Light at the end of the tunnel, Dynasty Asset Management

While Europe and the UK face structural challenges and a Russia-induced energy crisis, a recently published report highlighted the stellar performance of US corporates. According to MRB Partners, profits surged in the second quarter to an all-time high relative to GDP, “underscoring the extraordinary pricing power and global prominence of US corporations. Profits have benefited from a combination of strong revenue growth and relative pricing power to a greater extent than at any time in recent decades, and US companies have gained market share in both the domestic and global marketplace.”

Yet today’s investors are understandably more interested in the future trajectory of company earnings. Although we expect that the pace of revenue growth will slow, we do not envisage a major contraction for the US corporate sector over the following year. As such, even modest profit growth should continue to support equity valuations. Last week we pointed out that since the peak at the beginning of the year, the forward PE for the S&P 500 index has declined from 22X to16X, representing fair value relative to its long term mean of 16.5. The greater risks to a sustained market recovery are higher inflation levels and tighter monetary restrictions than are already priced in, but US corporate profits remain a light at the end of this tunnel of data-dependent uncertainty.

“It is important to distinguish between lead and follower countries to understand the dynamics of technological diffusion and analyse processes of catch-up and falling behind.”

– Angus Maddison, Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History

“Bottom line is: Jobs are up, wages are up, people are back to work. And we’re seeing some signs that inflation may be, may be – I’m not going to overpromise you – may be beginning to ease.”

– US president Joe Biden

Global News

Global equity markets are on course for their first weekly gain in four. After exhausting twists, the S&P 500 managed to close slightly above 4,000 for the first time since late August. However, treasuries tumbled across the curve, taking the 2-year rate to the highest since 2007. Bond yields have soared on bets that the Federal Reserve will stay hawkish as it confronts the hottest inflation in about four decades.
Spurred on by the US Federal Reserve’s most forceful tightening cycle in more than a generation, the stronger dollar is pushing rival currencies lower. This has the effect of driving up the cost of imported goods, constricting financial conditions and feeding inflation in other economies. As a result, there is more pressure on central banks to hike rates.
The European Central Bank hiked interest rates by 75 basis-point on Thursday in a “powerful and big signal but more steps should follow,” Governing Council member Klaas Knot told Dutch radio Friday, warning of a “big risk of second-round effects.” He has said it must continue to raise rates to prevent record euro-zone inflation from spilling over into wages, reinforcing the hawkish message after this week’s historic hike.
Liz Truss was this week named as the new PM at a time when the country faces a cost-of-living crisis, industrial unrest, and a recession. Truss is a self-styled disruptor and is not scared to take people on when she feels they are wrong. She has promised action to help Britons cope with the rising cost-of-living and has introduced a price cap for energy that will last for two years, and save the average household in England, Wales, and Scotland £1,000 a year on future bills.
Russia could well face a longer and deeper recession as the impact of US and European sanctions spreads, which will handicap sectors that the country has relied on for years to power its economy.
The Chinese currency is currently seen as a threat after reigning supreme as a safe haven just months ago. Its currency has tumbled to a two-year low and looks set for further losses, resulting in suggestions that it could result in a shock wave as far away as Africa and Latin America.
Although analysts already expect oil supply to be tight for the last quarter of the year, Brent Crude was trading at around $89/bl this morning, well below its 90-day moving average of $106/bl. The price decline is a positive development in curbing global inflation.
Following Biden’s signature on a comprehensive climate bill devised to spur investment in electric cars and clean energy, corporations, including Toyota, have announced a series of big-ticket projects to produce the kind of technology the legislation seeks to promote.
At Apple’s biggest product launch event of the year, dubbed Far Out, the company introduced the iPhone 14, which features and upgraded camera, as well as satellite features. It also launched fresh AirPods Pro earbuds and an Apple Watch upgrade that included a first ever Ultra model.
US tech companies that receive federal funding will be barred from building “advanced technology” facilities in China for 10 years, the Biden administration has said. The guidelines were unveiled as part of a $50bn plan aimed at building the local semiconductor industry amid fears that the US is losing its technological edge to China. It comes as business groups have pushed for more government support to reduce reliance on China.
The S&P 500 was up 2.1% for the week, to Thursday’s close.

Local News

South Africa’s economy has declined by 0.7% in the second quarter of this year, taking output back to pre-pandemic levels. In the first quarter, it reached pre-Covid levels, but was then hit by the KwaZulu-Natal floods in April and ongoing rolling blackouts, which are back until at least Saturday.
Economists have dialed back their predictions on the back of the weak GDP figures and now expect South Africa’s growth to come in at less than 2% for 2022 despite the government’s progress with structural reforms.
South Africa’s current account surprised by swinging into a deficit in the second quarter as imports outweighed exports and companies paid higher dividends. It switched to an annualised deficit of 1.3% of gross domestic product, or R87 billion, from a revised 2.4% surplus in the previous quarter. This dealt a blow to the rand, which dropped by more than a percent, adding to its 8% decline over the year.
Consumer confidence, too, is battling, having shown a slight recovery in the third quarter, after having plunged to its lowest level in more than three decades in the second quarter of 2022. Confidence has been knocked due to elevated inflation, rising interest rates and escalating unemployment.
Daily Maverick’s Tim Cohen has written an article looking at five reasons why South Africa is failing economically. He says that a research team at PwC called Strategy& has come to the conclusion that: “If economic growth was a car, SA would be driving at 60km/h while the global average is above 100km/h.”
Treasury’s acting director-general Ismail Momoniat has said that a wealth tax won’t be able to raise enough revenue to potentially fund a basic income grant in the same way an increase in VAT or personal income tax could. In the interim, Cabinet has begun a debate about introducing an economic relief package to shield restless South Africans from the worst cost-of-living crisis in more than a decade.
Shrugging off the recent health crisis, Discovery has reported its highest normalised headline earnings in its history, beating pre-pandemic levels. Normalised headline earnings rose 70.7% year-on-year to R5.82 billion. Yet the company declined to pay a dividend due to widespread risks such as uncertainty about the future effects of Covid-19 and an increasingly worrying global economic backdrop.
South Africa’s largest retailer, Shoprite is growing even bigger in its planned expansion for the next financial year, which will be its biggest to date as it invests in upgrading its supply chain, opens 275 new stores and experiments with new chains such as Outdoor that can benefit from its distribution network. It has almost 3,000 outlets currently.
Tiger Brands’ market cap dropped by R3 billion on an announcement that would recall baby powder after the detection of asbestos in test samples from a batch of pharmaceutical-grade talc powder.
At the time of writing, the JSE All Share was up 2.1% for the week, while the rand was 0.2% weaker against the US dollar.