Markets this week struggled to take clear direction from central banks and economic data. The Nasdaq and the S&P 500 indices slid on Wednesday as the Fed suggested that more interest rate increases might be appropriate this year, after deciding to pause the tightening cycle last week. Meanwhile, an increase in the UK’s base rate from 4.5% to 5% had markets fretting about the possibility of a recession.
But when we zoom out from the obsession with short-term economic data and interest rate moves, we can find reasons to be optimistic about the long-term future. In particular, the dramatic advances we are seeing in artificial intelligence and the growing focus on an impact economy – meaning an economy that is more inclusive and sustainable, and not only focused on the output of goods and services – show that forward-thinking companies and institutions are busy architecting the future.
Environmental, social, and corporate governance (ESG) has been a buzzword for some years now and it is a concept that has always inspired some skepticism among the investment community. However, we can see clear signs that many of tomorrow’s winning companies and business models will be those with an element of investing for these impacts.
An example of a move to an impact economy is Switzerland, where voters have approved a proposal to take the economy climate neutral by 2050. Another example is the convening in Paris this week of 50 heads of state and government, representatives from international financial institutions, members of the private sector, climate experts and members of civil society, to finalise a climate finance roadmap. This includes a $100 billion climate finance pledge to developing countries.
We’ve discussed the theme of AI and the fourth industrial revolution in several newsflashes this year. But, like the transition away from fossil fuels, it is an economic theme that will shape which companies and economies are tomorrow’s winners and losers. McKinsey estimates the generative AI market could grow by 42% to reach $1.3 trillion by 2032.
The advent of the green economy and a fourth industrial revolution powered by robotics and AI could create trillions of dollars of value over the next 10 years, as well as displace or destroy jobs and value in some sectors. Long-term investors will want to position themselves to mitigate the risks and reap the rewards.
We believe that Dynasty’s global investment strategy is aligned to these big picture trends: The inclusion of equity index trackers enables our investors to capture value as some sectors of the economy outgrow others, as we can see from the growing weighting of Big Tech stocks in the S&P 500 and Nasdaq composites. We have also noticed a considerable overlap between assets in our actively managed quality funds and companies that score highly for ESG metrics. Well-run companies tend to be attuned to ESG risks and are well positioned for the future.
“The big picture doesn’t just come from distance; it also comes from time”.
– Simon Sinek, American Author
“Change is the law of life. And those who look only to the past or present are certain to miss the future”.
– John F. Kennedy 35th President of USA
Global News
- Fed Chairman Jerome Powell said on Wednesday that there is still a long way to go to get to low and stable inflation, which could take as long as 15 months to conquer. Testifying before Congress, he indicated that the central bank would likely raise interest rates in the coming months, just more slowly than before. Fed officials last week paused the rate after lifting it 10 times in a row to tame increased costs. Powell called projections of two more increases this year “a pretty good guess of what will happen if the economy performs as expected”. Should the two increases be implemented, that would take the interest rate to a 22-year high.
- Treasury Secretary Janet Yellen has predicted that there is a diminishing risk for the US to fall into recession, suggesting that a slowdown in consumer spending may be the price to pay for finishing the campaign to contain inflation. Yellen’s latest assessment of the US economy follows a May employment report that showed job gains beating all economists’ forecasts. Home construction and retail sales for last month have also shown surprising resilience in the face of the Fed’s aggressive monetary tightening. US unemployment benefit applications were unchanged last week at the highest level since October 2021, suggesting the labour market is cooling somewhat.
- The student loan payment pause, which provided relief from $1.6 trillion in debt, will be lifted no later than 30 August following a debt-limit deal struck by the White House and congressional Republicans. Over $185 billion that would have been paid during the forbearance period will now come due according to a calculation by Goldman Sachs. This pause, which has been in effect for three years, allowed for increased borrowing and spending, positively impacting borrowers’ credit scores, and enabling them to take on more debt for purchases like cars and homes. However, concerns are rising as borrowers now face the resumption of monthly student loans as well as other bills, potentially straining their budgets and the overall economy.
- China’s economy is trending downwards. Investment in China has stagnated this northern spring after a flurry of activity in the hemisphere’s late winter. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people are unemployed. At the same time, the country’s residents’ appetite for gold is slowing – an indicator of how weak the economy is. The Shanghai gold price is now trading at a discount to the international market, according to the World Gold Council.
- French President Emmanuel Macron wants to build support for an overhaul of the global lending architecture as world leaders gathered in Paris this week. His Summit for a New Global Financing Pact seeks to change the way that multilateral institutions work to better support poor nations and address threats like climate change and future pandemics. The talks will tackle issues ranging from reform of international development banks to financing green infrastructure and mobilising capital for countries vulnerable to extreme weather patterns.
- UBS has reported that Swiss voters approved a proposal to take the economy climate neutral by 2050. This is an unusually direct signal of the impact economy. Economic wants are no longer just the goods and services of the output economy (though satisfying those wants is important). Today, people also want sustainability, and diversity and inclusion. Economics must evolve to meet these needs.
