Following a blockbuster gain of 26% in 2023, the S&P 500 has continued its winning streak in 2024. The index briefly powered to a new record high of 5,000 points on Thursday this week. Markets ignored cautious noises from the Fed about its timetable for interest rate cuts, relishing good earnings from companies in sectors as diverse as Big Tech, apparel, entertainment, and luxury goods.
Stocks as varied as Marriott International, Ralph Lauren, Costco, Prudential, and General Electric are trading at levels last seen years or decades ago. Power management company, Eaton, is trading at record levels after more than 100 years on the stock market. Last week, Meta Platforms saw a record-breaking one-day gain of $196 billion in value.
Stock markets appear to have hit a sweet spot, where investors feel confident that inflation and interest rates have finally peaked — and that they have done so without denting the labour market or consumer spending. This confluence of abating inflation, robust growth, and upcoming interest rate cuts is an unusual and highly beneficial environment for stocks.
Some economists call it ‘immaculate disinflation’— a scenario where inflation cools without causing a spike in unemployment. It’s worth noting that the US job market remains buoyant, even after many companies announced extensive rounds of layoffs during January.
We are heartened that stock markets have held up so strongly and this means that our longer-term global equity investors have enjoyed solid dollar-based returns. However, it is important to recognise that the past 13 months’ gains will seem less impressive to investors who entered the markets at high levels just prior to the previous peak attained on 3 January 2022. In these instances, portfolio performances, when measured over the past two years, still appear to be tepid.
We noted in a recent newsflash that economic and analyst forecasts for calendar year 2024 are wildly varied. But, as JP Morgan’s Grace Peters notes, the fact that markets are scaling new heights doesn’t necessarily mean they are about to fall, unless other adverse macroeconomic or geopolitical factors come to the fore. “We looked at what happens after calendar years with rallies of 20% or more. Out of the 14 other instances since 1970, 11 of them (nearly 80%) ended the next year higher. What’s more, the median return the following year was 13.7%.”
We are pleased to enjoy the gains from rising stock market indices as long as they last. But Fundsmith MD Terry Smith’s philosophy also resonates with us: “Buy good companies. Don’t overpay. Do nothing.” Between our index trackers and preferred funds that focus on quality businesses with reasonable growth prospects irrespective of the economic environment, our equity portfolios are well-positioned to participate meaningfully in any future market upside, whilst also providing a large measure of downside protection should markets fall.
“Understanding how far and how long this narrative of immaculate disinflation can run is likely going to be the driver for markets and risk sentiment for this year.”
– Wei Li, global chief investment strategist at BlackRock
Global News
- Fed Chair Jerome Powell has said Americans may have to wait beyond March for the central bank to cut interest rates as officials look for more economic data to confirm that inflation is heading towards 2%. Fed Reserve Bank of Minneapolis President Neel Kashkari celebrated the recent pullback in inflation, though he noted the central bank has not yet reached its inflation goal. Yet, Fed Reserve Bank of Cleveland President Loretta Mester said policymakers will probably gain confidence to cut interest rates “later this year” if the economy evolves as expected but said she doesn’t see a need to rush.
- A threat by Iranian-backed Houthi rebels in Yemen to destroy internet infrastructure traversing the Red Sea may not be enough to destabilise the internet across the region. The undersea cable infrastructure connects parts of the Middle East, Africa, and much of Asia to the Western world. The Red Sea is one of the world’s busiest shipping corridors.
- Israel has turned down a surprise peace plan from America to resolve the war in the Middle East. Antony Blinken, America’s secretary of state, has proposed the creation of a Palestinian state in the West Bank and Gaza Strip; Arab security assurances to Israel, beyond diplomatic relations; and Arab states’ help with reforming the Palestinian Authority, so it is fit to run Gaza. These all depend on Israel agreeing, but the country appears determined to fight until it can declare victory over Hamas. Regional contagion of the conflict could pose a risk to the upward trajectory of global stock markets.
- China’s extended stock market rout was so bad that leader President Xi Jinping fired the country’s top markets regulator, Yi Huiman, late on Wednesday. The new boss of the China Securities Regulatory Commission is Wu Qing, who is nicknamed “Broker Butcher” for leading a crackdown on traders over regulatory breaches during the 2000s. The announcement of a new securities regulatory chief surprised insiders. The Chinese stock CSI 300 was up 5.8% for the week on the back of the news.
- Investors looking for an end to the freefall in shares of Chinese e-commerce company Alibaba Group Holding may be in for a long wait if options traders are correct. Shares have fallen nearly 80% since its 2020 record high. Alibaba’s revenue for the three months through December is expected to have risen 5.6% from a year ago, the slowest growth in three quarters.
- Arm Holdings shares surged 48% on Thursday after artificial intelligence spending helped bolster the chip designer’s forecast. It provided a blockbuster earnings report when it projected revenue of $850 million to $900 million for the March quarter, surpassing analysts’ projections.
- Uber Technologies’ higher-than-anticipated earnings in the three months to December was a standout quarter to end a good year. The numbers showed strong global demand for rides and food delivery during the holiday period.
- Pinterest shares declined 7.8% in late trading after fourth-quarter revenue missed analysts’ estimates. This was despite the pinboard-style search company topping projections for user growth, reaching 498 million monthly users, an all-time high.
- Exxon Mobil and Chevron are generating returns not seen since their heyday over a decade ago, with $58.7 billion handed to shareholders last year and more to come in 2024, even if crude prices drop. However, they are struggling to compete in a stock market beholden to Silicon Valley.
