that time is right about now as surveys of inflation and the state of financial markets support this proposition.
If monthly increases in the US consumer price index were to revert to the 20-year average, inflation could be trending well below 7% by year end and drop to 2% by late 2023. Bloomberg surveys conducted in July indicate inflation in Europe – now at over 8% – will recede to 2% by the end of 2023, whereas inflation in South Africa is expected to decline to 5% by late 2023.
The slowdown of price increases on the supply-side are supportive of this view: Disruptions that ramped up oil, grain, shipping, and metal prices have abated somewhat and costs are now all well off their recent peaks. Industrial commodity and metal prices are 50% lower than their peak values attained in January. These prices may remain at high levels but appear to have plateaued and will not force inflation higher.
With the S&P still 15% down year-to-date, this leads us to believe that there is now asymmetry in the medium-term (1-2 years) pricing of markets, with more upside than downside potential from current levels.
For those who have an interest in empirical research, the graph contained in the following link illustrates how stocks have historically bounced back strongly from big two-quarter drops, such as currently being experienced. While we cannot predict a repeat of this pattern, there may well be a case for optimism.
“There are enough circuit breakers in the market, particularly when you think about the strength of the consumer, the strength of the corporate sector, and how well telegraphed this potential recession has been. Because of that, a lot of that pain has already been felt by markets.”
– Stephen Parker, JPMorgan Private Bank
Global News
- The S&P 500 had its best day in three weeks on Monday as investors assessed the outlook for earnings and as speculation grew that markets may have come close to bottoming out. The tech-heavy Nasdaq 100 outperformed major benchmarks, ending 3.1% higher, with Apple and Alphabet bouncing back from the day’s losses.
- However, the S&P 500 experienced a weaker than normal start to the second quarter earnings releases as the number and magnitude of positive earnings and revenue surprises have been smaller than average. Overall, only 7% of the companies in the S&P 500 have reported actual results for Q2 2022 to date. Of these companies, 60% have reported actual EPS above estimates, which is below the five-year average of 77%. In aggregate, companies are reporting earnings that are 2% above estimates, which is below the five-year average of 8.8%.
- As central banks around the world hike rates in the face of rampaging inflation, four out of six African monetary policy committees are likely to raise interest rates in the next two weeks. In a surprise move, the European Central Bank raised interest rates 0.5 percentage points this week, the first time since 2011, to tackle Eurozone inflation that increased to 8.6% last month. Central banks’ deliberations will continue to centre around food, fertilizer, and energy costs stemming from supply shortages caused by Russia’s ongoing war with Ukraine.
- In other matters concerning the Russia/Ukraine conflict, Russians are preparing to install proxy officials, establish the ruble as the default currency, and force residents to apply for citizenship, according to US intelligence. Russia is also attempting to take control of broadcasting towers, while the US is set to announce a new weapons package for Ukraine as it engages Russia in fierce battles to the east of the country.
- This comes as Russian president Vladimir Putin visited Tehran on Tuesday for talks with Iranian leader Ayatollah Ali Khamenei, the Kremlin leader’s first trip outside the former Soviet Union since Moscow’s 24 February invasion of Ukraine. This trip is in aid of the country forging closer strategic ties with Iran, China, and India in the face of Western sanctions.
- Russia has resumed sending natural gas to Europe through the Nord Stream pipeline system after a pause, bringing relief to a continent whose economy is starting to wobble under the strain of reduced supplies.
- Meanwhile, China’s government has said it would take “forceful measures” if US House of Representatives speaker Nancy Pelosi visited Taiwan. This after news that she would go to the Chinese-claimed island next month. Pelosi and her delegation will also visit Indonesia, Japan, Malaysia, and Singapore.
- Italian president Sergio Mattarella has accepted prime minister Mario Draghi’s resignation, dissolved parliament, and called for new elections, ending an exceptional period of Italian stability and influence, and opening what promises to be a chaotic political season as Europe struggles to maintain resolve in the face of Russian aggression.
