With recent US inflation data surpassing expectations and increasing the probability that the Fed may cut interest rates in September; we are starting to see some signs of a different appetite for risk over the past week. As examples, the Dow Jones Industrial and Russell 2000 indices have both substantially outperformed the S&P 500 and Nasdaq indices since 10 July, the day before the latest US inflation figure was released.
Although slightly off Tuesday’s highs, the Russel 2000 – an index tracking small capitalisation stocks – has gained 7.3% in dollars since 10 July, while the Dow Jones Industrial Average climbed by 2.4% over the same period.
The Dow tracks 30 large blue-chip industrial companies trading on the New York Stock Exchange and, thus, has lower exposure to Big Tech than the S&P 500, which itself is less tech-heavy than the Nasdaq. In addition, because it is price-weighted rather than weighted by market capitalisation, the Dow is less skewed by the movements of the Magnificent Seven (tech) stocks than the S&P 500 and the Nasdaq.
By contrast to the Russel 2000 and the Dow Jones Industrial, the S&P 500 has declined by 1.6% since 10 July and the Nasdaq by 4.7%. This indicates that the current market rally, which was driven by a handful of mega-capitalisation tech stocks in 2023 and the second quarter of 2024, may broaden out to encompass other sectors due to the following influences: The commencement of interest rate cuts; an increase in the appetite for risk; and investors starting to agree that the Big Tech stocks might be heading into overvalued territory. (We have written about this in a similar context on 5 April 2024)
It is too early to definitively say that small caps, in particular, will enjoy a massive boost once interest rates come down, but the performance of the small cap sector does tend to be cyclical in nature, with it having unperformed significantly in recent years. However, it is encouraging to see signs that the stock market rally is reflecting positively on both small cap as well as other quality non-tech exposures within our preferred active funds over the last week.
“The battle between the broader markets and 2024 leadership is set to continue over the short run in our view, as relative strength disparities between these groups show the potential for more rotation ahead. This cannot be confirmed as a long-term trend/investment theme at this time.”
– Dan Wantrobski, Associated Director of Research at Janney Montgomery
“In the near-term, this rotation into smalls can continue. Markets are looking forward to easier monetary conditions, and they’re likely to get them this fall.”
– Liz Young Thomas, Head of Investment Strategy at SoFi
Global News
- Following a report from Bloomberg on Tuesday that the Biden administration is mulling plans to impose more sanctions on Chinese tech firms and to heighten semiconductor trade restrictions between the US and China, tech shares slumped as investors shed the behemoths that fuelled Wall Street’s monster stock rally this year. The Nasdaq Composite index tumbled 2.8%, logging its worst day since December 2022. The S&P 500 lost 1.4%. Shares of tech heavyweight Nvidia slumped 6.6% and rival chipmaker Advanced Micro Devices shares dropped by 10.2%. ASML shares dropped by 10.2%.
- On Monday, Powell said second-quarter economic data has provided policymakers greater confidence that inflation is heading down to the central bank’s 2% goal, possibly paving the way for near-term interest-rate cuts. The US economy grew at a slight pace heading into the third quarter, with a few regions noting flat or declining activity, the Federal Reserve said in its Beige Book survey of regional business contacts. Employment also increased only slightly, according to the report released on Wednesday. Labour turnover declined. Yet the International Monetary Fund has warned that stubborn inflation could keep interest rates higher for longer than expected, increasing fiscal and financial risks around the world.
- Financial markets reacted to the attempted assassination of Donald Trump the past weekend when they reopened on Monday. Treasuries fell as trading kicked off, with long-dated bonds leading losses on bets Trump’s fiscal and trade policies will spur growth and add to inflationary pressures. The yield on 30-year bonds rose to 4.45% steepening the curve and surpassing two-year equivalents for the first time since January. The dollar strengthened against most currencies, and S&P 500 Index futures rose by 0.4% shortly after trading began.
- Donald Trump has formally accepted the Republican nomination and has chosen JD Vance, for his ability to appeal to the working class, as his running mate signalling how powerful populism remains in US politics.
- President Joe Biden faces unprecedented pressure to drop out of the 2024 election race as even his top Democratic allies see his exit as inevitable, believing he is no longer suited to contest the elections. According to sources known to the New York Times, Biden, who is isolating because he has COVID-19, has begun to accept the idea that he may not be able to win in November and may have to drop out of the race.
