A delicate dance, News Flash, Dynasty Asset Management

After months of debate and anticipation about when the Fed will cut interest rates, investors have locked in September 18 as the date we’ll see interest rates drop for the first time since 2020. The discussion is no longer if or when the Fed will slash rates, but by how much.

A 25bps cut would indicate that the Fed believes that indicators such as GDP growth and employment are holding up well and that a soft landing is in sight. On the other hand, a 50bps reduction would suggest that the Fed sees weakness in the economy and is acting to stimulate growth and borrowing.

One would expect a softer landing for the economy to be supportive of company earnings and hence equities’ performances. And on the flipside, economic weakness and possible recession would suggest that weaker economic growth and earnings would dampen performance.

On the face of it, this seems paradoxical or counter-intuitive, because, if the Fed cuts by just 25bps it may lead to a lower performance for risk assets including equities. On the other hand, a more aggressive 50bps cut could spur better performance for equity markets.

There is a key insight for investors to bear in mind as we navigate the path towards lower interest rates. Although it is ultimately earnings growth that drives market direction, interest rate movements have a greater impact on share prices in the short-term, especially in certain sectors such as the technology sector where a discounted future earnings valuation metric is applied to long-term cashflows to determine the current pricing of stocks. Higher interest rate cycles negatively impact valuations, while lower interest rate cycles have a positive influence.

It is instructive to look back on the year of the pandemic and compare it to 2022 when inflation started to bite, and interest rates rose sharply. The S&P 500 ended 2020 16.3% up, despite COVID-19 related economic shutdowns for large parts of the year. Lower interest rates and economic stimulus led to higher asset prices.

Conversely, the S&P 500 plummeted 20% in 2022, a year in which company earnings, GDP growth, and the labour market all showed enduring resilience. Yet, the Fed had raised rates at the most aggressive pace in forty years in an effort to fight rising inflation.

Also worth noting is just how sensitive markets have been to inflation data, which has had a direct impact on the pace and extent of interest rate hikes and cuts. Equities and treasuries have moved in exaggerated ways in response to jobs and GDP data or Fed committee members’ public statements about the expected direction of travel.

For now, a majority of economists polled by Reuters expect that the Fed will cut interest rates by 25bps at each of the remaining three meetings of 2024, one more reduction than predicted last month. If this comes to pass, it would suggest a soft landing has been achieved and that we can expect more moderate returns from equities going forward.

“The relationship between interest rates and stock prices is a delicate dance, with rates leading the way”

– Liz Ann Sonders, MD and Chief Investment Strategist at Charles Schwab & Company

“Changes in interest rates can have a profound impact on stock valuations, and investors must be prepared”

