On 29 July 2022 we wrote about the fact that in these paradoxical times, bad news is good news. This theme continued in the last week as the earnings of some of the largest tech companies disappointed, which reportedly plays right into the Fed’s hands.
While it’s not helpful for investors to see the earnings of the specific companies they hold disappoint, in aggregate, it’s a necessary evil, as it shows the Fed that the measures they have put in place are starting to take effect and at some point they’ll be able to take their foot off the economic brake – on which they pushed down harder this week by raising rates by another 0.75%.
While the latest rate hike was indeed anticipated and priced-in, the market reacted positively initially on Wednesday night as the Fed noted that they were likely to consider smaller increments going forward and also highlighted that they are aware that interest rates act on inflation with a lag and, to this extent, they’re going to have to allow their efforts the time required to take effect. In the Q&A portion Chairman Jerome Powell, however, then reversed the market sentiment by emphasising that rates were likely to peak at higher levels than the market was anticipating, causing a 2.5% sell-off on the S&P on the day. Perhaps part of the reason for the reversal was the fact that the S&P had gained 8.1% for the month of October, a very welcome recovery.
So, while Microsoft fell over 9% this week on their results, they actually beat estimates and revenue grew 10.6% year-on-year, while their cloud services business, Azure, disappointed with only 35% revenue growth. Similarly, Google’s parent company, Alphabet, fell 13.6% this week as it highlighted the fall-off and cyclicality of advertising revenue, which only grew 6% year-on-year.
It’s worth noting that, while the market may have been expecting more or is concerned about the future prospects of these tech giants, they continue to grow despite the challenging environment. It is this ability to grow regardless of economic pressures that we value in the quality businesses we strongly favour.
“Financial assets have already adjusted quite materially. Investors should begin to look where the troughs are, rather than looking for where they can still exit. That is an important mindset change that needs to occur.”
– Clyde Rossouw, co-head of Quality and portfolio manager at Ninety One
Global News
- The Fed hiked rates another 75 basis points on Wednesday and guided that rates were likely to peak at higher levels than the market was expecting, causing stocks to fall. The Dow Jones Industrial Average dropped 1.5% on the day, giving up a gain of more than 1.2% earlier in the afternoon. The S&P 500 fell 2.5%, and the technology-focused Nasdaq Composite lost 3.4%.
- Although US interest rates will go higher than expected, the path may soon evolve to smaller hikes as Federal Reserve Chair Jerome Powell continues to try regain control of inflation. He anticipates that it may be appropriate to slow the pace as soon as the next meeting, although no decision has yet been made.
- The Bank of England has delivered its biggest interest rate hike in 33 years. It raised rates 75 basis points to 3%, but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession.
- Newly elected British Prime Minister Rishi Sunak will be going to the COP27 summit in Egypt next week, backpedaling on a much-criticised decision to skip the annual climate gathering to work on pressing economic issues at home. This comes as some of the world’s biggest consumer goods companies, including PepsiCo, Mars and Nestle, are almost certain to miss a target to make plastic packaging more sustainable by 2025.
- China’s election of Xi Jinping has adversely affected Apple’s iPhone supply chain as its largest factory, Zhengzhou Foxconn Technology Group, has been locked down as part of a move to limit the spread of Covid-19. However, unconfirmed reports that the zero policy may be done away with are helping Chinese stocks roar back.
- Elon Musk has dissolved Twitter’s nine-person board of directors, making him the social media company’s sole director following his purchase of the business. He aims to delist it to make desired changes, which include charging for blue tick verifications. He may appoint a new board in the coming weeks. Advertisers want to know how Musk will prevent the platform from becoming a “free-for-all hellscape” with misinformation abounding.
- Tech giants such as Amazon.com, Meta Platforms, and Intel, are being judged on how quickly they can make spending cuts. Amazon has vowed to cut back on expenses after warning of its slowest holiday season ever, saying it would pause hiring in some businesses and wind down products and services. It has shut down a delivery robot business, a virtual tour feature and a kids-focused video calling device.
- As at Thursday’s close the S&P 500 was 4.6% down for the week.
