On the face of it, equity markets have many reasons to celebrate. More than three quarters of Fortune 500 companies that have reported earnings for the September quarter have beaten expectations, the US has delivered impressive GDP growth and inflation seems finally to be coming under control. Why, then, did the S&P 500 fall another 4% in October, following an awful September?
The answer lies in the future guidance that CEOs gave analysts and stockholders when they reported those robust earnings. Automotive strikes, resumption of student debt repayments, weaker consumer spending and declining credit extension are among the reasons that many US-based multinationals expect weaker earnings going forward.
Markets, because they look forward rather than back, have responded by rerating stocks on the major indices. And geopolitical instability—the situation in the Middle East especially—is contributing to the general jitters. For investors, this may seem like discouraging news after markets started to recover from their trough in October 2022 and looked on course, as recently in August, to deliver strong returns for 2023.
As disheartening as the wiping out of many of the gains in September and October may be, the negative contributing factors are known and, in our view, are being priced in. Barring any other nasty surprises, markets may start anticipating positive news. Indeed, November’s early days have been in the green. The Fed and the Bank of England have paused interest rate hikes—and we could see the Fed starting to cut interest rates from the third quarter of 2024.
Markets are notoriously unpredictable and can recover sharply even amidst adverse conditions. This was clearly evidenced in October 2022, when the S&P 500 bounced by 14.4% in the seven weeks from the 12 October lows to the end of November, following a negative return of 9.2% in September, notwithstanding that there were no new factors at play.
For South African investors, one welcome development in recent days is that the rand has recovered back to the level it was at before the Lady R debacle. This may present an opportune time to externalise funds and buy into international markets at a more attractive currency conversion rate and at more reasonable stock market valuations.
“The future is never clear; you pay a very high price in the stock market for a cheery consensus.”
– Warren Buffett
Global News
- KPMG’s 2023 CEO Outlook finds that 73% of global CEOs are confident about the economy over the next three years, compared to 71% last year. But CEOs’ confidence in their own company’s growth is at a three-year low; in early 2020, 85% of CEOs were confident in their company’s growth prospects, compared to 77% this year. For the full report click here.
- Goldman Sachs Group has stated that AI will boost productivity over the next decade, lifting its long-term growth estimates for the US and many other major economies. The AI impact rises Goldman’s US GDP forecast to a 2% expansion rate in 2027 and to 2.3% by 2034, projections show.
- The Fed on Wednesday held interest rates steady in a unanimous decision. Chairman Jerome Powell indicated it could be finished with the most aggressive tightening cycle in four decades after it held off on raising interest rates for a second consecutive policy meeting. Equity and bond markets reacted quite positively to the news, as interest rate concerns have been the single biggest driver of markets since January 2022.
- US labour productivity grew by an annualised rate of 4.7% in the third quarter, the most in three years. This indicates that companies are ramping up attempts to improve efficiency, which will support economic growth and help to dampen the inflationary impacts of rising wages.
- Euro-area inflation has declined to its lowest level in more than two years as the bloc’s economy shrank by 0.1% in the third quarter, following an unprecedented ramp-up in interest rates. CPI gained 2.9% year-on-year in October, down from 4.3% in September month-on-month and below the 3.1% median estimate in a Bloomberg survey of analysts.
- The Bank of England held interest rates steady at 5.25% for the second consecutive meeting with a 6-3 voting split. Governor Andrew Bailey said it is much too early to be thinking about starting to cut rates, Markets reacted positively, with the pound gaining and the FTSE 250 rising by more than 3%, with much of the boost coming from rate-sensitive property stocks.
- Apple reported a 1% decline in revenue for the quarter to September, the fourth period of such declines. Although not unexpected, it beat Wall Street predictions. However, it expects a further slowdown over the festive period due to a slump in sales in China. The decline comes despite record iPhone and services revenue. Apple’s stock is up 32.5% year-to-date.
- Google will invest as much as $2 billion in AI company Anthropic. So far, the search giant has invested $500 million upfront into the OpenAI rival and agreed to add $1.5 billion more over time. This will underscore a ramp-up in its efforts to better compete with Microsoft, a major backer of ChatGPT creator OpenAI, as Big Tech companies race to infuse AI into their applications.
- Tesla has seen its stock fall, dropping the company’s value by nearly one-fifth in less than two weeks amid growing concerns that demand for electric cars is starting to weaken. Wall Street analysts have provided grim predictions on the market.
- Novo Nordisk saw sales jump in the third quarter, with double-digit expected to carry into 2024, driven by burgeoning demand for its obesity and diabetes blockbusters. This strengthens its grip on an obesity market estimated to hit $100 billion by 2030. Operating profit also rose 47% during the period. The stock is held in the Fundsmith Equity Fund.
- As at Thursday’s close the S&P was 4.9% up for the week.
Local News
- Finance Minister Enoch Godongwana took a careful line in the Medium-Term Budget Policy Statement (MTBPS), which seemingly reassured markets that fiscal discipline still exists at the National Treasury while making concessions to anxious colleagues in the cabinet and in the ANC concerning deteriorating social conditions and entitled government workers. Unfortunately, despite the talk of austerity, the budget sees debt-to-GDP levels continuing to rise, despite no allowances for SOE bail outs, which are highly likely to be forthcoming.
- For more on the MTBPS, click here.
- Peter Bruce, editor-at-large at Arena, states that, if the opposition can get its act together, we could see them winning in next year’s elections, while an editorial in BusinessLIVE points out that South Africa can learn from the Rugby World Cup win if it replaces old leaders with newer, energetic, ones.
- South Africa is “cautiously optimistic” that it can maintain its African Growth and Opportunity Act (Agoa) status with the US, as the Agoa Forum kicked off in Johannesburg on Thursday. Maintaining South Africa’s status under the African Growth and Opportunity Act will save 30,000 jobs in the Western Cape alone and increase trade from an annual R50 billion-plus. Ramaphosa has asked for a 10-year extension, but South Africa’s support for Hamas and Russia means it may face pushback.
- Analytics Consulting FX Solutions believes there are several factors that are currently contributing to a positive outlook for emerging markets and their currencies. These include a weaker US dollar due to the Federal Reserve announcements, a growing willingness among investors to invest in affordable emerging market assets and currencies, China’s efforts to support its economy through fiscal and monetary measures, and – in the case of South Africa – no unexpected shocks in the MTBPS. These factors have led to the recent strengthening of the Rand and other select emerging market currencies.
- The National Department of Health indicated on Tuesday that medical aid tax credits will end, and the money – usually granted as tax relief – will be used to partially pay the National Health Insurance Fund. Concerns over the proposed legislation include the source of funding for the scheme, the government’s lack of capacity to manage it, and the threat of corruption and maladministration.
- The JSE’s equity market has seen its trades fall 76% and volumes drop 68% over five years as it drops down the rankings of the world’s largest exchanges. It is currently 19th from 12th in 1995 and has seen dozens of delistings.
- Growthpoint CEO Norbert Sasse has told the group’s shareholders that municipalities continue to levy above-inflation cost increases while their service quality declines, and this was eroding returns for property owners.
- At the time of writing, the rand was 2.1% stronger and the ALSI was 3.3% up for the week.
Sources: Dynasty, News24, BusinessLIVE, BusinessTech, Engineering News, Bloomberg, The Economist, TechCentral, NYT, EWN. Financial Mail, Daily Maverick, BizNews.com, Reuters, Analytics Consulting, KPMG, etc.