– Bill Gross, American investor

Global News

Fed policymakers are increasingly attentive to the US labour market ahead of their next policy meeting later this month when their assessment of job-market health will be key to how big an interest-rate cut they deliver. Analysts largely expect the Fed to stick to a 25bps cut, given that employers have continued to hire although at a slower pace than before, and the unemployment rate is still at a relatively low 4.2% as announced today.
Wall Street has started September with a rather sharp retracement after a disappointing economic report dragged down the Dow by 626 points, or 1.5%, on Tuesday afternoon. This tumble, which began in the United States, continued across Asia and Europe on Wednesday as concerns about the global economy and major tech companies like Nvidia spread among investors. The S&P 500 wavered on Wednesday, fluctuating between small gains and losses, and ultimately fell about 0.2%, after a drop of more than 2% the previous day. Thursday saw the S&P 500 down 0.3%.
It is becoming increasingly hard for China to turn its economy around as consumers have become even more frugal. Businesses have cut salaries and scaled back hiring. Millions of college graduates joining the job market are facing long odds and poor prospects. China’s population has shrunk two years in a row. Confidence is eroding. The property sector is in crisis. Developers have collapsed, leaving behind huge debts, a trail of failed investments, unsold apartments, and lost jobs.
Japan’s central bank has announced an end to the era of zero interest rates. The Bank of Japan bumped up rates in March and July and has indicated this path will continue. It had maintained benchmark interest rates near zero since the mid-1990s. As a result, many home buyers had become used to paying between 0.3 and 0.4% for floating-rate mortgages, or just over a percent for longer-term, fixed-rate ones.
The latest sign of the steep challenges facing traditional automakers came on Monday when Volkswagen warned it could close plants in Germany for the first time in its history as it seeks to cut costs. This comes as the rapid rise of China’s homegrown EV makers, such as BYD and Xpen, upend the largest passenger car market on the planet and leave the world’s biggest carmakers on the losing end. VW is selling 500,000 fewer cars in Europe a year compared with pre-pandemic levels, the equivalent of around two car plants.
OpenAI is making substantial changes to its management team, and even its corporate structure, as it courts investments from some of the wealthiest companies in the world including Microsoft, Apple, Nvidia and investment firm Thrive for a deal that would value it at $100 billion. Over the past several months, OpenAI, the maker of the online chatbot ChatGPT, has hired top tech executives, disinformation experts, and AI safety researchers. It has also added seven board members while revamping efforts to ensure that its AI technologies do not cause serious harm.
AI chip maker Nvidia, which was briefly the world’s most valuable company, is now in a major rut as it had the worst day in the history of the stock market on Tuesday. Its 9.5% share price decline shaved $279 billion off the company’s value, far outpacing the previous record of $240 billion set by Meta in 2022. CEO Jensen Huang, Nvidia’s largest individual shareholder, lost $10 billion in wealth on Tuesday from Nvidia’s sharp tumble. The PHLX chip index plummeted 7.75%, its biggest one-day drop since 2020.
The US Justice Department is investigating whether Nvidia is making it harder to switch to other suppliers and penalises buyers that don’t exclusively use its AI chips, according to sources. It is sending legally binding requests that oblige recipients to provide information, according to people familiar with the investigation, taking the government a step closer to launching a formal complaint. Nvidia, however, has said it has not been subpoenaed.
UBS Group has ended a bullish call it’s held for two years on European tech darling ASML Holding, warning that the earnings growth potential from AI is becoming overhyped. Analysts at the bank downgraded the stock to hold from buy after the share price surged more than 60% since UBS first implemented its buy rating in August 2022.
Apple’s upcoming iPhone release has sent its stock price soaring 39% off an April low, as of the stock’s last close on Wednesday. This is due to promised AI features. The company’s stock typically underperforms after iPhone launches. If the newest iPhone does not live up to expectations in terms of product features or sales, Apple could see a repeat of those valuation doldrums.
Hermès sales jumped, with revenue at constant exchange rates gaining 13.3%, above analysts’ expectations for the first second quarter to August. All regions grew by double digits except for the area that includes China. Hermès’ shares rose as much as 2.4% in early Paris trading, bringing the gain this year to about 8%. The Birkin bag maker is weathering the luxury demand slowdown better than its peers due to its reliance on the wealthiest clients.
UK’s fashion house trench coat maker Burberry Group is battling falling sales as its stock plunges. Its shares have declined more than 76% since hitting a record in April last year, while the London Stock Exchange Group said Burberry will be dropped from the FTSE 100 on Wednesday because its market capitalisation fell below the level required to keep its place. The stock closed at its lowest level in more than 14 years. Recently appointed CEO, Joshua Schulman, is set to lay out his vision for the brand in November when Burberry reports six-month results.
A coalition of media organisations, including CNN, has petitioned a Nevada court to open the secret proceedings surrounding a legal battle over the future of billionaire Rupert Murdoch’s media empire. Murdoch, the 93-year-old patriarch, filed a petition late last year to amend the irrevocable family trust that would have given equal voting shares to Murdoch’s eldest four children. Murdoch now wants to grant exclusive control to his eldest son and chosen successor Lachlan.
As at Thursday’s close the S&P 500 was 2.6% down for the week.

