From liquidity to growth – without incident? News Flash

The current debate dominating the markets, and being discussed by market watchers, is the relationship between liquidity and growth. The question being asked is what markets would look like without the assistance that has helped plump up economies. Stimulus, if you will, is now starting to get cut back.

Some argue that, as liquidity is withdrawn, growth will take over. However, Ninety One points out in a video you can watch here that history shows this has never been painless, and the Fed’s tapering of support is likely to involve a certain amount of adjustment. This is especially so in an environment in which stock markets are at all-time highs.

The major themes driving headlines and market direction remain China, inflation and interest rates, and energy prices. These will continue to weigh on market sentiment as we close out 2021, so volatility will remain.

We constantly point out to our clients that funds and exchanges are, by their very nature, cyclical, and this needs to be considered when making investment decisions. This would be less relevant, however, to clients who have a longer-term investment horizon, or where their income requirements are set at a modest level.

On the SA front, the Municipal Elections dominated the headlines. With the age of coalitions now upon us, how these alliances will be cobbled together at individual municipal level, the functionality thereof, and the capacity of the civil service to effectively deliver on improved policy, remain our key concerns. This latter point, of course, still applies where a single party has outright control over any metro.

A weakened ANC is going to place pressure on ANC policy and leadership succession as the party is left without much room other than to form coalitions after recently losing several key metros. There is no incoming wave of new disciples, and President Cyril Ramaphosa is not seen as being strong enough to lead from the front.

The M&G reported on the bloodbath strategy sessions that await the ANC as it enters coalitions. In one corner is Ramaphosa and his strongest ally, Gwede Mantashe, who are expected to canvas the party for a coalition with the DA in a bartering exchange of the metros and hung municipalities. In the other corner, treasurer general Paul Mashatile and possibly deputy secretary general, Jessie Duarte, will be advocating that the ANC takes its chances with the smaller parties and Julius Malema’s EFF.

“Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizeable price increases in some sectors.”

– US Federal Reserve (4 November 2021)

“We think returns have become more muted and they will carry on being more difficult to obtain. We think Goldilocks is headed for the woods, and the three bears are in the house. What are those three bears? China, energy and interest rates.”

– Gail Daniel, portfolio manager, Ninety One

Global News

US markets finished October at record highs thanks to strong company earnings. The S&P 500 and the Nasdaq Composite posted their best monthly performance (up 6.9% and 7.3% respectively) since November 2020. This rally continued on Tuesday, with both the S&P 500 and the Nasdaq reaching fresh new highs. Potential good news is that the November and December period is historically the strongest for the S&P 500.
Federal Reserve officials have laid out a plan to slow their bond buying program, their first major step toward withdrawing monetary policy support. The announcement comes as the economy is healing from pandemic disruptions, and the Fed is dealing with high inflation at a time when millions of workers remain on the job market’s side-lines.
SA’s Financial Mail had this to say on the topic: Now inflation is “expected to be transitory” whereas, previously, inflation was largely the result of “transitory factors”. That, obviously, is a big difference in tone, not to mention meaning. The Fed chairman was referring to the spike in prices that have, over the past few months, gripped much of the US and many parts of the world, thanks to the surging costs of oil, shipping, labour, lumber, iron ore, coal, gas, coffee, wheat, etcetera.
In England, bank officials voted against an interest rate hike, which surprised commentators who had expected it to be the first major authority to start increasing rates. As a result, Europe may take longer to hike as well.
Large container ships accumulating off the twin ports of Los Angeles and Long Beach, California, predicated a supply storm that would shake the global economy. A year later, ships are starting to fill up docks again and things are looking grim. Referred to as “Containergeddon”, the “Great Supply Chain Disruption” and the “Big Crunch”, these terms speak to an expanding fallout that is pushing up prices, waiting times, and threatening inflation. Covid is only partially to blame as it exposed issues with logistics that have long existed.
In a world first, Britain has led the charge in approving Merck’s Covid-19 antiviral pill, describing the treatment as safe and effective following a swift review. The drug, molnupiravir, can be used by people with mild to moderate Covid and at least one risk factor for developing severe illness, the UK’s Medicines and Healthcare Products Regulatory Agency said Thursday. We have mentioned this ground-breaking treatment before.
Pfizer shares jumped 11% today after the company announced its Covid pill reduces hospitalisations and deaths in high-risk patients by 89%.
US President Joe Biden urged Democrats to pass his domestic agenda after an electoral wipe-out highlighted the fragile state of the party’s electoral majorities in the House and Senate. White House officials and Democratic congressional leaders concluded that voters were unhappy with their incomplete push to spend trillions of dollars on public works, the social safety net, and combating climate change. These Democrats said there is now a clear incentive to accelerate their work.
Meanwhile, the Biden administration is expected to issue a sweeping new order mandating that nearly all federal agencies patch hundreds of cybersecurity vulnerabilities that are considered major risks for damaging intrusions into government computer systems. The new requirement is one of the most wide-reaching cybersecurity mandates ever imposed on the federal government, covering about 200 known security flaws identified by cybersecurity professionals between 2017 and 2020 and an additional 90 discovered in 2021 alone.
In tech news, Apple has accused French antitrust regulators of blundering when they slapped the company with a record 1.1 billion euro fine for allegedly squeezing out resellers of iPads and Mac computers. A hearing currently underway at the Paris court of appeals heard that Apple did not seek to disadvantage premium resellers. Silicon Valley firms have been facing intense French scrutiny in recent years.
A tech industry battle is taking shape over the “metaverse”. This concept is explained by WSJ tech reporter Meghan Bobrowsky, who discusses why tech companies like Facebook, Roblox and Epic Games are investing billions to develop this digital space.
Coca-Cola announced that it has bought full control of sports drink maker BodyArmor for $5.6 billion. Kobe Bryant was an early backer of BodyArmor with a $6 million investment in 2014, which is now worth between $560 million and $800 million. That’s much more than his career earnings of $323 million as a pro-NBA ballplayer. Bryant, however, died in a helicopter crash in January 2020.

