At the outset of this year, we wrote an article about why we’re not bullish about the JSE, despite its outperformance of the global markets in 2022. In line with our expectations, we have seen a reversal of fortunes between major international indices and the local bourse this year. If anything, the tide has turned even faster than we anticipated.
Looking back at the full year of 2022, the JSE ALSI ended the year only 3.5% down in US dollar terms, while the Nasdaq composite was down 33.1% and the S&P500 fell 19.1%. For the year to date, the picture couldn’t be more different. The Nasdaq Composite was up 23.6% for the year-to-date by end May and the S&P500 was up 9.65%, while the JSE ALSI has surrendered 10.06% in US dollar terms.
So, what’s behind the numbers? One of the key factors on the international front is that big tech stocks are back in vogue after a torrid 2022. Investors are backing stocks like Nvidia (which briefly joined the trillion market cap club this week), Meta, Microsoft and Apple as the AI race heats up. The hope that the Fed will soon end the cycle of interest rate hikes is also helping to boost international indices.
Back in South Africa, mining stocks helped to power the JSE’s performance in 2022. But the commodities boom seems to have run its course, with the Bloomberg Commodities Index declining 12% in dollars for the year-to-date. This has dampened the performance of many of the rand hedge stocks that should, in theory, offer a bulwark against the weaker rand which has depreciated 15% against the US dollar since the onset of 2023.
When it comes to domestically focused shares such as the retailers and financial services companies, South Africa’s poor economic performance limits their potential for growth. With weak consumer spending and confidence and relentless load shedding increasing their operating costs, the outlook for South Africa Inc. shares is overwhelmingly negative.
Given South Africa’s significant levels of political risk, a low likelihood of economic reforms, and the high possibility that load shedding will get worse over the winter months, the JSE’s prospects for the rest of the year are bleak. The movements of the market over the year-to-date vindicate our longstanding belief that the offshore markets offer a wider and superior set of opportunities than the JSE.
While our stance on South Africa and our reluctance to invest in cyclical commodities stocks meant that some of our funds underperformed benchmarks in 2022, our clients are being rewarded for their offshore exposure this year. Investors in our domestic house-view Dynasty Ci Wealth Preserver and Dynasty Ci Wealth Accumulator Funds have also benefitted from our strategic overweight position in offshore equity, with the two funds ranked 1st and 2nd, respectively, in their respective peer groups for the twelve- month period ended 31 May. (Source – Corion Unit Trust Survey as at 31 May 2023)
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much money you lose when you’re wrong”.
– George Soros, American businessman and philanthropist
Global News
- The US House on Tuesday passed, by a majority, debt-limit legislation forged by president Joe Biden and speaker Kevin McCarthy that would impose restraints on government spending through the 2024 election and avert a destabilising US default. It has a timeframe long enough to get Biden through the next electoral process. The basic framework of the deal lifts the debt ceiling, currently at $31.4 trillion but there are likely to be some retrenchments in government services until 1 January 2025. Investors have largely judged the risk of a US default as resolved and are shifting attention to other uncertainties, such as Fed policy.
- Friday’s fresh jobs data are likely to inform Fed policymakers as they try to decide whether they should take a break from hiking rates. Job growth jumped in May with US employers adding 339,000 jobs on a seasonally adjusted basis, an increase from a revised total of 294,000 in April. This complicates the picture for the Fed, which has been raising interest rates for more than a year to temper the labour market and rein in price increases. Fed officials have indicated that the jobs report will be an important factor as they decide whether to raise interest rates again.
- Many big businesses have continued raising prices, even though the cost of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Some of the world’s biggest companies have said they will continue increasing prices or keep them at elevated levels for the foreseeable future. This strategy has cushioned corporate profits, but at the same time could keep inflation robust, contributing to the very pressures used to justify surging prices. Because of this, some economists have warned that policymakers at the Fed may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.
- In Europe, food prices remain stubbornly high. Throughout the European Union, consumer food prices were, on average, 17% higher in April year-on-year. This was a slight slowdown from the previous month, which set the fastest pace of growth in over two-and-a-half decades. The situation is worse in Britain than in Western Europe: Food and non-alcoholic drink prices were 19% higher, the quickest pace of annual food inflation in more than 45 years. By comparison, the annual rate of US food inflation was 7.7%. Rising labour costs and the possibility of profiteering means that food prices are unlikely to come down anytime soon. More broadly, rising prices could also put pressure on central banks to keep interest rates high, potentially restraining economic growth. However, Eurozone inflation dropped to 6.1% in May, from 7% a month ago – the lowest reading since February 2022.
