Markets don’t react well to mixed messages and volatility was in play this week amid a range of contradictory signals. Fed Chairman Jerome Powell failed to offer clarity about the future direction for inflation and interest rates. On Wednesday, he both scaled back signals that the Fed might hike interest rates more aggressively and indicated that the Fed is willing to take rates higher than anticipated if the economy remains hot. The unclear forward guidance is one of the major sources of the pull back in financial markets this week.
All eyes were on the release of jobs data from the US today, which came out higher than expected as 311 000 jobs were added in January, against a forecast of 225 000, indicating that the labour market remains strong. Sentiment may lean towards the Fed increasing rates by a 50bps on March 22, versus a 25bps increase that was priced into the curve as recently as last month.
In California, the sudden collapse of Silvergate Capital and SVB Financial Group’s desperate attempts to raise funds have further clouded the outlook. Yesterday, the banking sector on the S&P 500 fell by more than 4% as markets weighed up whether these developments might be the beginning of a broader structural problem.
Back in South Africa, President Cyril Ramaphosa and his government sent mixed messages to a country desperate for strong leadership and decisive action on load shedding, crime, and weak economic performance. The long-awaited cabinet reshuffle turned out to be a damp squib, with many poor performing and allegedly corrupt ministers hanging onto their jobs.
There are also mixed feelings about the new electricity minister, Kgosientsho Ramokgopa, a highly qualified and respected technocrat tainted by the Tshwane prepaid smart meter scandal of 2013. It’s not clear who he reports to, or how he will work with the minsters of energy and public enterprises. Perhaps wisely, Ramokgopa isn’t making any bold commitments to a timeline for addressing the power crisis.
Answering questions in parliament this week and addressing the nation on Monday, the President sought to reassure South Africans that government understands the manifold challenges the country faces. Yet falling back on the familiar ministers and policies that have led us to this point suggests the Ramaphosa administration isn’t able to grasp the nettle for genuine reform.
Continued factional infighting with the ANC, fears of deep electoral losses and his own Phala Phala headaches mean we’re unlikely to see president Ramaphosa align his party behind a clear, single message. Expect the mixed messages and uncertainty to prevail as the countdown to the 2024 elections continues under a national state of disaster.
“I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation.”
– Jerome Powell: Chair of the Federal Reserve of the United States
Global News
- As the Fed fuels expectations of a bigger interest rate hike this month, traders are pricing in peak rates of 5.6% from less than 5% at the end of last year as inflation remains stubbornly elevated. As a result, the prospect of US rates hitting 6% is causing investors to rethink their strategies as they hang off a cliff in anticipation of the next meeting.
- Investors across bonds, stocks and currency markets were, in February, still calling for an end to higher rates with expectations for a broad rally in the second half. However, Treasury traders are now doubling down on recession expectations, the dollar has rebounded while equity markets from the S&P 500 Index to the MSCI Asia Pacific gauge are giving up gains as policymakers across the globe struggle to bring inflation under control.
- President Joe Biden presented a proposed budget that targets the rich with new taxes, while promising to assist the country’s “working families”. This amounts to his 2024 re-election pitch. The main points in Biden’s budget proposal include a pledge to slash the federal deficit by $3 trillion over the next decade. Republicans in Congress will certainly block most of Biden’s proposals, arguing that spending cuts, not tax raises, are the solution to resolving the country’s ballooning debt. At the same time, there are concerns that the $5 trillion debt ceiling may be reached.
- Silvergate Capital plans to wind down operations and liquidate its bank after the crypto industry’s meltdown sapped the company’s financial strength. The shares plunged more than 50%. It collapsed during scrutiny from regulators and a criminal investigation by the Justice Department’s fraud unit into dealings with fallen crypto giants FTX and Alameda Research. Though no wrongdoing was alleged, Silvergate’s woes deepened as the bank sold off assets at a loss and shut its flagship payments network, which it called “the heart” of its group of services for crypto clients.