- Gold edged closer to an all-time high on Tuesday as more economists expect a US rate cut, while some traders ramped up bets on a second Trump presidency. Gold is 18% higher for the year, boosted by anticipation of Fed loosening, as well as significant buying by central banks. Geopolitical tensions have also supported the precious metal, which is traditionally seen as a safe-haven asset.
- As expected, the European Central Bank kept interest rates unchanged yesterday, with President Christine Lagarde saying a move in September was “wide open”. Last month, the central bank cut rates from record highs in a move that even some of its policymakers considered rushed after progress on lowering inflation to its 2% target stalled. With domestic inflation still stubbornly high and wage growth sticky, the bank is likely to be more cautious about a follow-up step.
- UK inflation unexpectedly stayed at 2% in June, higher than economists predicted and causing a paring of bets on when the Bank of England will cut rates. The news sent the pound above $1.30 for the first time in a year.
- China’s gross domestic product has expanded by 4.7% in the second quarter from the same period a year earlier according to data released on Monday. This was weaker than all except one of 28 estimates in a Bloomberg survey of economists and the worst pace in five years. Retail sales rose at the slowest monthly pace since December 2022 as consumers remained under strain, despite efforts to reinvigorate the economy.
- Trump’s proposed tariffs of 60% on all Chinese exports to the US would more than halve China’s annual growth rate, according to new research from UBS Group. If his proposed 60% tariff is effected, it would cut 2.5 percentage points from China’s gross domestic product in the year that follows, according to a report from UBS economists published on Monday. Beijing is seeking to reach about 5% growth this year after the economy expanded 5.2% in 2023.
- A global cyber outage has grounded major US airlines, while other carriers, media companies, banks and telecoms firms around the world also reported system outages were disrupting their operations on Friday. Cybersecurity firm CrowdStrike said its Falcon Sensor threat-monitoring product has been causing Microsoft’s Windows operating system to crash. It was unclear what triggered the issues, which coincided with disruptions of Microsoft’s Azure cloud and 365 office software services. This is a developing story.
- Streaming company Netflix has added 8.05 million customers in the second quarter and raised estimates for annual sales and profit margins. In Asia-Pacific, 2.8 million new customers signed up. This move extended its lead over the streaming competition and topped expectations in every region around the world. Analysts expected a total of 4.87 million on average.
- General Motors Co CEO Mary Barra has walked back expectations for her company’s electric vehicle programme, following other legacy automakers as momentum slows for plug-in models. Barra told CNBC at an event on Monday that GM won’t have the production capacity in place to build one million EVs at the end of next year, which was the previous target. The CEO said customer demand will dictate how fast the company can get to the one million mark for annual sales of EVs, and that it’s currently seeing a slowdown in deliveries of them.
- Luxury goods company, Richemont – controlled by South African billionaire Johan Rupert – slightly increased sales in the three months to end June by 1% in constant currency to €5.3 billion, delivering results that were somewhat better than its peers, even though this figure was 19% down from a year ago. However, Richemont said its sales in the quarter were constrained by the Asia Pacific region, where items sold declined 18%. It also noted that higher sales in South Korea and Malaysia only partially mitigated a 27% decline in China, Hong Kong, and Macau combined.
- Pernod Ricard is selling most of its wine brands, as wine consumption is falling globally and will instead focus on growing its champagne and premium spirits labels, including in the United States. Wine consumption globally hit a 27-year low last year, according to an estimate by the International Organisation of Vine and Wine. The French group owns Absolut Vodka, Jameson Whiskey, Olmeca Tequila and Beefeater Gin.
- As at Thursday’s close the S&P 500 was 1.3% down for the week.
Local News
- Addressing Parliament last night for the first time following the establishment of the new administration, President Cyril Ramaphosa said his new multi-party administration will prioritise economic growth by tackling structural reform, fixing badly-run municipalities, cutting red tape and ramping up infrastructure investment. He also said reducing poverty is a priority, as the government now seeks to expand the basket of essential food items that are exempt from VAT and review administered prices, including the fuel price formula.
- The South African Government is considering amending legislation to permit pension funds and other asset managers to finance industrial policy initiatives in a move that could open the door to trillions of rand in retirement savings for strategic sectors amid fiscal constraints. The proposal to amend regulation 28 of the Pension Funds Act to finance industrialisation was tabled by the Department of Trade, Industry and Competition at the past weekend’s cabinet lekgotla as part of a “comprehensive suite of regulatory tools and mechanisms” to spur industrialisation, minister Parks Tau said.
