Beyond the noise, Dynasty Asset Management, News Flash

Following lower-than-anticipated inflation numbers from the US last week, we saw similarly encouraging inflation figures out of the UK, Australia, New Zealand and South Africa this week. UK inflation data for June reflected a higher-than-expected drop from 8.7% to 7.9%, and, earlier in the month, the euro-area reported year-over-year inflation of 5.5%, the lowest increase since the start of 2022.

On Wednesday Statistics SA reported that inflation for June declined to 5.4%, which is within South African Reserve Bank’s (SARB’s) 3-6% inflation target band. With signs of prices stabilising elsewhere in the world and the Fed choosing to pause interest rate hikes, the SARB elected to leave the repurchase rate unchanged at 8.25% on Thursday.

The positive news on inflation doesn’t, however, mean that the cycle of global or domestic interest rate hikes has yet reached its peak.

The SARB has highlighted lower tax revenue, higher employee compensation and the ongoing financing needs of state-owned enterprises as risks for South Africa’s inflation and interest rate outlook. The European Central Bank is, meanwhile expected to raise interest rates by 25bps next week, while the Bank of England has hinted further interest rate hikes are forthcoming. Importantly, the consensus is still for two more hikes of 25bps each in the US.

But even so, inflation moving in the right direction gave markets some time to catch their breath this week. There are signs that supply chains disruptions have not only improved since the pandemic, but also that most economies have adjusted to the further supply-side chaos caused by the war in the Ukraine. In this environment, major central banks might manage to guide the global economy to a soft landing.

Risks remain in play of course, from a slower-than-expected recovery in China to the possibility that a Russian blockade of Ukrainian grain exports will fuel food inflation. And all eyes are on Q2 corporate earnings releases in the US for more insight into whether profits are holding up or slowing down. But for now, relative stability has returned, and we’ll take that!

“One of the major behavioural problems investors encounter is mistaking the ceaseless action in markets as a call to action in our portfolios. If something is happening in markets, then something should be happening in our portfolios. Investment junk food preys on this misconception. It tells us that things are changing and asks us why we are not doing anything about it.”

– Joe Wiggins, financial author

Global News

A cooling labour market in the US is helping slow inflationary pressure, according to Treasury Secretary Janet Yellen. At the same time, housing costs and vehicle prices are among factors that are likely to keep pushing down cost pressures. However, she said people should not be overly optimistic because of lower inflation in June. The dollar, however, is teetering at the lowest level in more than a year after signs of cooling inflation bolstered bets that the Fed will soon stop hiking interest rates.
BRICS started out as a slogan created by Goldman Sachs and has now become a real powerhouse that has countries as diverse as Iran and Saudi Arabia wanting to join. This issue, a key talking point, could create friction when the unit meets between 22 and 24 August in Johannesburg. At least 19 countries have expressed an interest in being part of it, and, of those, 13 have formally asked to join. However, what will not be up for discussion is developing a new common currency to counter the dollar. Given China and India’s respective populations and GDPs, they both hold sway, with India acting as a counterweight to China.
China’s second quarter GDP growth came in at 6.3%, missing the 7.1% estimate pencilled in by experts. The country warned that its recovery is not solid as it comes out of zero-COVID. In June, retail sales clawed back some momentum, gaining 3.1%, while factory sales grew 4.4%. The key interest rate was held unchanged at 3.55% in July.
At the same time, China’s ruling Communist Party and the government have vowed to make conditions for private business better to try revive corporate confidence in the nation. Regardless of ownership, businesses are to be treated equally, and governments at all levels are encouraged to invite outstanding entrepreneurs for consultation before drafting and evaluating policies. The plan has fallen flat with investors, who view it with scepticism, wanting more concrete measures to revive sentiment.
Amazon has overtaken Apple to become the world’s most valuable tech brand across all sectors, after its value gained 36% since the start of the global pandemic, now making it worth $299.3 billion. Apple’s brand is seen as being worth $297.5 billion.
Facebook owner Meta Platforms is putting a commercial version of its open-source artificial intelligence model Llama online for download and through Microsoft’s cloud service, Azure. This will give start-ups and other businesses a powerful free-of-charge alternative to pricey proprietary models sold by OpenAI and Google.
Tesla shares declined 4.2% after the carmaker warned of more hits to its already-shrinking profitability. Months of markdowns to sell vehicles in a high interest rate environment have already taken a toll on automotive gross margin, which fell to a four-year low in the second quarter. Tesla is not the only “tech” company that has seen shares drop: Netflix and IBM both declined, Netflix on weaker sales and IBM on a lower forecast. This was despite overall stocks rising. Apple gained on AI news.
As at Thursday’s close the S&P was up 0.65% for the week.

