After another week of high drama for the global banking sector, the world seems reasonably safe from a systemic crisis. Swift action from regulators – and even competing banks – in the wake of the crises at Silicon Valley Bank (SVB), First Republic Bank, Silvergate, Signature Bank and Credit Suisse has helped to restore market confidence—at least for now. But the disruption and price destruction of these banking stocks has validated the aversion to investing in this sector by both of our quality style global managers.
Writing for the Financial Times, Terry Smith, chief investment officer at Fundsmith, says that he never invests in banking shares because he understands how banks work. They are vulnerable to factors outside their control because contagion can spread as soon as there’s a run on one of their peers. Just witness how quickly banking stocks tumbled as bad news started coming out of Silvergate, Signature Bank and SVB.
Furthermore, Smith writes: “I never invest in anything that requires leverage to make an adequate return. Banks have a very small amount of equity to support their balance sheet.” Return on equity from banks is inadequate, in his view, for the leverage and the risk which accompanies it – especially when compared to the stocks in sectors such as consumer staples that a quality-focused fund such as Fundsmith would favour.
As if he needed another reason not to like banking shares, Smith, himself a former banker, believes that banks face severe disruption in the years to come. With the rise of FinTechs and digital currencies, banks’ roles in taking deposits, making loans and effecting payments could be supplanted faster than many of us anticipate. Banking services will always be needed—but will banking institutions?
Back in South Africa, years of gradual decline appear set to manifest as rapid collapse. We saw services such as rail and power start to decay under President Thabo Mbeki, followed by the accelerated deterioration in infrastructure and institutions due to poor policy, corruption and mismanagement under Zuma’s watch. President Cyril Ramaphosa has not managed to institute the structural reforms needed to arrest the decline, and consequently we are now at the precipice of a failed state. Commentators such as RW Johnson believe the breaking point could arrive as soon as the 2024 elections.
“Gradually and then suddenly.”
– Ernest Hemingway’s 1926 novel, The Sun Also Rises
Global News
- Competing for the main news this week, along with bank collapses, was that the Fed raised interest rates 25bps on Wednesday. The central bank continues to target inflation of 2% and warned that more tightening may be in store. This is the ninth consecutive month rates have moved upwards. The hike shows that the Fed is taking a calculated risk that banking turmoil, which could slow the economy, may not grow into a broader financial meltdown. The last time this happened, in 2007, previous officials got it all wrong. Fed chair Jerome Powell needs to balance his fight against inflation against a sudden banking crisis.
- Following the collapse of Silvergate, SVB and Signature Bank, troubles emerged at another US regional bank, First Republic, as well as at Credit Suisse, a large Swiss institution that has been teetering on the edge for some time. In the case of Silvergate, Silicon Valley SVB and Signature Bank, the regulators’ guarantee for deposits averted an immediate banking crisis. However, stock prices for the three are down 99%, 81% and 92% respectively compared to their respective peak levels.
- First Republic is in talks with peers and investment firms about capital infusions, but its stock price is also hovering near record lows. Credit Suisse, meanwhile, is to be rescued by UBS in a £2.46 billion takeover. In the Credit Suisse instance, shareholders aren’t the major losers. Swiss financial regulator Finma has made the controversial decision to render $17 billion in subordinated bonds worthless as part of the rescue deal, a development that is likely to be challenged in court.
- The bailouts have brought to the fore again the idea that finance as an arm of the state is back, which will reshape global banking. The restructuring of finance this time, as compared to the Global Economic Crisis of 2008/09, looks less likely to be about a big new set of rules than about a deeper change in the political mindset: an acceptance of a mercantilist form of finance. The US, which is probing SVB’s downfall, moved too late on the collapse while billionaire Warren Buffett has been in talks with senior officials in the Biden administration to possibly invest in the banks as the regional banking crisis unfolds. Secretary of State Janet Yellen has said that those who are responsible for bank failures should not profit, while she supports a new law that seeks to hold those in charge of banks accountable for their actions.
- The Federal Reserve and other major global central banks are shoring up reserves to ensure dollars remain available across the global financial system as bank blowups in America and banking issues in Europe create a strain on markets. The crisis has pushed Bitcoin higher to hover near a nine-month high on Sunday, closing out its best week in four years as turmoil in traditional banking drove some investors to digital assets. The crypto currency rose 26% last week and is up more than 35% in 10 days as turmoil in the banking sector has rippled around the globe.
- Outgoing World Bank chief, David Malpass, has said China should be more active in restructuring discussions for developing countries that are in a debt crisis. The communist country has become one of the world’s major lenders to developing countries, and the World Bank wants them to restructure debt, which is not something China typically does. Malpass criticised China for including nondisclosure clauses that make it difficult to evaluate the loan contracts.