Local News

The new government of national unity is holding a series of high level engagements with big business and state-owned enterprises to try to unlock trade opportunities in Africa. International relations and co-operations minister, Ronald Lamola, held discussions with business leaders at a Standard Bank round table last week, with sources saying he gained insights from business leaders on some of the available opportunities. It is not known which leaders were in attendance.
The International Monetary Fund (IMF) has said that the new multiparty government should implement bold reforms to achieve the economy’s full potential. It should build on the existing reform agenda but “increase its ambition and accelerate implementation to put the economy on a permanently higher and more inclusive growth path”. Structural reforms, it said, that were required included electricity and transportation-sector changes that foster private sector participation, removing obstacles to trade and strengthening governance, and prudent monetary and financial policies.
The IMF has indicated that GDP growth was expected to reach 1% this year because of improved investor sentiment and electricity generation, and stabilising at 1.4% in the medium-term, as structural bottlenecks ease gradually. It has pointed to upside risks for the economy in a report released on Wednesday that was generally upbeat.
A BusinessLIVE editorial has warned that the National Prosecuting Authority’s (NPA’s) lethargy is costing taxpayers as the longer accused in various state capture cases go without facing consequences, the more emboldened they become. In the end, South African taxpayers will be sponsoring their defence when they appear in court. Cabinet is convinced that South Africa will address the remaining 14 greylisting anti-money laundering deficiencies required by the Financial Action Task Force to get the country off the greylist in the next five months. These include submissions from lawyers, estate agents, and dealers in precious stones.
The South African Revenue Service processed almost 2,500 tax withdrawal directives on the first day the Two-Pot system came into effect, which will add R6.7 million to the fiscus after just one day. Some large retirement fund managers are reporting a rush of queries about withdrawals. Old Mutual reports that 190,000 clients have interacted with it so far this week, while Sanlam has also seen a surge in client enquiries. Old Mutual expects a million of its clients will make withdrawals.
Corruption accused and former Eskom CEO, Brian Molefe, is now exercising parliamentary oversight of the power utility. This is despite the Zondo Commission finding that he was one of the “central” figures that advanced state capture at the state-owned enterprise. Molefe was among the state capture-linked MK Party representatives sworn in as members of Parliament last week. Molefe denied wrongdoing when testifying during the state capture inquiry.
Justice Minister Thembi Simelane will not be shielded from accountability over her alleged involvement in the VBS scandal. Her deputy, Andries Nel, assured parliamentarians on Wednesday that the NPA would act against anyone, despite their political affiliation or position held. Last week, a joint investigation by News24 and Daily Maverick revealed Simelane had used a R575,600 loan from Gundo Wealth Solutions to buy a coffee shop in Sandton.
Portugal is a growing destination for wealthy South Africans, which marks a shift from the traditional emigration routes to the UK, Australia, and the US. About 12,500 South Africans had now settled in Portugal, said Overseas Trust and Pension, a specialist provider of international trust, retirement and pension solutions. About 71,000 South Africans have, over time moved to New Zealand, 140,000 to the US, 206,000 to Australia, and 217,000 to the UK.
Saudi Aramco, Abu Dhabi National Oil Company, and commodities trader Trafigura are among companies seeking to buy Shell’s 600 service stations after the petroleum, company said it would stop downstream production. The Central Energy Fund, which owns PetroSA, as well as Sasol have also indicated interest. Shell could raise as much as $1 billion through the sale. A winner could be picked by the end of the year, though it may also slip into 2025, according to sources.
Banking shares have soared on the JSE in recent months, as reduced load-shedding, an improved economic outlook, expected interest rate cuts, and the favourable election outcome have made investors bullish about the sector. Last week, three of the five major banks saw their share prices hit record highs, with Capitec and Standard Bank peaking at R2,977.72 and R243.17, respectively, while FirstRand closed at R87.15. The JSE banking index also reached record levels.
Aspen Pharmacare, Africa’s biggest drug manufacturer, has secured a R9.9 billion loan package from a development finance consortium led by the World Bank’s International Finance Corporation, further bolstering its plans for the development of medicines and vaccines for Africa. This follows a financing deal announced three years ago by the partnership, which saw Aspen receive a €600 million long-term debt financing package to boost its vaccine manufacturing capacity.
Bidvest is on track to dispose of Bidvest Bank before the end of this year, with more than 60 companies having shown interest in buying the asset. The industrial conglomerate sounded out the market for a potential buyer for its financial services assets in July, turning its focus to its core, and more profitable, businesses. The group’s financial services business reported a 38.6% surge in trading profit to R660 million in the year to end June.
Woolworths is targeting female clients with its new liquor offering and has already rolled out about 20 WCellar stores, with more in the pipeline. Its research indicated its client base needed an outlet to buy its liquor. This move hones in on a well-heeled market that has been lucrative for rivals such as Checkers. Sales in the second half to June declined by 2.9%, with price increases of 6.3% being passed on, while comparable store sales fell over 1% despite price inflation of almost 9%.
At the time of writing, the rand was 0.6% stronger against the USD and the ALSI was down 2.3% for the week.