Local News

As results of the recent local government election continue to trickle in, the ANC has lost the KwaZulu-Natal economic powerhouse and its traditional stronghold, eThekwini metro municipality. The ANC had reportedly asked for a recount of some voting districts in KZN. ANC leaders in the province have told Business Day they are deeply humiliated, with some party insiders saying they saw it coming as the party was riddled with deep divisions, infighting, killings, breakaways, and high levels of corruption.
The official national results show:
- The ANC secured 46% of the vote
- The main opposition Democratic Alliance (DA) 22%
- The left-wing Economic Freedom Fighters 10%
- The Zulu Inkatha Freedom Party (IFP) 6%
- The majority Afrikaner party Freedom Front Plus 2%
- And the newly-minted ActionSA also 2%
In the upcoming Medium-Term Budget Policy Statement – to be presented on 11 November – two big new claims on the budget have materialised: the final public sector wage settlement, which cost the state R20 billion more than expected, and a R36 billion economic support package President Cyril Ramaphosa was forced to announce in the aftermath of the July unrest. Fortuitously, the expected commodity-related revenue windfall remains intact, despite most commodity prices coming off their recent peaks. Some economists forecast the amount could even be as large as R170 billion. Read more here.
Ramaphosa confirmed South Africa has secured a commitment of R130 billion of highly concessional climate financing from developed countries and the European Union to help the country move away from coal to cleaner forms of energy. The resources are explicitly intended to assist Eskom to close its coal power stations before the end of their normal lifespan, to assist it to build a renewable energy sector, and to expand and upgrade the transmission grid to enable connections of new renewable energy plants. The move has been lauded by international leaders.
Peter Bruce, editor-at-large and columnist at Business Day, argued that the R131 billion deal clinched at Cop26 will be in the hands of a semi-criminal enterprise — and a coal fanatic. “What the funding governments think they have is a deal with the government of SA. In fact, they have a deal with the ANC, a semi-criminal enterprise; greedy, wildly incompetent, and arguably the worst possible business partner on earth. The R131 billion coming from the developed countries is going to have to run a policy and power-grabbing gauntlet the likes for which it is simply not prepared.” Read more here.
Mr Price has said profits rebounded from South Africa’s hard lockdown in 2020, but civil unrest shaved off almost R90 million in earnings. Headline earnings per share are expected to rise by between 30% and 40% in the six months to October. When normalised for the effects of asset write-offs, this profit measure would have risen by up to R432 million. Civil unrest throughout KwaZulu-Natal and parts of Gauteng in July resulted in the looting of 111 of the group’s 1,592 stores, or about 7%.
Also affected by the riots was Massmart, amid a turnaround strategy to stem annual losses. It had to foot a R650 million insurance shortfall after damages caused by the looting, arson and store closures during the civil unrest cost it R2.5 billion. The size of the insurance shortfall is a big blow to a company that has been loss-making since 2019 and has brought in three top Walmart executives to reshape the company. The store turnaround, however, seems to be working.