- UK inflation surprisingly stayed stuck at 8.7% in May, leading to the Bank of England raising its benchmark interest rate by 50bps as it increases its fight against the worst bout of inflation since the 1980s and warning it may have to hike again. This is the highest level in 15 years and the biggest move since February. The UK is currently an outlier when it comes to other countries such as the US and Europe, where inflation has started to ease. The news is bad politically for UK Prime Minister Rishi Sunak, who has promised to halve inflation this year to around 5%. Millions of people across Britain are struggling with a cost-of-living crisis and facing soaring mortgage payments, with interest rates on two-year loans now above 6%.
- Direct promotion of an impact driven economy is this week’s announcement that a US government programme designed to finance futuristic energy businesses is issuing a conditional $9.2 billion loan to Ford Motor Company so it can build three battery factories. This is the biggest government backing for a US automaker since the bailouts in the 2009 financial crisis and marks a watershed moment for President Joe Biden’s aggressive industrial policy meant to help American manufacturers catch up to China in green technologies. The three-factory buildout by BlueOval, co-owned by Ford and South Korean battery giant SK On, plus an adjacent Ford EV assembly unit have an estimated price tag of $11.4 billion. Ford plans to make as many as 2 million EVs by 2026, a huge increase from the roughly 132,000 it produced last year.
- McKinsey believes AI could add “$2.6 trillion to $4.4 trillion annually” to the global economy, close to the economic equivalent of adding an entire new country the size and productivity of the United Kingdom to the Earth ($3.1 trillion GDP in 2021). The $2.6 trillion to $4.4 trillion economic impact figure is a huge increase over its previous estimates of the AI field’s impact on the economy from 2017, up 15% to 40% from before. This upward revision is due to the incredibly fast embrace and potential use cases of GenAI tools by many enterprises.
- Intel is set, in principle, to build a new manufacturing plant in Israel, which is part of it, and its peers’ plans, to diversify their chip production sources. The facility will be for silicon fabrication, a segment in which Israel is already one of Intel’s four major providers, sources indicated. The expansion will further a push by Intel CEO Pat Gelsinger to place more manufacturing outside of Asia, which dominates chip production. He’s also striving to restore the chip pioneer’s technological leadership after companies like Nvidia and Taiwan Semiconductor Manufacturing Company eclipsed its capabilities.
- US memory chip firm Micron Technology will invest as much as $825 million in a new chip assembly and test facility in India, its first factory in the country. With support from both national and local government, the total investment in the facility will be $2.75 billion. Of that total, 50% will come from the Indian central government and 20% from the state of Gujarat, where the plant will be located.
- As at Thursday’s close the S&P was -0.6% lower for the week.
Local News
- After being the worst performing emerging market currency in May, the rand is now the best performing emerging market currency, gaining 8.5% against the dollar in the first half of June. In contrast, emerging market currencies, in aggregate, are up only 1.5%. The strength has been aided by less loadshedding, the undervaluation of the currency in May (down -14.3% year-to-date), a lack of action to date by the US against South Africa after the Russian arms scandal, and a weaker dollar against the euro. All of this raises the question as to whether the currency can sustain its recent relative strength. Read more here.
- One of the main concerns about South Africa’s so-called non-aligned relationship with Russia is that South Africa could be ejected from the Africa Growth & Opportunity Act (Agoa), which provides the country with preferential treatment when it comes to exporting goods to the US. However, another threat to remaining a beneficiary of Agoa now looms, after Trade, Industry and Competition Minister Ebrahim Patel admitted in parliament this week that South Africa could be viewed as having gained enough from the trade arrangement and can be “graduated” out of it. This could be seen as a pre-emptive statement to save face should South Africa indeed be ejected. An African country can be “graduated” out of Agoa if it has developed and grown to a point where it no longer needs preferential access to US markets. Patel said South Africa would continue to engage US representatives to hear their concerns as it puts forward a case on why it should remain.
- After a disastrous “peace mission” to Ukraine and Russia during which an estimated 120 protection services members were not allowed to disembark in Poland as they couldn’t produce the correct documentation, President Cyril Ramaphosa pleaded with Russian President Vladimir Putin to end the war in Ukraine, which is affecting food security, partially because of the spillover effect on fertiliser supplies to African countries. Stephen Grootes believes that the Russian and Ukraine peace mission may deepen the internal divisions in South Africa over our apparent close relationship with Russia. The issue brings to the fore issues about South Africa’s basic competence. For an in-depth and well-written look at the trip and what Business Day editor-in-chief, Alexander Parker, makes of it, click here.