- The Bloomberg gauge on commodities has dropped more than 10% since the start of the year to the lowest since 2021. From copper and wheat to natural gas, the cost of some of the world’s most important products is dropping dramatically, bringing long-awaited relief for consumers that were stung by last year’s soaring prices. However, some prices are proving stickier, and there’s uncertainty over how long-lasting the disinflationary pressures will be, limiting the extent that this will ease the cost-of-living squeeze. Driving the disinflationary trend is a world economy flirting with recession, Europe’s industrial slump and China’s weaker-than-expected emergence from Zero Covid policies.
- China’s recovery from Zero Covid is stalling and it is facing deep, structural, problems in its economy, indicating that its era of rapid growth is over. A few months ago, the outlook was better after the country lifted strict Covid-19 controls, which caused consumer spending to rise as people ate out and treated themselves to travel. The property boom and government over- investment that fueled growth for more than a decade has ended. Enormous debts are crippling households and local governments. In addition, president Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—as indicated by a new campaign against international due-diligence and consulting firms—are stifling foreign investment. Economists say these worsening structural problems are hobbling China’s chances of increasing the growth marvel that transformed it into a rival to the US for global power and influence. China, which had typically expanded at between 6% and 8%, might soon see growth 2% or 3%, according to some economists.
- Goldman Sachs Group is pondering another round of job layoffs as it battles a muted dealmaking environment that has dented revenues across Wall Street. The investment bank is working on what would be its third round of job cuts in under a year, according to sources. The firm eliminated several hundred jobs in September, followed by a much bigger round of cuts at the start of this year. The moves this time are expected to affect less than 250 people and will include more senior employees at the firm. A company spokesperson declined to comment.
- Social media platform Twitter is only worth 33% of the $44 billion Elon Musk paid for it in October last year. This is according to Fidelity, which recently marked down the value of its equity stake in the company. Musk recently admitted Twitter is worth less than half what he paid for it. However, Musk is again the world’s richest person after shares in luxury goods firm, LVMH, fell 2.6% in Paris trading on Wednesday, leaving luxury goods tycoon Bernard Arnault the second wealthiest person.
- Apple is busy with plans to expand and revitalise its retail chain, aiming to push deeper into China and other parts of Asia while overhauling established locations in the US and Europe. It wants to open 15 new stores across the Asia-Pacific region, five locations in Europe and the Middle East, and four additional outlets in the US and Canada by 2027. This is according to sources. It is also aiming for six revamped or relocated stores in Asia, nine in Europe and 13 in North America. In total, the company is proposing 53 new, relocated, or remodeled stores over the next four years.
- Chip company Nvidia’s market value briefly went over $1 trillion on Tuesday after its AI prospects pushed it into an elite club of just five American companies. Its shares gained as much as 7.7% early in the session, before retreating on Wednesday when it fell 5.7%, the most since 30 January. Alphabet, Amazon, Apple, and Microsoft are the only other US businesses to have trillion-dollar valuations, and fewer than 10 companies globally have achieved this distinction. No other company embodies Wall Street’s current obsession with AI more than Nvidia. It has become the world’s biggest maker of the specialised chips needed to power a new generation of AI products, surpassing Advanced Micro Devices and Intel in capability just as the viral success of ChatGPT has virtually every company around the world baking AI into its operations.
- As at Thursday’s close the S&P was 0.37% up for the week.
Local News
- Government is considering moving the BRICS meeting to China, or hold it virtually, to avoid a requirement to carry out an International Criminal Court warrant of arrest for Russian president Vladimir Putin. International Relations Minister Naledi Pandor, however, maintains that the summit, which could have far-reaching implications for the country, will be held in Johannesburg. On Thursday, Pandor and foreign affairs ministers from Brazil, Russia, India, and China addressed the media on the outcomes of their summit – held as a precursor to the main event set for August. On Tuesday, rand weakened as much as 1% to R19.91 to the dollar after government laid down a plan to host Putin for BRICS in August. George Glynos, head of research at ETM analytics, warned that the rand could weaken to levels much lower than R20 to the US dollar if sanctions are imposed because of South Africa’s relationship with Putin.
