A question we continue to pose to ourselves is – will it be the ‘P’ or the ‘E’? This vexing subject was debated in our opinion piece dated 3 July under the same header. As major equity markets (the P), will end yet stronger in July, we note that the forward consensus earnings forecasts (the ‘E’), remains mostly weaker, thereby maintaining equity market valuations at levels that are very expensive by historic standards. However, there clearly are winning companies where their high price/earnings ratios have been vindicated by strong earnings growth in Q2 of this year. Amazon, Facebook, Apple, and Alphabet reported Q2 revenue that crushed analysts’ forecasts. Combined, these companies constitute roughly 20% of the S&P 500 Index and have benefited significantly from the accelerated move towards digitalisation by consumers and business alike in response to the Covid-19 induced lockdowns. As mentioned previously, the high ‘P’ of each of these companies was fully justified, whereas old-economy industries such as retail and auto manufacturing will continue to struggle for some time to come. It is this latter category that is likely to reflect a more muted economic recovery as expressed in this week’s quote below.
- US GDP shrank by 9.5% in the second quarter of the year, this being the largest drop on record since 1947. Over a year, that translates to a 32.9% annual rate of decline. (Indeed our view in April was that the devastating economic effects of Covid-19 and the government ordered shutdowns would only really be apparent at the end of Q2). While May saw an improvement in employment, spending, and production, the recovery was tempered by a resurgence in Covid-19 cases in the US.
- The Federal Reserve this week left interest rates near zero. Chair Jerome Powell said that the biggest risk to US recovery is the nation’s Covid-19 infection rate and that, “we have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity.”
- Goldman Sachs warned that the US dollar could lose its status as the world’s reserve currency and dominant force in foreign-exchange markets. With the weight of the stimulus package to aid the wounded economy and the Fed having swelled its balance sheet by about $2.8 trillion this year, the bank’s strategists warned the US policy is triggering currency “debasement fears”.
- On the back of these fears, gold has surged and major banks have concurred that it will breach the $2000/oz mark. Although JPMorgan Chase & Co are of the view that the rally could start to lose steam, other banks are more optimistic on the metal’s prospects, with Bank of America Corp calling a $3000/oz level by the end of the year. (Dynasty introduced a gold position into our proprietary Funds in April).
- News today is that Hong Kong has delayed its September election by a year. The delay is a blow to opposition politicians and is the latest in a series of aggressive moves by the pro-Beijing establishment to assert increased control in that region. But China’s Xi has also set his sights on Taiwan. Read on for how this leader wishes to continue on the path of Mao and Deng, thereby posing an additional threat to the stability of the global economy.
- Follow this link for an opinion piece by Robin Wright from the New Yorker, where she analyses why President Trump cannot win his cold war with China, and how the circumstances differ from the cold war with the USSR. She argues that China is too integrated into the world economy and that the US will not be able to shore up allies and isolate China the same way it did to squeeze Moscow.
- With the voting polls swinging against him, President Trump has suggested that November’s presidential election could be delayed until the Covid-19 pandemic eases. There was backlash to the news as the power to delay an election lies with Congress, and not the President. The President’s tweeted suggestion came minutes after the news that the US economy had shrunk by 9.5% in the second quarter.
- Regulatory issues may pose a risk to four of the world’s most powerful tech companies: The House Judiciary Committee had a meeting this week with Apple, Amazon, Google and Facebook, to determine whether they have abused their dominance in the online marketplace.
- Zimbabwe has, with conditionality, agreed to compensate white farmers whose land was expropriated by the government many years ago. This is a move to resolve one of the most divisive policies of the Robert Mugabe era. Although the Zimbabwean government does not have the $3.5 billion agreed upon compensation, they are entering arrangements to issue long-term bonds and are approaching international donors to raise the required funding.
- South Africa has taken a $4.3 billion International Monetary Fund (IMF) loan. There are many pros and cons to this loan. An advantage of the loan is that South Africa is receiving $4.3 billion at an approximate 1.1% interest rate. If the government tried to raise the same amount either on domestic markets or from other international sources, it would pay a considerably higher rate – the current rate for government bonds of comparable maturity is about 7%. A disadvantage of the loan is that South Africa has now taken on debt denominated in foreign currency. This means that the country bears the risk that if the rand depreciates, the loan and the interest repayments will become more expensive.
- This loan presents the ruling party with two problems: Keeping the promises it has made to the IMF and getting the overall party and its supporters to accept the move. Follow this link for more.
- Moving towards the Abyss: In an opinion piece dated 15 May, our consulting analyst, Professor Ivor Sarkinsky, likened SA politics to Newton’s Third Law of Physics, which states that for every action there is an equal and opposite reaction. This analogy has continued under the Covid-19 mantle, where the reform efforts led by President Ramaphosa (and his limited support group), to drive through positive policy change, were met by swift pushback from the Radical Economic Transformation (RET), group. In an opinion piece published in the Daily Maverick this morning, Richard Poplak expands on the destructive internal politics within the ANC, arguing that the reformers are not up to the task of governing, as they have no constituency within Luthuli House (the ANC headquarters). The reformers’ efforts during Covid-19 are increasingly being met with deliberate intent (pushback), by the RET faction, whereby “the lockdown’s destruction of the formal economy is not incidental”. Follow this link to access the full article.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc