Throughout 2023, it was the momentum of the Magnificent 7 that drove US equity market returns, with an equal dollar-weighted return of 107%. The seven Big Tech companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – powered ahead to account for 28% of the S&P 500 index by the end of the year.
Thus far in 2024, the narrative is somewhat different. The more uneven performance of the Magnificent Seven and the tailwinds behind industrials have rebalanced markets to some extent. The Magnificent Seven are now the Fantastic Four, with Amazon, Meta, Microsoft, and Nvidia attaining new heights, whereas Alphabet, Apple, and Tesla have shed around $1.1 trillion in market cap since their peaks attained between July 2023 and January 2024. This loss in value equates to the combined value of McDonalds, Coca-Cola, Blackrock, Pfizer, Cisko, and Nike.
Close to 130 companies in the S&P 500 have reached all-time highs in 2024 and industrial stocks have been among the biggest beneficiaries. Close to half of the companies in the industrials sector have hit new peaks, making it one of the top-performing segments of the market – a correction yesterday notwithstanding.
Factors contributing to market momentum include optimism that interest rate cuts will indeed take place this year even if not as quickly as some of the more bullish observers expected at the outset of 2024. (Markets at this stage expect the first rate only in June.) The second reason is the solid earnings growth across the board and the general resilience of the US economy. Thirdly, the federal government’s investment in infrastructure and the strengthening probability of a “soft landing” could provide a tailwind for industrials throughout 2024. And fourthly, “America is moving production closer to home and has already received significant investment in onshore operations”, according to Ninety One.
Against this backdrop, our preferred active managers who have been underweight to Big Tech stocks in their portfolios relative to the S&P 500 and MSCI World indices – and consequently underperformed their benchmarks in 2023 – may outperform in the months ahead should the industrials rally continue. Notwithstanding, we will retain our index exposure in our Dynasty Funds so as to capture the broader market beta at low cost.
“From a macro perspective, the most important driver of US stocks is earnings. And earnings are growing. They’re growing for the largest companies. They’re also growing for smaller companies. The strength we’re seeing in the economy and in corporate America is much broader based than just the AI trade that has captured so much attention recently.”
– Ben Snider, Goldman Sachs equity strategist
Global News
- US inflation rose by 3.2% for the 12 months ended in February, up slightly from January’s annual reading of 3.1%, and higher than economists’ expectations. On a monthly basis, CPI rose by 0.4% in February, in line with expectations. It’s the fastest pace since September. Inflation was pushed up by higher fuel prices.
- President Joe Biden’s $7.3 trillion fiscal 2025 budget proposal lays out a second-term vision that would deliver more services, middle-class tax breaks, and price controls to voters funded through higher taxes on the wealthy and corporations. The document details Biden’s opening salvo in his re-election battle with Trump, building on the State of the Union address he delivered last week. Notably, little of the budget stands a chance of becoming law in a divided Congress.
- A rally in Chinese stocks sent several benchmarks surging 20% from lows, which indicates that the battered market may be headed for a more sustainable uptrend after multiple false dawns over the past year. The Hang Seng Tech Index became the latest gauge to enter a technical bull market during Tuesday trading, joining the ChiNext gauge of China’s growth shares and other sectoral indexes on materials and renewables to hit the milestone. This sentiment marks a sharp improvement from just months ago when Chinese shares were among the world’s worst performers and big-name investors cut exposure.
- On the one hand, the war in Ukraine seems to be working in Russia’s favour as wages have soared by double digits, the ruble has stabilised, and poverty and unemployment are at record lows. For the country’s lowest earners, a key constituency for the Kremlin ahead of elections between 15 and 17 March, salaries over the last three quarters have risen faster than for any other segment of society, clocking an annual growth rate of about 20%, Federal Statistics Service data show. On the flip side, a big and persistent source of economic worry for the Kremlin remains the rapid price growth that is eating into Russians’ incomes and the dwindling of the country’s foreign exchange reserves that were built up before the war.
- A new report, compiled by Gladstone AI and commissioned by the US State Department, paints an alarming picture of the “catastrophic” national security risks posed by rapidly evolving AI. It warns that time is running out for the federal government to avert disaster. The report states with absolute certainty that the most advanced AI systems could, in a worst case, “pose an extinction-level threat to the human species”.
- Medicare, the US federal insurance entity, may soon be required to cover the blockbuster weight-loss drug Wegovy, made by Novo Nordisk, for heart disease patients with obesity. The FDA approved a label expansion for Wegovy on Friday, which allows it to be marketed to reduce the risk of major cardiovascular events in adults who are obese or overweight and have established cardiovascular disease. In addition, Novo Nordisk – has announced headline results of their latest trial, suggesting that semaglutide can reduce the risk of kidney disease progression by 24% in people who have type 2 diabetes and chronic kidney disease.
- Apple will allow European users to download iPhone applications from web platforms for the first time as it aims to become compliant with European Union rules targeting Big Tech dominance. As part of the overhaul, Apple will also let developers offer discounts to users away from the app store and will permit third-party marketplaces to offer their own developed apps.
- There will be zero growth in sales volumes for Tesla this year as Tesla’s ability to grow at the furious pace that its expensive valuation promises is no longer a guarantee, analysts have indicated. And in 2025, it’ll be worse yet: volumes will drop. Shares of the company reacted appropriately, dropping 4.5% to close at a 10-month low of $169.5 on Wednesday. The stock has now fallen 32% this year, missing out on a broader rally that has pushed the S&P 500 Index up 8.3%.