- Justice Mahala has opined that, while president Cyril Ramaphosa dithers, deputy president Paul Mashatile is going around the country and presenting himself as “as a decisive man of the people and as something of an action man for business”. He has stated that land reform would be fast tracked, emergency power would be procured, and shaky coalition governments will be discussed at a national dialogue in the next two months. “There is now no doubt that Mashatile is girding himself for the top job. But when and how will his opportunity come?” Read more here.
- Almost three months after taking up the position of being appointed electricity minister, Kgosientsho Ramokgopa, finally has his officially delegated powers, in addition to being responsible for the National Energy Action Plan that aims to reduce the intensity and frequency of the rolling blackouts, he now has the power to direct the procurement of new generation capacity and ensure security of supply. Yet, a crucial aspect of the Electricity Regulation Act, under which Ramokgopa received his powers, has been left out. As a result, the power to carry additional electrons from project deal to grid continues with minister of mineral resources and energy, Gwede Mantashe, who retains contractual and tender and procurement authorities. The Independent Power Producers Office also remains with the Department of Mineral Resources and Energy.
- Eskom has made a massive R21.2 billion loss over the past financial year, its largest ever, its unaudited results disclosed by the National Treasury in Parliament showed. This is despite a 9.61% tariff increase and an R21.9 billion bailout from the Treasury. Net revenue grew slightly to R259.2 billion in 2022/23, up from the previous year’s R247.6 billion. Eskom battled in the last year because of loadshedding, municipalities that didn’t pay, and additional costs, especially on diesel. Eskom will see diesel costs more than double to 21.4 billion to try keep the lights on. Ramokgopa has said there will be substantially lower levels of loadshedding by the end of the year. Meanwhile, the central bank is working on a contingency plan to ensure the country’s payments system remains in operation in the event the nation’s electricity grid collapses.
- Cape Town is negotiating to potentially take over Eskom-owned infrastructure to better manage the grid under its care, while investing R2.3 billion in additional power generation. Integrating all electricity infrastructure under a single management unit would contribute towards greater operational efficiency in powering the city, says the Cape Chamber of Commerce and Industry. The chamber welcomed the news that the city and Eskom were engaged in discussions about the possible transfer of Eskom staff and infrastructure to the metro.
- Transnet is forging ahead with plans to increase private participation in South Africa’s ports and freight-rail networks as its operational performance deteriorates. The state-owned entity also expects to form partnerships with private operators at the Durban Pier 2 Container Terminal. However, miners are fuming over Transnet’s inability to provide trains, leaving them unable to export their products. This is despite the Minerals Council having agreed to set up teams consisting of member companies and Transnet Freight Rail managers aimed at improving the quality of performance across chrome, iron ore, manganese, and coal.
- Spar extended its Wednesday losses on Thursday to more than 20% as the market digested a dire profit warning. After losing more than 6% on Thursday, shares in the JSE-listed retailer closed below R100 for the first time since January 2011. Spar warned that half-year profit could fall by more than a third due to difficulties in the implementation of its new IT system. Furthermore, load shedding had a “direct effect on the trading and profitability” of its retailers, which spent more than R700 million on diesel in the six months to end March.
- Consumers constrained by repeated interest rate hikes and a cost-of-living “crisis” are cutting back on foodstuffs and non-essentials such as tomato sauce, baked beans, and mayonnaise, according to Tiger Brands’ results for the six months to end-March. The country’s biggest food producer published weaker results and warned of tough times ahead, sending its share price into a tailspin. The share closed 16.83% lower at R157.82 on Tuesday, the largest fall since 2008. Its net profit declined 3.3% to R1.19 billion. Pepkor has sounded the same warning on lower consumer spending.
- As at the time of writing, the rand is 0.8% stronger and the ALSI is 0.7% up for the week.
Sources: Dynasty, BusinessLIVE, BusinessTech, SARB, Financial Mail, Bloomberg, Daily Maverick, 702, New York Times, News24, Wall Street Journal, EWN, TechCentral, Reuters, The Guardian, etc.