- Wall Street is asking if one bank wobbling and another folding is a crisis. Silvergate Capital’s abrupt shutdown and SVB Financial Group’s hasty fundraising have sent US bank stocks diving. The issue at both the once-highflying California lenders was an unusually fickle base of depositors who pulled money out quickly. But behind this may be a crack reaching across the banking sector: Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. If too many customers tap their deposits at once, it risks a vicious cycle. (It should be of some comfort to our clients though, that Dynasty’s quality-style global managers do not hold banking shares in their portfolios).
- The world’s second-largest wheat exporter, Australia, could see shipments slump 20% from record levels in the coming financial year. Production has tumbled as the climate becomes drier. Exports will probably fall to 22.5 million tons in 2023-24 from an all-time high of 28 million tons a year earlier. Output is set to decrease to 28.2 million tons from 39.2 million tons. Planting for the coming crop only gets under way in April.
- Zimbabwe, which boasts the world’s highest interest rates – will not move to using a new blended inflation gauge to determine interest rates, rather than the benchmark headline rate that assesses costs in local currency terms. Zimbabweans are increasingly using US dollars to pay for everything from food and fuel to school fees. The African nation last month cut its benchmark interest rate to 150%, from 200% on expectations that a downward trend in inflation will continue.
- Meta Platforms will implement an additional round of job cuts, which could amount to thousands of employees as soon as this week. Meta, which owns Facebook and Instagram, slashed 13% of jobs last November, affecting 11,000 employees in its first ever round of retrenchments. It has also been working to flatten its organisation, giving buyout packages to managers, and cutting whole teams it deems nonessential.
- Intel has asked for an additional €4 billion to €5 billion in subsidies from Germany before it goes ahead with a chip manufacturing complex in the eastern part of the country, sources said. Intel has delayed starting construction at the plant, which should have started at the end of 2022, due to economic headwinds. It has, so far, received €6.8 billion in government aid.
- The world’s largest brewer, AB InBev, has reported its first volume decline since the early days of the pandemic. Consumption of alcoholic drinks in the US suffered from blizzards in December, while the final stage of China’s Covid Zero policy weighed on demand in Asia. This led to a surprise drop in fourth-quarter volume, against analyst expectations for an increase. AB InBev shares dropped as much as 4.5% on Thursday morning.
- As at Thursday’s close the S&P was 2.4% weaker for the week.
Local News
- President Cyril Ramaphosa’s Cabinet reshuffle on Monday failed to garner market confidence and is being seen by many commentators as a “damp squib”. The most urgent tasks facing the president — gargantuan political corruption and the collapse of the national power grid — remain largely unaddressed, writes commentator William Saunderson-Meyer.
- Talk that EFF leader Julius Malema may become South Africa’s next deputy president is making the rounds, Business Day columnist Anthony Butler writes. He opines that the EFF will probably only achieve its customary 10% in the mid-2024 elections, but the ANC could well face the possibility of its support falling below 40% for the first time. With such an outcome, the ANC could not easily form a majority for Ramaphosa to be re-elected in the National Assembly. Meanwhile the EFF has turned on Ramaphosa while maintaining friendly relations with ANC deputy president Paul Mashatile and secretary-general Fikile Mbalula. The possibility therefore exists that – post the election – Mashatile offers to serve the nation by stepping into Ramaphosa’s presidential shoes and negotiates a deal with the EFF whereby in exchange for EFF votes, Malema would be appointed as Mashatile’s deputy.
- The government is pondering taking drastic measures against municipalities that fail to pay their water bills, in a bid to save the country’s ailing water boards from financial ruin. Business Day understands that the department of water & sanitation briefed legislators last week on plans to ensure the financial viability of water boards, which were owed R16.1 billion by municipalities as at the end of December. This includes R10.9 billion that is overdue for more than three months. The outcome of the meeting was a draft, standardised, debt collection procedure that would provide cash flow to municipalities to develop infrastructure as well as ensure that investors are not put off by the amount of debt.
- Daily Maverick has exposed a R4 billion South African National Roads Agency Limited (Sanral) bridge contract awarded to a ‘defunct business’ with R418 million debt pile. The deal to build the long-awaited Mtentu Bridge in the Eastern Cape was awarded in November 2022 and is one of its largest recent contracts, with a local construction firm and a Chinese conglomerate winning the bid.