- Dubai aims to break into the world’s top ten metaverse economies, a field that Facebook owner Meta seeks to dominate. It will do this through a new strategy that envisions the sector supporting as many as 40 000 additional virtual jobs and adding $4 billion to the city’s economy in five years. It aims to develop global standards in building safe and secure platforms for users, while developing infrastructure and regulations to accelerate the adoption of technologies such as Blockchain.
- In company news, leading electric vehicle innovator Tesla has sold a major chunk of its Bitcoin holding, an investment that helped legitimise the world’s largest electronic currency. Tesla had converted roughly 75% of its Bitcoin to fiat currency at the end of June.
- Other manufacturers are accelerating their transitions into the electric vehicle (EV) space, believing this is where improved profitability can be derived. Porsche is moving aggressively into the segment and is planning an initial public offering in the fourth quarter to grow return on sales to more than 20% in the long term, up from 16% last year. The company expects 80% of its cars will be electric by the end of this decade. At the same time, Ford Motor plans to cut as many as 8 000 jobs in the coming weeks as it tries to boost profits to fund its push into the EV market, according to sources.
- Amazon aims to buy primary-care company One Medical for $18 a share, or $3.19 billion, making it the latest move by the e-commerce giant to muscle into the healthcare market.
- At the time of writing, the S&P 500 was up 3.5% for the week based on Thursday’s close. The S&P 500 posted its biggest three-day gain since 27 May, led by tech and consumer discretionary stocks on Thursday.
Local News
- As South Africa continues to battle with an unprecedented energy crisis, the Central Energy Fund is moving ahead with Energy Minister Gwede Mantashe’s plan to build a ‘gas bridge’ to Mozambique, while Eskom calls for up to 6 000 megawatts of new gas-fired power to urgently be added to the grid.
- President Cyril Ramaphosa met with business leaders on Tuesday to discuss the energy crisis. Business Unity South Africa called for a more focused partnership between the government and private sector.
- An analysis of South Africa’s current electricity crisis by Financial Mail states that some are more equal than others when it comes to power failures. It claims R2.6 million in tax money is paying for generators at the homes of ministers and deputy ministers, which is deeply alarming.
- Meanwhile, Ramaphosa has missed an extended deadline to reply to questions from the public protector about the burglary at his Phala Phala game farm from which millions in forex was stolen. As a result, he has been subpoenaed in an investigation as to whether he flouted the executive ethics code. Having initially indicated he would answer questions about the robbery after another 30-day extension, Ramaphosa is now expected to provide his responses today.
- Consumer price inflation reached a 13-year high in June, accelerating to 7.4% from 6.5% in May. This is well above the upper band of the South African Reserve Bank’s inflation targeting range of 3% to 6%. Local markets dropped on the news.
- As a result, the Reserve Bank’s Monetary Policy Committee hiked interest rates by 0.75 basis points on Thursday. This move surprised markets as it is the biggest increase in almost two decades and takes the cost of borrowing to 9%. More hikes are on the cards, according to the central bank.
- Business headlines were dominated this week by news that Africa’s largest mobile group MTN wants to buy rival Telkom in a $1 billion-plus deal that would leapfrog the Vodacom Group. Analysts have questioned whether this would meet the approval of the Competition Commission.
- This news helped lift telecom stocks briefly as they have been largely lower in 2022, with MTN down 18.5% and Telkom having slumped 25%. Vodacom, which has tended to be the more stable investment choice, is up 2.5%. The earnings season may show unlocked value and new revenue streams, while consolidation continues to drive the telecoms sector, with companies expected to focus more on their fibre businesses.
- The JSE suspended sugar mill giant Tongaat Hulett from trading on the local bourse from Wednesday for failing to publish its provisional results on time. Last week, it requested voluntary temporary suspension.
- At the time of writing, the JSE All Share was up 4.9% for the week, with the rand 0.7% stronger against the US dollar.
Sources: Dynasty, Bloomberg, Daily Maverick, Reuters, BusinessLive, Mail & Guardian, News24, Factset, etc.