- Chinese president Xi Jinping has visited Moscow for the first time since Russia invaded Ukraine, giving him diplomatic cover for Russia’s war crimes. He used that time to firmly align with Russia against the US. But the Chinese leader held back from offering Vladimir Putin something he’s been looking for: A commitment to buy a lot more gas. The lack of progress on any major energy deals or specifics on other economic deals shows that Xi doesn’t want to appear too close to Russia. However, Russian President Vladimir Putin has embraced Xi’s Russia-biased proposal for ending the war in Ukraine as a potential blueprint for peace as the leaders pledged ever-closer ties.
- French president Emmanuel Macron seems to be safe in his position as the country’s French National Assembly rejected a no-confidence motion against his government, ensuring that a fiercely contested bill raising the retirement age to 64 from 62 becomes the law of the land. There was a close vote, which reflected widespread anger at the overhaul to the pension law, at Macron for his apparent aloofness and at the way the measure was rammed through Parliament last week without a full vote on the bill itself. France’s upper house of Parliament, the Senate, passed the pension bill this month. The new revised age of 64 is in line with many other developed market countries across the globe.
- Huawei Technologies is getting rid of tech made in the US and has replaced more than 13,000 parts in its products that were hit by US trade sanctions. The Chinese company invested $23.8 billion in research and development in 2022 and plans to increase this as it is branching out into software such as enterprises resource planning. This comes as the US is getting strict on new operations set up in China by US firms to make chips, which are generally supported by federal funds.
- Apple and Microsoft will increase their dominance in technology-stock indexes because of an overhaul of sector benchmarks compiled by S&P Global and MSCI, which takes effect after the market closes on Friday. This rework will remove 11 big US stocks from technology-focused indexes. Payment companies — including Visa, Mastercard and PayPal — will be moved into indexes tracking financial companies, while payroll processors like Paychex and Automatic Data Processing will be classified as industrials.
- Giant online retailer Amazon will fire 9,000 corporate and tech workers by the end of April, on top of the 18,000 roles it cut late last year and this January. These job cuts, 3% of its corporate work force, will target workers in some of its most lucrative divisions, which had previously been spared, including Amazon’s cloud computing business and advertising operations. Those two segments of the business are much higher-margin operations than Amazon’s core retail business, according to financial analysts and filings.
- As at Thursday’s close the S&P was 0.8% up for the week.
Local News
- After threats of bringing the nation to a standstill on Monday over demands that President Cyril Ramaphosa resign, and loadshedding ends, the EFF’s protest was somewhat of a damp squib. The party has a history of disruptive street politics, but Monday was mostly peaceful, with the police, army, courts, and civil society joining together to form a strong lobby against violence. Only about 500 people were arrested. However, this doesn’t mean the entire exercise was a total washout for Julius Malema’s party. It is also important to understand that not supporting the EFF shutdown must not be mistaken for support of the ANC.
- Political commentator RW Johnson argues that the ANC pulling in less than a majority – pegged at under 40% of the votes as indicated by recent polls – would leave the country with the worst possible post-2024 scenario- a period of indecision by the party as Ramaphosa embarks on a lengthy process of consultation while the country sits frozen in alarm pondering its various possible futures. Currently, the most obvious option is an ANC and EFF alliance, although this is not likely to be stable. With the EFF’s stated position of nationalisation, in a country where pretty much every SOE is broken, an ANC-EFF government would create a huge market panic, the crash of the rand, capital flight, the emigration of most of the country’s professional and business classes and the almost complete collapse of the economy. Similarly, the ANC would battle to join forces with the DA, as this would meet a wall of opposition from the far left as well as Russia and, perhaps, even the Chinese, who would see it as an unacceptable deal with “capital”, the forces of apartheid and the enemies of the working class.
- On Human Right’s Day, President Cyril Ramaphosa acknowledged lapses in service delivery. “There are times when water is not provided or is of poor quality, or when refuse is not collected. The failure to provide adequate services consistently is a human rights issue. That is why we are working to improve the functioning of local government, which carries the greatest responsibility for the provision of these services.” However, there is a funding issue. Jabulani Sikhakhane, editor of The Conversation Africa, says municipalities are finding it hard to balance the books. In the run-up to the 2024 election, it seems likely there will be appropriations from the national budget to failed municipalities in order to remedy the delivery of basic services, in an initiative for the ruling party to garner votes.