- As at Thursday’s close the S&P 500 was 0.52% up for the week.
Local News
- The latest survey by the Brenthurst Foundation shows the ANC’s electoral support plummeting to 39% nationally as political parties up the ante in the build-up to the crucial 2024 national and provincial elections on May 29. The survey has a 3% margin of error. Political analyst Dr Piet Croukamp from North West University believes that it’s “business as usual” for the ANC. Voters in the national election will be fuelled by their anger at the ANC, but may not yet view any of the opposition parties as a viable alternative.
- Jabulani Sikhakhane, a former spokesperson for the finance minister, National Treasury, and the South African Reserve Bank, writes that Ramaphosa is prizing the unity of the ANC over driving the socioeconomic reforms that are required to arrest South Africa’s decline. Keeping the names of six people implicated in State Capture on the ANC candidate list for election is just one such example and harks back to PW Botha’s behaviour in the late 1970s and early 1980s, he said.
- Writing for BusinessLIVE, regular columnist Tom Eaton says that, while the DA’s concerns around election rigging are valid in theory, he isn’t convinced that the ruling ANC has either the skill or the ambition required to steal an election in just more than two months. In addition, the ANC would have needed to have hollowed out and discredited the Electoral Commission of SA (IEC) years ago, which hasn’t happened.
- South African Reserve Bank governor Lesetja Kganyago is confident South Africa will be removed from the grey list in 2025 given the work it is doing in identifying remedies required by the Financial Action Task Force imposed in February 2023. However, Kganyago said the high-risk designation was costly for South Africa, with the lesson being that joint efforts are required to look after the integrity of the financial system.
- Electricity minister Kgosientsho Ramokgopa has stated that the ministry will no longer be required by the end of 2024 as he is confident the immediate electricity crisis will be mostly resolved by then. Ramaphosa has said that the government’s partnership with business is making headway and has announced that Eskom is finalising a deal with business to deploy additional independent skilled experts to support it. Meanwhile, Eskom claims that a warning contained in a report National Treasury commissioned from Germany’s VGBE report that South Africa could hit stage 13 is wrong. National Treasury has warned Eskom to heed the report.
- The deal to sell 51% of SAA to the Takatso consortium has been cancelled, minister of public enterprises Pravin Gordhan said. The deal, which was first agreed in June 2021 and shrouded in secrecy, has faced numerous obstacles. Among them has been the revaluation of SAA’s assets due to the lengthy time between the original agreement and the final agreement on the sale of shares. Arena editor-at-large, Peter Bruce, said SAA has become a government “plaything”.
- On the local currency front, the US dollar spot index experienced a meaningful leg down towards the end of last week and is now 2.2% weaker against that basket of currencies than it was on 13 February. This recent weakness has lowered our Investment Committee’s latest estimate of fair value for the rand/dollar to R17.64. However, we continue to hold the view that domestic political and economic woes are likely to keep the rand exchange rate at weaker levels than fair value would suggest.
- President Ramaphosa has reappointed Lesetja Kganyago as governor of the country’s central bank for another five-year term. He also reappointed Kganyago’s deputies Fundi Tshazibana and Rashad Cassim for fresh terms and named Mampho Modise as another deputy governor of the central bank, replacing Kuben Naidoo who departed last year. Ramaphosa’s decision removes a source of potential uncertainty about the leadership of the central bank. Kganyago’s term was due to expire in November, with Cassim and Tshazibana’s in July.
- Standard Bank’s 30-year bet on Africa is yielding returns for the group as shown by a 27% surge in headline earnings to R43 billion for the year to end December, with earnings from its African operations jumping 49%. Africa now accounts for more than half the group’s banking profits. Standard’s strong results come after Absa, which also has sizeable operations in the rest of Africa, reported earnings growth of just 1%. Nedbank grew earnings 11% and FirstRand 6%.
- South Africa’s biggest bank by retail customers, Capitec, is in talks to take a controlling stake in Cyprus-based online consumer lending group Avafin Holding for as much as €26.3 million as part of its strategy to grow its footprint in the e-commerce lending space internationally. It bought a 40% stake in Avafin in March and is on a drive to diversify its revenue sources.
- Habib Overseas Bank has been liquidated a year after the National Treasury placed it under curatorship over governance issues that included allegations that it fragrantly breached South Africa’s exchange control rules and facilitated money laundering activities. About R1.7 billion was allegedly laundered via Habib by some of South Africa’s biggest gold smugglers. The bank’s curator found the lender was “hopelessly insolvent”. The South African Revenue Service is closing in on companies it believes are key players in the gold-smuggling industry – an activity it says is bleeding the fiscus of billions of rand.
- Brait, which is backed by business tycoon Christo Wiese, has seen Virgin Active South Africa increase its active membership base from 606,000 at the end of September to 625,000 at the end of February. Sales remain relatively robust despite the impact of inflation on consumer spend. Brait slumped 7% after the update and has fallen by about two-thirds on a one-year basis.
- Transaction Capital is set to list subsidiary WeBuyCars separately on the JSE on 11 April. It expects to raise R750m with a book build beginning on March 18, which will value WeBuyCars on the JSE at between R8.7 billion to R10 billion with an estimated 413.7 million shares in issue.
- At the time of writing the rand was flat against the USD and the ALSI was 0.61% down for the week.
Sources: Dynasty, News24, Reuters, AFP, Bloomberg, Daily Maverick, BusinessLIVE, CNN, Daily Investor, Fast Company, MSN, BizNews.com, NinetyOne, Analytics Consulting, etc.