- South Africa’s economy shrank more than expected in the fourth quarter of last year with Gross domestic product contracting 1.3% in the three months through December, according to Statistics South Africa. This is the biggest contraction since the third quarter of 2021, when deadly riots, looting and arson disrupted supply chains, industrial output, and demand for manufactured goods. Economists in a Bloomberg survey predict a contraction in gross domestic product in the three months through March, meaning the economy may already be entering a technical recession. S&P has downgraded the country’s outlook.
- Although both the global and domestic macro-economic environments are net negative for the rand, our research shows that the currency is circa 6% undervalued relative to the dollar and appears to have priced in much of the bad news. This would suggest that there is room for some short-term improvement. The rand closed at R18.53/$ on Thursday, breaching levels last seen in November 2022. It’s down 8.2% against the dollar for this year so far and a massive 21.1% year-on-year.
- South Africa also posted a current account deficit for the first time in three years in 2002, as imports increased and power shortages and rail constraints curbed exports, heightening the nation’s vulnerability to external shocks. The balance on the current account, the broadest measure of trade in goods and services, swung to a deficit of 0.5% of gross domestic product for the year as the fourth quarter number fell to a deficit of 2.6% of GDP, thus pushing the calendar year into deficit, according to the South African Reserve Bank.
- In company news, the Supreme Court of Appeal has handed down a surprise ruling that forced South Africa’s third-largest investment manager Coronation, to do away with its half-year dividend because of a dispute with the South African Revenue Service (Sars) over how it structures its offshore entities. Coronation had claimed that its Irish business — Coronation Global Fund Managers (Ireland) — was a legitimate offshore business and should be exempted from its South Africa tax submission. Coronation CEO Anton Pillay will be taking the Supreme Court ruling to the Constitutional Court to settle what constitutes a “foreign business establishment”.
- As the reporting season gets underway, Nedbank announced a record-high final dividend and a planned share buyback programme of up to R5 billion as a result of excess capital on its balance sheet, this being aided by double-digit earnings growth across all its business clusters in 2022. FirstRand also raised its interim dividend for the six months to December, as normalised earnings gained 15%.
- Within this trend, Standard Bank on Thursday also reported record-high earnings, which grew 37% to R34.2 billion in the year to December 2022. CEO Sim Tshabalala said he believes the group could have delivered a stronger set of results were it not for the myriad of issues currently facing South Africa. He said the South African economy was rundown, with pessimism about a quicker turnaround becoming more entrenched amid unprecedented electricity supply and other structural issues. Despite this, the company will be paying the largest dividend in its 161-year history.
- Shoprite CEO Pieter Engelbrecht says that South African consumers are in serious distress and are changing their food shopping behaviour accordingly. This is based on data from its 26-million-member reward programme. The company, South Africa’s largest retailer, found that customers are changing the sizes of products they buy as well as brands. He was speaking on Tuesday at the release of the group’s earnings for the six months to December, which saw revenue jump 16.8% to R106.3bn. Shoprite expects to pay around R1 billion a year for diesel as loadshedding continues, with CEO Pieter Engelbrecht lamenting a lack of action for businesses and households to feed more renewable energy to the grid.
- In contrast to the operating environment in the US, AB InBev’s local unit, South African Breweries, delivered record total full-year volumes after the local beer market share moved ahead of pre-pandemic levels. Top local brand Carling Black Label “grew by mid-teens,” and premium, super premium and “Beyond Beer” portfolios (hard seltzers and ready-to-drink products) all delivered a double-digit increase in volume. AB InBev also flagged Flying Fish and Brutal Fruit as top local performers with these alcohol brands all reporting double-digit revenue growth on a full year basis.
- As at the time of writing, the rand was 0.9% weaker for the week and the ALSI was 2.9% lower.
Sources: Dynasty, News24, BusinessLIVE, Daily Maverick, News24, Bloomberg, Reuters, NYT, TechCentral, etc.