- Having considered the financial statements that some of the largest JSE-listed companies have published in recent weeks, Daily Maverick has concluded that the impact of rolling blackouts on South Africa’s economy was at least R15 billion in 2022. But the R15 billion estimate is believed to be a highly conservative estimate which regardless could have been spent by companies on investment initiatives rather than consumption measures such as buying generators and solar panel installations. As South Africa’s corporate giants started to detail the negative impact of rolling blackouts, the country’s weak economy and President Cyril Ramaphosa’s ineffective Cabinet on their operations, this sparked a costly share bloodbath on the JSE. About R1-trillion was wiped off the value of shares on the JSE in seven days, with the FTSE/JSE Africa All Share Index falling by as much as 3.2%.
- As a result of loadshedding and the risk of grid collapse, The Foschini Group lost R1 billion in sales over the past 11 months; Shoprite, was forced to spend R560 million on diesel to power its stores during the six months to 1 January 2023; Tiger Brands are spending R15 million a month on generator maintenance and will be spending R120 million in additional generating capacity; Agri SA believes the agriculture sector lost an estimated R23 billion in just nine months last year; MTN lost R695 million in the 2022 year; FNB spent 500% more on running its operations during the six months to December 2022, Nedbank spent R59 billion on diesel, and Absa is expecting to spend as much as R350 million on diesel in 2023 and 2024; Growthpoint will have invested about R500 million on backup power by the end of June 2023 for its tenants; and property company Vukile plans to spend R350 million on renewable energy over the next 10 months.
- The International Monetary Fund has taken South Africa’s situation seriously and says it now expects real GDP growth in South Africa to “decelerate sharply to 0.1% in 2023, mainly due to a significant increase in the intensity of power cuts”. Its previous forecast in January of 1.2% growth barely seemed credible.
- According to Nedbank, a 25bps hike is now all but guaranteed at the end of this month which will take the Repo rate to 7.5%. Yet eighteen out of twenty economists polled by Reuters say this could well be the last hike in the current cycle as inflation is thereafter expected to decline.
- Short-term insurance company Outsurance sees Ireland as a strategic fit and aims to expand there, even though the move could cost the company a year’s worth of profits. It sees the country as a good target thanks to its market size and historic profitability, English-speaking population and a familiar regulatory environment that makes it possible to use a direct distribution model like the one here.
- Transaction Capital has decided it won’t be issuing new stock to part-fund a deal to acquire a further 15% stake in used-vehicle retailer WeBuyCars. Its share price crashed last week, ending 60% down, after a profit warning saying its headline earnings for the six months to end March will decline 370%-375% to a loss of between 196.1c and 199.5 c compared with headline earnings of 72.5c in the prior period. In September 2021, Transaction Capital announced it would increase its shareholding in WeBuyCars by a further 15%. This would take its holding to around 90%. Transaction Capital’s acquisition of WeBuyCars is part of its long-term strategy to diversify its business beyond taxi financing. Currently making up 43% of its 2022 earnings, WeBuyCars is now Transaction Capital’s largest business.
- Ocean Light shipping, a company that acts as an agent to get customs shipments cleared, has had its licence cancelled, making it about impossible for it to do business here any time soon. This is a consequence of defrauding South African Breweries of nearly R140 million. Ocean Light assisted the brewer in importing Corona Light beer from Mexico from August 2018 to November 2019. However, the products were fraudulently cleared as traditional African beer — a product that attracts either no import duties or far less than Corona beer.
- Rand Merchant Bank has bought a quarter of Remgro-owned Ubiquity Energy, which holds Energy Exchange of Southern Africa. Energy Exchange is a licensed electricity trader that offers corporate customers an alternative source of electricity generated by independent power producers. The value of the deal was not disclosed.
- The Competition Tribunal has given the go ahead for the sale of Remgro’s controlling stake in diversified liquor group Distell to Dutch brewing giant Heineken. Namibia Breweries, owner of beer brand Windhoek, will form the other leg of a bigger Heineken South Africa. As a result, it is likely that the new-look challenger with go head-to-head with liquor heavyweight AB InBev, which houses South African Breweries.
- In good news for a country that desperately needs foreign direct investment, overseas investors are buying up our stressed winelands in a wave of deals that is helping ignite the sector. Several prestigious properties – including Uitkyk, Villiera and Kleine Zalze – have been acquired by these investors over the past few months. The snap up is largely a result of the rand’s weakness.
- As at the time of writing, the rand was 1.2% stronger for the week and the ALSI had gained 2.4%.
Sources: Dynasty, Daily Maverick, BusinessLIVE, NYT, Bloomberg, Reuters, TechCentral, News24, WSJ, BBrief, etc.