- As the ANC faces losing its majority and is being slammed by CEOs, political analyst RW Johnson says that bringing the heads of companies into the government’s fold to help fix the problems is not any solution to the mess in which the country currently finds itself. “Ramaphosa is a broken reed, and all the best laid plans will crumble on his hopeless leadership and the usual non-implementation.” He says the solution is to bring all top CEOs together – as well as prominent sporting and media personalities – to create a National Salvation Front, whose sole aim is to save South Africa from its multiple crises, without any political ambitions.
- Inflation is finally on a downward trend, dropping to a 13-month low in May and moving closer to the upper limit of the Reserve Bank’s 3%-6% target range, thanks to slowing food and transport prices. It came in at 6.3%, down from 6.8% in April and was the second month in a row of slowdowns. It is now at the lowest level since April 2022 when the rate was 5.9%. Economists believe inflation may return to the South African Reserve Bank’s target range soon.
- Embattled power utility Eskom spent close to R8 billion on diesel during April and May to run its diesel-power open-cycle gas turbines, which are meant to be used for emergencies or during peak demand periods. Given how fast Eskom is burning through diesel to run the open-cycle gas turbines, it is likely that the R30 billion the utility has available for diesel this financial year (until end-March 2024) will be insufficient. In the previous financial year to end-March 2023, Eskom spent three times the R10 billion it had budgeted. In potentially good news, South Africa has launched a dedicated fund that aims to raise R18.2 billion in funding for the construction of a substantial pipeline of green hydrogen projects in the country to help facilitate its transition away from an energy system based on fossil fuels. It will also create jobs.
- At the heart of the dysfunction in Johannesburg is a governance crisis. Since the country’s governing national party, the African National Congress, lost control of the city in 2016, unstable coalitions have resulted in six mayors in four years. The current leader is a member of a party that holds 1% of the municipality’s 270 seats. For an article that digs deep into the situation through storytelling, click here.
- Michael Avery believes that it’s incomprehensible that members of Parliament voted for the National Health Insurance Bill as National Treasury has not given details on how it will be financed. One of the biggest issues is the lack of transparency around costing and, more importantly, the financial feasibility (which looks at the economics of the proposal) of implementing the NHI. “As the debate rages about the NHI’s affordability, a perplexing contradiction emerges in the provisions governing the NHI fund’s income,” he states. The Bill says that the funds will come from Parliament and be fed by tax revenue such as general tax, a payroll tax, and a surcharge on personal income tax. But law firm Webber Wentzel reveals a twist. This tax-based funding scheme clashes with another part of the proposed law, which empowers the health minister to regulate all fees payable to the fund.
- Clicks has admitted to a cyber-attack that took place at the end of May and said it had deployed a security patch to limit access to customers’ personal data after the breach. It stated that a small number of clients’ data (0.05% of pharmacy customers) was accessed at a limited number of Clicks pharmacies, mainly relating to those who bought over-the-counter medication. In most cases, the information downloaded was incomplete, for example, a name with no contact details or a cellphone number without a name. No customer passwords or banking information was accessed. Clicks is investigating and informing affected clients.
- Fashion retailer Mr Price reported lower annual profit and fewer like-for-like sales in its results for the 52 weeks to 03 April 2023. This was a result of interest-rate hikes dampening consumer spending and the impact of load-shedding that cost it about R1 billion in revenue as it lost trading hours. More backup power, such as batteries and inverters, have been installed and an investment of R220 million should see all the group’s stores covered by the end of June 2023.
- Family-owned Food Lover’s Market is certain it has the potential to nearly double the footprint of its brand locally, while also taking on bigger rivals with better prices on key products. It has 89 stores and is targeting 150 without providing a timeframe. The Food Lover’s brand only has an estimated 2.1% market share of the formal food retail market, according to data from Nielsen, providing some major runway for growth. It has put aside R250 million a year for capital expenditure, with the lion’s share going to new stores, the remainder on revamps.
- Growthpoint, South Africa’s biggest listed property group and co-owner of the V&A Waterfront, said rotational blackouts had contributed towards a mixed performance across its diverse portfolio in the nine months to end-March. It continued to suffer double-digit rental reversions but is encouraged by some positive leasing activity. It spent R87 million in the first three months of the year. Overall, vacancies picked up slightly to just over 10%, it said, but its negative rental reversions on renewal are gradually improving, reducing from a 16% fall at its half year to just over 14%.
- MultiChoice has lost a large amount of money after investing nearly R6 billion in sport betting company KingMakers. In the last financial year, KingMakers recorded a loss after tax of $28 million, which MultiChoice attributed to investment to further scale the business and cash extraction losses out of Nigeria, which amounted to $13 million. Its expansion plans did not work as expected, and KingMakers exited operations in Kenya and Ethiopia. It has written down its majority investment by R2 billion.
- As at the time of writing, the rand was 2.7% weaker and the ALSI was 5.5% lower for the week.
Sources: BusinessLIVE, Daily Maverick, Bloomberg, Daily Investor, New York Times, CNN, ABC News, Wall Street Journal, Analytics Consulting, Reuters, UBS, etc.
