On 13 May, in our Newsflash entitled Searching for the bear market trough, we wrote that a signal for the turning points in bear markets is typically when there is a total vacuum of optimism, and when the prevailing news is overwhelmingly pessimistic.
We penned this at a time when clients and even global investment professionals were deeply negative about market prospects, understandably because there was no shortage of a multitude of cogent reasons: Global inflation rising ahead of estimates; decades-high inflation in the US showing no sign of abating; hawkish Fed statements pointing to a continuing aggressive rate hiking cycle; an energy crisis in Europe; Covid-19 lockdowns in China with supply bottlenecks; and geopolitical risks such as Ukraine/Russia and China/Taiwan on the rise.
The low point for the S&P was reached during this period, specifically on 16 June, but has since recovered by 17.1% as at this Thursday’s close.
Similarly, the low point for the JSE was reached on 14 July and had bounced by 9.4% as at Friday morning. Hopefully these turnarounds will prove that we are now past the point of maximum pessimism.
As Ninety One Asset Management states: This is “a good opportunity to reflect on just how quickly markets can change direction in the short term – the exact reason why investing requires a long term orientation.”
Whilst we remain mindful of recessionary risks – both locally and abroad, and deeply concerned about the protracted conflict in the Ukraine, we humbly acknowledge that the exact outcomes and timings thereof are outside of our control. We far prefer to focus on well-considered market analysis, ensuring that our clients’ portfolios are robustly positioned to weather the prevailing risks.
“If the whole financial system does not melt down, and we did not buy, we did not do our job. If the whole system collapses, it doesn’t matter whether you bought or not because there will be nothing left.”
– Howard Marks (American Investor)
“Stocks won’t make you wealthy. Your behaviour around stocks makes you wealthy”
– Nick Murray, (Respected Financial Services author and speaker)
Global News
- As the US Federal Reserve grapples with bringing inflation under control through successive rate hikes in the face of a recession in the US that is almost a given, it can, again, learn from past mistakes. However, the Fed will need political will to implement strategies that will right the economy, such as control inflation – even at the expense of a recession, rethink fiscal stimulus, financial regulation, and the tools in its arsenal to control the higher cost of living.
- Warning bells are sounding for Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, over investors chasing the latest rally in stocks. Instead, they shouldn’t get too excited about a potential peak in inflation after the consumer-price index cooled off a bit in July. The inflation index most recently slowed on its growth trajectory, rising 8.5% for year-on-year in July, down from 9.1% year-on-year June.
- Despite the previous week’s expectations-busting movements on Wall Street, sharp market reversals are baffling real-money veterans, retail speculators and quants alike. Stock bears are suddenly getting crushed. Once-dependable momentum trades are misfiring. Inflation-lashed bonds are bouncing back.
- Tech stocks have jumped after entering a bear market earlier this year, with the Nasdaq 100 up more than 20% from its low set in mid-June. Advancing for the past month, these improvements as at last Friday, are the longest streak of weekly gains since November. Ahead of this, George Soros’ investment firm, Soros Fund Management, had increased its holdings of big tech stocks
- According to UBS, the most recent inflation data left financial markets uncertain about the US Federal Reserve’s next policy move. “This uncertainty (and associated risk premia) can be linked to the Fed’s June policy errors. The elevation of the status of consumer price inflation increases uncertainty given the flaws and volatility of that data. The trashing of forward guidance means markets can pursue their own whims on policy without effective Fed restraint.”
- In a contrary view to the risk to America, Fast Company states that the biggest challenge it faces is not government spending, but rather climate change and what it will cost to bring this under control. The passing of a climate change package, the so-called “Inflation Reduction Act,” is a modest, but necessary first step to bring climate change under control, even though some are seeing it as reckless spending and a risk to inflation upside. Irrespective, The Conversation states that coal use in the US is on the decline.
- In a surprising move that goes against the trend of hiking rates, the People’s Bank of China lowered the rate on its one-year loans by 10 basis points to 2.75% on Monday. Economic data from the world’s second-largest economy also disappointed, with industrial production growing 3.8% in July, less than the expected 4.6%.
- Russia is devising a two-tier system severed from adversaries after it was deprived of global finance following the invasion of Ukraine. Its proposals will see a gradual unwinding of local restrictions that will focus on mobilising capital at home while catering to jurisdictions it considers friendly. The Moscow exchange will allow trading in debt securities for investors from countries that haven’t joined the sanctions imposed by the US and its allies.
- In Germany, the trend to cut back on food serving sizes – shrinkflation – instead of hiking prices has come under fire with consumer-protection authorities in Germany, Europe’s top economy, being inundated by complaints. Food prices are the second biggest driver of German inflation after energy, rising at an annual pace of 14% in July – almost twice as much as the overall index.
- Showing the benefits of pricing power that we regard as characteristic of a quality company, Nestle (a key holding in Ninety One’s Global Franchise Fund) was able to pass on a 5% price hike in the first quarter of 2022, while simultaneously seeing sales volumes rise by 2.5%. This also highlights the extraordinary power of resilience shown by recessionary proof businesses.
