International markets seem set on strong growth, with the S&P 500 closing several days at new highs. The S&P hit its 50th all-time high on 24 August 2021, placing it 20% up for the year to date. It seems this market is pricing in job gains with the US probably having added 725,000 jobs in August, a more moderate pace than the previous two months, but stronger than the gains seen early this year.
Asia Pacific stocks were also upbeat ahead of the US jobs report, which is expected to provide clues on the Federal Reserve’s monetary policy moving forward. Asian shares were mostly up on Friday morning, despite the latest Chinese economic data being disappointing. In Europe, the pan-European STOXX 600 index this week is anticipated to close just shy of the record high reached last month.
While many are waiting for signals on the US potentially tapering economic aid, this does not seem likely to occur until November, and markets are reacting positively in anticipation of a solid and sustained recovery post the Covid-19 related lockdowns that have dented markets around the world. Yet we can expect the structure of the global economy to look significantly different – Bloomberg has an interesting look at the future of the travel and hospitality sector.
At home, the JSE All Share Index felt the fallout from China – declining 2.8% for the month – given the significant weight Naspers and Prosus hold in the index and the significant share price declines incurred by Tencent. Over 12 months, however, the local stock exchange is still 25% higher, and optimism remains with some in the domestic investment community that the JSE still has further to go based on its forward P/E being at a significant discount to overseas counterparts.
“Consumers’ balance sheets are at their strongest in decades due to the significant build-up in household savings over the past year, while on the production side, retailers will continue to restock to keep up with demand.”
– Mark Haefele, UBS AG analyst
- The S&P 500 briefly broke above 4,500 last week to reach an all-time high despite a recent run of negative news, including disappointing US consumer data and a continued rise in Covid-19 infections. This is indicative of further upside to equities and that the economic recovery is intact. Company profits are up, and consumers’ balance sheets are at their strongest in decades thanks to the significant build-up in household savings over the past year. Retailers are expected to continue to restock to keep up with demand.
- Federal Reserve Chair Jerome Powell has indicated that a reduction of bond purchases could start this year as the US economy has met the test of “substantial further progress” toward the Fed’s inflation objective while the labour market had also made “clear progress”. The market reacted positively to the news. However, tapering of economic stimulus remains flexible, as policymakers are monitoring economic data and pandemic risks.
- Iraqi finance minister Ali Allawi has made an unprecedented call to fellow oil producers to move away from fossil fuel dependency and into renewable energy, ahead of a key Opec meeting. Iraq is one of Opec’s founding nations. Allawi has urged oil producers to pursue “an economic renewal focused on environmentally sound policies and technologies” that would include solar power and, potentially, nuclear reactors while reducing their dependency on fossil fuel exports. Opec met Wednesday to negotiate potential curbs to production as oil prices slow.
- Opec has agreed to gradually increase production as the global economy and demand for fuel continue to recover from the worst of the coronavirus pandemic. The group fended off pressure from the US to move faster to restoring production cuts made during the pandemic and potentially ease costs at the pump for American drivers.
- China has imposed the world’s strictest limits on video games as it continues to go after big technology firms for alleged abuse of monopolistic power and the misuse of data. Already, for-profit tutoring has been banned, while companies and billionaires have been hectored about their wider social responsibilities. The crackdown is claimed to have wiped more than $1 trillion off the value of China’s biggest tech firms.
- According to Nick Downing, the Far East contains many emerging market opportunities, which can be accessed by South African investors. Emerging Asian equity markets trade at a 20% discount to global emerging markets, despite enjoying political stability, more rapid economic growth, and better earnings prospects. The starting point sets the stage for a period of prolonged and substantial outperformance. The emerging Asian region is already larger than the US in gross domestic product terms and, once Washington has spent its Covid relief stimulus, will be growing at a significantly faster pace.
- On the subject of corporate fraud, the jury selection process is set to shortly begin for the fraud trial of Elizabeth Holmes, the former chief executive of Theranos, a start-up that attempted to revolutionise the process of blood testing but failed spectacularly in 2016 after the press and regulators probed the company’s inflated claims. Holmes faces felony charges after allegedly duping elite financial backers, such as news mogul Rupert Murdoch, customers, and patients into believing her start-up was about to revolutionise medicine. Various documentaries about her, the board of directors and the company, once worth $9 billion, are available on YouTube.