- Amgen has opted for a different route to a weight-loss windfall as it targets an obesity market some analysts predict could reach as much as $150 billion a year. It says its drug aims to result in quicker weight loss, less frequent dosing, and possibly better weight maintenance.
- Ford has simultaneously announced earnings that were double analysts’ expectations and that it is working on inexpensive, small electric vehicles to stem its electric vehicle losses and take on Tesla and Chinese automakers. It is reviewing its strategy to move away from large, expensive EVs because high prices are the biggest barrier to convincing mainstream car buyers to go electric.
- Japan’s Toyota Motor raised its full-year operating profit forecast by nearly 9% after its third-quarter earnings raced past analysts’ estimates thanks to a weaker yen and strong sales of high-margin cars and hybrid vehicles. Toyota shares surged after the announcement and closed 4.8% higher — the biggest one-day gain in nearly eight months.
- As at Thursday’s close the S&P 500 was 0.8% up for the week.
Local News
- In our view, last night’s State of the Nation Address (SONA) delivered by President Cyril Ramaphosa outlining his administration’s achievements and those of the governing ANC since 1994, was expectedly unconvincing. The country has scored numerous “own goals” for more than a decade, with the meaningful gauge of GDP per capita continuing on the decline since 2015. Ramaphosa’s previous addresses included ambitious plans to build smart cities and bullet trains, whereas pledges to tackle corruption and crime have not materialised. Moreover, the energy crisis and dysfunctional SOEs have cost the country millions of jobs and billions in revenue. South Africa’s financial markets and the rand did not react to SONA.
- Foreign investors have withdrawn a net R1 trillion from South Africa’s bond and equity markets over the past 10-and-a-half years — a situation that asset management firm Stanlib says was triggered by successive credit downgrades, the sharp deterioration in the country’s fiscal position, rampant corruption, and the sustained decline of state-owned entities.
- Long-standing BusinessLIVE columnist Peter Bruce writes that – ahead of what will be a difficult National Budget – government may look for magical – yet paper – money from the South African Reserve Bank in the form of the Gold & Foreign Exchange Contingency Reserve Account, which is simply the difference in the exchange rate and not real cash. South Africa’s debt burden is becoming unpayable, and the government wants access to the Reserve Bank’s money.
- Ahead of the National Budget Speech, to be presented towards the end of this month, National Treasury’s most recent data gives the clearest indication yet that public finances are in bad shape. The budget deficit has widened from 5.7% in November on a rolling 12-month basis to 6% in December. This is the largest deficit in more than two years.
- The potential introduction of prescribed assets is not unique to South Africa. UBS stated in their commentary today that UK Chancellor Hunt wants pension funds to invest in UK assets. The 2022 debacle after the Truss budget saw UK pension fund asset values drop almost a quarter. That challenges the value of government investment advice and is a warning to other countries that ignoring economists and pursuing ideological fiscal policies is not necessarily a winning strategy.
- Sibanye-Stillwater CEO Neal Froneman has come out swinging about state failure and rampant crime. The head of the mining company told Daily Maverick in an interview on Tuesday on the sidelines of the Mining Indaba in Cape Town that the anti-crime initiatives that business is partnering with the government on are just treating the “symptoms” and not the underlying cause.
- In the most recent ISPOS poll, the research led to the conclusion that support for the ANC is plummeting, and risks dropping below 40%. The DA and EFF are set to battle it out for the role of official opposition. Ahead of SONA, Daily Maverick polled readers and 75% said Ramaphosa must step down. A Bloomberg poll predicts support for the ANC will drop to 48%, from 57% five years ago. The Democratic Alliance is expected to garner 22% backing, and the populist Economic Freedom Fighters — currently the third-largest party — 12.5%.
- The passage of the National Health Insurance Bill, even before it becomes law, has already had devastating consequences for South Africa. This is according to Business for South Africa (B4SA) Steering Committee Chair Martin Kingston. The business groups have said that the NHI, in its current form is unworkable, unimplementable, unaffordable, and unconstitutional. Business Unity South Africa and B4SA are preparing to submit a petition to Ramaphosa, requesting that the Bill be referred to the National Assembly for amendment. If the Bill is signed into law, the organisations have threatened legal action against the government.
- Transnet says it needs more time and cannot meet deadlines beginning in March in a roadmap to address the country’s logistics problems. It is in discussion with government on some of the dates.
- Ramaphosa wants South African Revenue Services commissioner Edward Kieswetter to extend his contract to ensure “an orderly transition” to new leadership. Kieswetter’s five-year contract expires at the end of April. He had initially indicated that he was available for “five years of national service,” after which he would retire.
- Mastercard has invested R3.8 billion into MTN’s FinTech business as part of a plan to partner with industry experts that will help to grow this fresh revenue line. The deal, a cash and debt-free contract, values MTN Group FinTech at $5.2 billion, meaning, at that valuation, Mastercard has taken a stake of just under 4% in the business.
- MultiChoice has rejected Canal+’s bid, valued at R30 billion, to buy out the satellite TV company. However, France’s entertainment conglomerate may still pursue MultiChoice with a higher buyout offer. Meanwhile, Comcast, the US-based television group, may also make advances on MultiChoice.
- As at the time of writing the rand was 0.7% weaker and the ALSI was 1% down for the week.
Sources: Dynasty, Financial Times, CNBC, TechCentral, Bloomberg, Daily Maverick, BusinessLIVE, Daily Investor, News24, Reuters, New York Times, The Economist, BizCommunity, etc.