Local News
- Ahead of the ANC’s national elective conference next month, president Cyril Ramaphosa appears unlikely to emerge with a resounding mandate that will allow him to increase his reforms in South Africa and the party itself. While he seems likely to hold on to the position of ANC leader, even as the Phala Phala issues hangs over his head, there is not an obvious and massive groundswell of support for his agenda. Stephen Grootes, however, believes he will win, but asks what price South Africans will pay for five more years under his leadership.
- Lawmakers are rushing to push through changes to the law to avoid SA being greylisted by the Financial Action Task Force, but face pushback. More than 26,000 South Africans commented on the Protection of Constitutional Democracy against Terrorist and Related Activities Amendment Bill via the DearSA public participation platform, with 99% against it, mainly for the potentially negative and unintended effect that the clumsily worded bill could have on political protest, free expression, the press, and religious activity.
- Poor global investor sentiment, fuelled by inflation concerns and aggressive rate hiking by the Fed, has resulted in emerging market bond yields moving much higher this year. However, South Africa bond valuations are now compelling as we should not see significant outflows, according to Ninety One.
- More interest rate hikes are in the offing as the central bank said it will continue using interest rates to curb inflation as it targets economic growth and job creation. This is even though inflation may have peaked. According to the South African Reserve Bank, South Africa needs the economy to grow at 5% to create jobs, with 3% being the minimum.
- The Absa Purchasing Managers’ Index managed to gain slightly modestly in October to 50 as rolling blackouts declined month-on-month, which places it in neutral territory. However, the employment index fell deeper into negative territory, which suggested the manufacturing sector won’t be creating job opportunities anytime soon.
- Absa Bank revised its third quarter gross domestic product growth forecast to negative 0.4%, which will put South Africa into a technical recession after the second quarter’s negative 0.7% print. The downward revision is due to loadshedding. Economic growth, thanks to loadshedding and other factors, will remain under 2% over the next two to three years, according to Nedbank. President Cyril Ramaphosa is confident that Eskom will continue to be the mainstay of power supply, even as rolling blackouts continue.
- However, Ramaphosa has raised the prospect of scrapping the R5 billion Soweto residents owe to Eskom, despite it battling with R400 billion of debt. Iraj Abedian, chief economist at Pan-African Investment & Research Services, says this may lead to more municipalities reneging on paying bills, and government taking on another R20 billion of what Eskom needs.
- Underscoring the increases in the cost of living, and contrary to the usual signal of a growing economy, South African Reserve Bank data indicated that private sector credit increased 9.7% year on year, ahead of market expectations of 8.15% and extending the growth in credit demand to the 15th straight month. The most significant contributor was asset-backed credit, accounting for 50.9% of total credit
- Meanwhile, the country recorded a trade balance surplus of R19.70 billion in September — well above August’s R7.2 billion, the smallest trade surplus in seven months — and above the Thomson Reuters expectation of a R5 billion gain.
- A large strike that could cripple service delivery looms as four more public service unions have been issued with strike certificates after seemingly endless talks failed to break the wage deadlock at the public service co-ordinating bargaining council. Unions have rejected government’s final revised 3% offer, including continuation of the R1,000-a-month after-tax cash gratuity ending in March 2023. A Business Day editorial says the sector needs an urgent structural review.
- Sibanye-Stillwater has inked a five-year wage agreement with the Association of Mineworkers and Construction Union for its Rustenburg and Marikana platinum operations. Such wage deals struck by it and its peers signal a welcome decline in union unrest in the sector.
- Sasol shares have slumped the most in more than a year after the synthetic fuels and chemicals giant unveiled plans to raise $750 million in convertible bonds to replenish capital reserves and refinance debt.
- Shares in Naspers and Prosus lept 22% and 19%, respectively this week, on rumours that the Chinese government was forming a committee to reopen the economy after the Covid pandemic. Further speculation, which was denied, included the fact that Naspers and Prosus were in talks with a state-owned Chinese investment company to sell their stake in Tencent.
- As at the time of writing, the rand was 0.6% weaker for the week and the ALSI was 2% up.
Sources: Dynasty, Daily Maverick, News24, Bloomberg, BusinessLIVE, Business Insider, Reuters, IOL, BusinessTech, New York Times, Wall Street Journal, The Guardian, FM, Engineering News, etc.