- Apple aims to launch its iPhone 14 line on 07 September, according to sources. It will roll out the latest version of a product that generates more than half its sales.
- Johnson & Johnson will stop selling its legacy talc-based baby powder products globally in 2023 on the back of continued legal battles, after allegations that it hid cancer risks from the product, although it has repeatedly said it is safe.
- At the time of writing, the S&P 500 was up 0.1% for the week based on Thursday’s close.
Local News
- The Public Servants Association was set to conduct a strike ballot with its more than 1.3 million members who are public servants, after it drew a line in the sand over its wage demands. Talks have not yet yielded the outcomes that the union is hoping for, at a time when government purses are strained. Government’s 2% cost of living adjustment offer and the R1,000 after-tax cash gratuity has been declined.
- Unions are demanding a 6.5% pay hike from government. In the second quarter, average wage settlements for sections of the manufacturing sector and the mining, transport and utilities sectors was 6.3%, with the highest of 7.3% being for the leather sector, followed by 7% for textiles and Eskom. In addition, the Public Servants Association is set to conduct a strike ballot with its more that 1.3 million members, after it drew a line in the sand over its wage demands.
- This has caused worries for the Reserve Bank, which is concerned that wage rises above its inflation target range of 3%-6% raise the prospect of a price spiral with second-round effects on inflation, which could call for tighter monetary policy.\
- South Africa’s central bank governor is also urging authorities to take urgent action to prevent the nation being added on a global watchdog’s “grey list” of countries that are not sufficiently acting to stop the flow of dirty money. This will adversely affect South Africa’s ability to borrow money from international investors, as the costs will be higher.
- The Financial Sector Conduct Authority has ordered the ANC staff provident fund to compel the country’s ruling party to settle about R86 million in accumulated contribution arrears that it owes members of the fund. The ANC has been battling to pay wages to its staff.
- President Cyril Ramaphosa, who has come under fire after millions in forex were stolen from his Limpopo farm, will not appear before the Section 194 inquiry into suspended Public Protector Busisiwe Mkhwebane’s fitness to hold office. She had requested that he be summoned to answer questions about her 9 June suspension and other matters before the courts.
- Meanwhile, the South African Reserve Bank must urgently report on its investigation into any potential foreign exchange contraventions by Ramaphosa arising from the revelations of a large amount of dollars stolen from his Phala Phala game farm in Limpopo to parliament’s finance committee.
- A step-change is emanating from the ANC, as the party’s top six is proposing changes to its constitution to allow it to expel members found guilty of crimes such as murder, graft, rape, and sexual assault. The party’s national working committee wants those convicted of serious crimes to be expelled from the party automatically once found guilty of criminal offences.
- Despite this, Financial Mail has asked whether the ANC’s share of the vote could fall below 40% in 2024. It seems it’s more than a distinct possibility. Over the weekend, Rapport newspaper, citing the ANC’s own polling, placed its support at under 40% in two years’ time. Another poll, released this week by market research firm Ipsos and published by the Daily Maverick, placed support for the ANC at 42%. Again, that study had huge margins for error. Analysts are not convinced that these polls provide for accurate election modelling.
- South Africa is maintaining its apparent “neutral” stance in the war Russia instigated against Ukraine, with Defence Minister, Thandi Modise, telling Defence chiefs in Moscow that the country would always be ready to “engage in the resolution of conflict” and believed in choosing “mediation and peace”. This position has been welcomed by Russia.
- Consumer spending is on the decline in the face of successive rate hikes and inflation pressures as retail sales dropped 2.5% year-on-year, following two consecutive quarters of growth. Retail sales data was the last set of numbers to be released for the second quarter. Consumer spending accounts for as much as 60% of South Africa’s gross domestic product.
- As Eskom continues to implement rolling blackouts due to constrained supply, Johannesburg – South Africa’s biggest city – is set to buy 500 megawatts of electricity from independent producers and has sent a request for proposals to National Treasury for approval.
- Absa’s interim results show that headline earnings increased by 30%, and diluted headline earnings per share grew 29.8% to 1 278.4 cents per share. Absa declared an ordinary dividend of 650 cents per share, up 110% from 310 cents.
- Naspers aims to sell off some of its Prosus stake in terms of its share buyback programme. This is subject to Reserve Bank approval. Naspers has, in the meantime, shrugged off the decline in Tencent’s quarterly revenue – the first in its history – a sign that investors feel that Naspers is serious about their buyback and serious about closing the discount to NAV.
- At the time of writing, the JSE All Share was up 0.1% for the week, while the rand is 4.3% weaker against the US dollar.
Sources: Dynasty, Bloomberg, BusinessLIVE, News24, Daily Maverick, ITWeb, Fast Company, UBS, Wall Street Journal, BusinessTech, Financial Mail, Reuters, etc.