- The National Health Insurance Act failed to get the full support of members of the National Council of Provinces on Wednesday, as it was largely criticised as not being the silver bullet to solving corruption, poor management, access to hospitals and the basics of the healthcare system. This is as Health Minister Dr Aaron Motsoaledi argued that societal imbalances favoured the rich.
- President Cyril Ramaphosa’s macroeconomic reform agenda is bearing fruit, particularly in the energy and logistics sectors, Standard Bank says. The bank does not expect Eskom’s improved operational performance to relapse. The bank’s chief economist, Goolam Ballim, said early improvement signs at Eskom and Transnet boded well for the economy.
- A 100 bps rally in bonds since the market-friendly outcome of May’s election is a boon for the fiscus, battling with high-interest payments from the government’s multi-trillion-rand debt pile as it will reduce the interest due on loans. Investors in the fixed-income assets enjoyed a total return – price appreciation plus interest – of 17% in the past four-and-a-half months. That’s a multiple of any developed country and double that of second-best Chile in emerging markets, according to data compiled by Bloomberg.
- The IMF maintained South Africa’s 2024 growth forecast at 0.9% despite the improvement in the logistics sector, supply of electricity, and the suspension of load shedding. This is the same GDP forecast that the IMF also made in April, as the country was still experiencing rotational power cuts even though they were not as frequent as in 2023. For 2025, the IMF forecast South Africa’s GDP growth to remain at 1.2% in 2025, the same forecast it gave in April.
- The South African Reserve Bank kept the repo rate unchanged at a 15-year high of 8.25% for a seventh consecutive meeting. However, two of the six Monetary Policy Committee officials wanted to lower rates by 25 basis points. Although the unchanged stance was in line with the median estimate of 23 economists in a Bloomberg survey, it was the first time this year that economists disagreed on what the South African Reserve Bank’s decision would be, with some expecting a cut. Hopes have been raised for a September cut. The bank is still targeting inflation of 4.5%, and it is currently 5.2%.
- The South African Government will send a high-level delegation to the US within the next two weeks to lobby against Washington enacting legislation for a full review of relations between the two countries. The visit coincides with this year’s African Growth and Opportunity Act (AGOA) forum in Washington DC from 24 to 26 July. South Africa’s perceived closeness to China and Russia in the past year placed it in the crosshairs of US legislators. Among delegation members will be newly appointed trade, industry and competition department officials, including Minister Parks Tau.
- The state loses about R24 billion a year in taxes due to the flourishing illicit cigarette market while health risks associated with substandard products are an extra burden on the cash-strapped healthcare system. This is according to a study, conducted by Ipsos and commissioned by British American Tobacco, which found that cigarettes being sold below the minimum collectable tax of R25.05 a pack are freely available.
- The trend towards companies leaving the JSE has continued, with both Bell and Sasfin stating their intentions to delist. Shares in Bell Equipment surged 49% after the founding family offered minorities R53 cash per share (value of R5 billion), while Sasfin Holdings offered minority shareholders nearly R1 billion to buy them out and take the company private. That offer was also well received by the market, with the group’s stock surging 46% on Monday after it made the offer public. Ascendis Health is another company set to delist and has been vindicated in a high court ruling that set aside a Takeover Regulation Panel decision about alleged contraventions of takeover provisions.
- Pick n Pay’s share price plunged more than 17% on Wednesday, as the retailer’s R4 billion rights issue officially kicked off. This is the first step in a recapitalisation plan aimed at turning around its fortunes. CEO Sean Summers has been granted a substantial amount of shares as an incentive to turn the struggling retailer around. At R27 a share, these could be worth as much as R108 million.
- Resources group BHP has reported strong operational performance for the year ended June, with record iron ore production and highest copper production in over 15 years. It said it finished the year with a strong fourth quarter, achieving several production records, and is meeting current production and unit cost guidance for all commodities. CEO Mike Henry said 2024 metallurgical coal achieved the upper end of its revised guidance.
- As at the time of writing the rand was 2.2% weaker and the ALSI was 2.4% down for the week.
Sources: Dynasty, BusinessLIVE, News24, Moneyweb, Business Report, Bloomberg, CNN, AP, etc.