Local News

The South African Reserve Bank’s (SARB’s) monetary policy committee left interest rates unchanged yesterday, following 10 hikes in 21 months aimed at cooling inflation, although Governor Lesetja Kganyago has not ruled out the possibility of more increases given the sticky nature of inflation in many developed countries. Inflation declined to its lowest level in 20 months, dropping to 5.4% from 6.3% a month earlier, within the SARB’s 3-6% target range. The reading came in below the Thomson Reuters consensus of 5.6%, and economists expect it to continue to decline. Food inflation is also slowing but is still in low double-digit territory.
Ahead of the inflation figures and the interest rate decision, Fitch Ratings had confirmed South Africa’s current rating (junk for the past several years) but warned of a downgrade due to current socio-economic factors.
Finance Minister Enoch Godongwana has spurned a call by some ANC members for him to push the SARB to use measures other than interest rate hikes to curb inflation, thereby reaffirming the bank’s independence.
Russian President Vladimir Putin will not be coming to South Africa next month for the BRICS convention, sending Foreign Minister Sergey Lavrov instead. Putin will attend the convention virtually. This follows President Cyril Ramaphosa warning that arresting Putin in compliance with the warrant out from the International Criminal Court should he set foot on South African soil, would be tantamount to declaring war on Russia. He also said it would be difficult to detain Putin.
In signs of a political schism, ANC Secretary-General Fikile Mbalula says the party’s working arrangements with the EFF in councils should end, suggesting that the ANC should rather work with the DA. Yet, ActionSA and several other opposition parties argue that the official opposition must rule out ever working with the ANC, for their “Moonshot Pact” to work. It is likely that virtually every party is going to have what US foreign policy officials call “strategic ambiguity”, where they refuse to be explicit about their real aims while waiting to assess the balance of power after the election itself. According to Stephen Grootes,” we are likely to see much of this kind of political language in the next few months, where parties publicly claim they could work with this or that party, when the real aim is to undermine possible coalitions.”
Goldman Sachs’ latest Global FX Forecasts indicated that the rand could appreciate to R14/$ by 2026. This aligns with other banks and economists who have said the rand is oversold and will strengthen in future. Dynasty has noted that some analysts are basing their forecasts on Purchasing Power Parity considerations, a methodology to which we do not subscribe. In our view, making medium-term forecasts for the rand is rather futile, as there are so many variables at play. Although the dollar may continue to weaken against other developed market currencies within the next few years, a R14/$ level needs to be premised on a reduction in local political and economic risks, the likes of which are not evident at present.
Jan Oberholzer, who had returned briefly to Eskom to oversee critical projects after his retirement as COO in April will leave at the end of the month. This news emerged hours after Electricity Minister Kgosientsho Ramokgopa announced that unit 1 at Koeberg nuclear power station in Cape Town will not be returned to service by mid-September as expected. It is possible that political interference was behind Oberholzer’s departure.
While embattled Transnet Freight Rail has seen a decline in issues such as cable theft, it still faces massive problems, such as a lack of locomotives, infrastructure failures, theft and vandalism, derailments, and strikes, meaning lost coal exports reached 38.6 million tonnes last year. There is still an impasse between China Railway Rolling Stock Corporation and Transnet that would bring back 159 locomotives into service within six months.
Pick n Pay Chairman Gareth Ackerman used its AGM to decry government’s newly drafted race-based water rights quotas and the Employment Equity Amendment Act, which are undermining any hopes of an economic revival. For the first time since 2009, it is possible that Pick n Pay could make a loss in its first half from March to August, thanks to load-shedding, staff restructuring, and distribution centre costs.
As at the time of writing, the rand was 0.5% stronger and the ALSI was 1.1% down for the week.