- As US students and staff return to school, the highly transmissible Covid-19 Delta variant has caused cases, hospitalisations, and death rates to soar across the country. Contrary to research early in the pandemic, children are just as likely to become infected as adults. According to the CDC, Covid-19 infection rates for adolescents aged 5 to 17 were as high as in adults 18 to 49, and higher than rates in adults over 50.
- The department of social development has withdrawn a green paper on comprehensive social security and retirement reform so clarity can be obtained on some of the issues raised. The department aims to release the paper again once those issues have been addressed. The green paper, which was not approved by the cabinet or Treasury, elicited an outcry of opposition from business and trade unions alike. It was withdrawn by social development minister Lindiwe Zulu in a government gazette notice on Tuesday, less than two weeks after it was first gazetted on 19 August.
- The Absa Purchasing Managers’ index (PMI), which shows how healthy the manufacturing sector is, moved up strongly in August after suffering a record single-month decline in July due to the unrest and looting that rocked South Africa. The PMI moved back up to 57.9 points from 43.5 in July, which was a 14-month low, and a record one-month drop in the measure of almost 14 points from the 57.4 reading in June.
- In the ongoing power ship saga, government has rejected “an unacceptable” settlement proposal by DNG Power, the disgruntled bidder seeking to displace Turkish company Karpowership as a preferred bidder in the tender process to provide South Africa with emergency power. The company has also made an application to the high court in Pretoria for the hearing of its case to be delayed. This is surprising as DNG had argued that the bid process was tainted. The court mess could see a delay in procuring emergency power for South Africa.
- Ahead of local government elections later this year, Financial Mail columnist Sam Mkokeli has argued that we are entering an era of painful chaos in our society, where events like July’s unrest will become all too familiar. He asks how businesses and citizens will survive in South Africa’s progressively worsening situation. According to Mkokeli, the ANC is a mess because “the party is reaping the whirlwind of focusing on state largesse more than anything else”. You can read more about this here.
- On the subject of the ANC, we await the Constitutional Court ruling about whether the municipal elections are to be delayed. Messy factional battles in the ANC could heat up, irrespective of the ruling.
- South Africa’s embattled power utility, Eskom, has reported an annual loss of R18.9 billion for the year to March as its unsustainable debt burden continues to weigh on its finances. The loss is despite a R81.9 billion drop in Eskom’s debt, bringing it down to R401.8 billion. While Eskom earned R30 billion from operations over the year, debt service costs amounted to R35.9 billion.
- The deal between SAA and the Takatso Consortium is now at an “advanced stage”. The agreement will be subject to various approvals and pre-conditions, which are likely to take some time. The equity stake deal is reportedly valued at between R2 billion and R3 billion.
- In company news, Cashbuild, South Africa’s largest retailer of building materials, witnessed a sales decline as violent riots hit South Africa in July. Sales for the first six weeks of its new financial year fell 10% as protests affected 36 stores, just more than 10% of its store base.
- Debt-laden Rebosis Property Fund is set to soon release details of a potential rescue plan that’s been in the works for months. Debt has eroded 98% of its market value since 2015. Rebosis owns a mix of shopping malls and offices that it predominantly lets to government. However, the commercial letting market is currently in the doldrums because of the ongoing pandemic that has moved most of South Africa’s office workers into their homes.
- Meanwhile, Johnson & Johnson ceased a mid-stage test of its HIV vaccine in Southern Africa after the shot showed insufficient ability to protect people from contracting the virus. The trial, called Imbokodo, showed the vaccine was only 25% effective in preventing HIV infection over a period of two years, missing its goal of 50% efficacy. The study’s halt is another setback in efforts to control HIV, a treatable yet potentially lethal disease that afflicts almost 38 million people worldwide.
- This comes as a team of South African researchers has identified a new lineage of SARS-CoV-2, the virus causing Covid-19. A lineage represents a genetically distinct virus population with a common ancestor and may be designated as a variant in future, based on significantly altered properties. The new lineage, assigned the name C.1.2, has been found in all provinces in the country. While it shares some mutations with other variants, it is different in some respects. Read more here.
- The rand strengthened in line with other emerging market currencies this week. We continue to take guidance from our currency model which indicates that insufficient SA specific risk is being factored into the rand/USD exchange rate at present.
Sources: Dynasty, BusinessLive, Moneyweb, The Conversation, The Economist, Associated Press, UBS, The Guardian, CNN, CTV News, Bloomberg, etc.