Inflation is the theme that has defined 2022, so the year draws to a close with some welcome news. This week, we saw the first signs that price pressures may be peaking with the annual US consumer price index (CPI) at 7.1% for November, the lowest since December last year, and below a reading of 7.7% in October. That is still more than three times higher than the Fed’s target of 2%, but it offers the prospect of a moderation of interest-rate hikes in the year to come.
Nonetheless, the Fed still hiked interest rates by 50 basis points on Wednesday and signalled that rates may need to remain higher well into 2023. Attention now shifts towards whether the US economy will be in for a soft-landing next year—with hopes that the Fed has managed to tame inflation without triggering a recession.
Closer to home, South Africa’s headline inflation slowed to a five-month low in November, rising by 7.4% from a year earlier. However, forward rate agreements are pricing in an 80% chance of a 50bps point hike at the MPC meeting scheduled for January 26, as the Reserve Bank targets price growth in a range of 3% to 6%.
In impactful local political news, South African President Cyril Ramaphosa comfortably, and as expected, survived an impeachment vote in parliament. Only five ANC MPs voted in favour of the motion to start impeachment proceedings, including his fierce political rival, Nkosazana Dlamini-Zuma. Notable was that Rampahosa’s high profile contenders, Zweli Mkhize and Lindiwe Sisulu, were absent from the vote.
This sets the scene for a brutal ANC leadership contest this weekend, where the Radical Economic Transformation faction is expected to motivate heavily for the president to stand aside. (There has to be some irony in that tomorrow’s public holiday is The Day of Reconciliation!) Before the findings of the independent Farmgate panel, Ramaphosa was expected to easily retain his position as the ANC’s president (and by extension, president of the country).
The odds still favour Ramaphosa’s re-election, but the outcome is less certain than the impeachment vote, where the panel’s report was flawed and open to attack. Yet even if Ramaphosa is to prevail at the conference, predicting exactly how his next term will unfold is – we believe – an impossible exercise, as there will undoubtedly be many complexities and variabilities at play.
Financial markets are also generally unpredictable by nature and so we at Dynasty continually evaluate different scenarios in the way we position our clients’ portfolios. More of this to come in future publications!
“Some people claim that they predicted a downturn, but they forecast a downturn everyday, and finally, one day, they are right. Even a broken clock is right twice a day.”
– Naved Abdali, finance professional and author.
Global News
- Wall Street’s optimism that the Fed would ease tightening was shown as stock futures on the S&P 500 initially jumped over 3%, while yields on 2-year Treasury bonds sank more than 20 basis points on Tuesday after the release of inflation data, which only gained 0.1% month-on-month in November. Excluding food and energy, the consumer price index rose 0.2% in November and was up 6% from a year earlier.
- The Fed hiked interest rates with a more moderate 50 bps, although it warned that more rises will be necessary to curb inflation, despite the lower November figures. It indicated that the interest rate could be above 5% a year from now.
- According to Michele Santangelo, portfolio manager at Independent Securities, Stocks and bonds are clawing back after a 2022 bear market. The S&P 500 has recently bounced off market lows in the latest response to what seems to be a softening in the inflation outlook. One of the few assets that has provided protection this year has been cash, within the safety net of a strong dollar.
- UK public sector wages increased by 2.7% in the year to October, falling short of the inflation rate of 11.1%. The hike is expected to fuel the anger of rail and health sector workers preparing to go on strike in the run-up to Christmas. Sunak’s government is planning for military staff and civil servants to cover for striking workers at air and seaports as the UK braces the for industrial action, set to cause major disruptions in the coming weeks.
- China is delaying a meeting to discuss policy objectives for the next year, which was due to start this week, after Covid infections surged in Beijing. There’s no set timetable for when the Central Economic Work Conference, usually attended by President Xi Jinping, will be rescheduled. Although the country’s capital, Beijing, isn’t in lockdown, the volume of closed businesses makes it feel like it is.
- FTX founder Sam Bankman-Fried has been charged with eight criminal counts, including conspiracy and wire fraud, for allegedly misusing billions of dollars in customers’ funds before the remarkable collapse of his cryptocurrency empire.
- Danske Bank admitted to conspiring to commit bank fraud and confessed to providing banking services to suspicious customers — including some in Russia — through its Estonian branch. It agreed to forfeit $2 billion to end a long-running US probe.
- Elon Musk, who was once worth as much as $340 billion, is no longer the world’s richest person, as that title now goes to Bernard Arnault, CEO of LVMH, whose brands cater to the affluent — from Christian Dior and Fendi to jewellers Bulgari and Tiffany & Company, and champagne house Moet & Chandon. Musk, 51, saw his fortune tumble by more than $100 billion since January to $163.6 billion.
- Tesla’s stock has slumped more than 50% this year. Tesla is now trading at 30 times projected earnings, its lowest ever, and well above the benchmark S&P 500 index’s 17 times forecast earnings. The company is grappling with a broad array of challenges, including the risks from its billionaire CEO’s association with Twitter to falling demand in China, the world’s largest car market.
- However, Musk’s SpaceX is offering to sell insider shares at a price that would raise the closely held company’s valuation to about $140 billion, from a $127 billion valuation in July.
- In Japan, fast-fashion behemoth Shein Founders are producing clothes quicker and cheaper than rivals including Zara, leading to a more than 2,000% return for early backer Tiger Global. It is worth $40 billion, and its outlets can be found along what is Japan’s Rodeo Drive.
- Microsoft will buy a stake in London Stock Exchange Group that will give the software company a 4% equity holding as it enters a partnership that will see it providing cloud services to the bourse. This underlines the pivotal position data, analytics, and technology play in increasingly computerised financial markets.
- As at Wednesday’s close the S&P 500 was up 1.55% for the week.
Local News
- With 214 votes against, 148 for, and two abstentions, president Cyril Ramaphosa escaped Phala Phala farm impeachment as ANC MP’s towed the party line after a long voting process. The ANC Women’s League in the Western Cape came out in support of the president ahead of the vote. The parliamentary report into Phala Phala, upon which the vote was based, was called badly drafted by Constitutional lawyer Pierre de Vos. Commentator Justice Malala states that the president both of the country and the ruling party survived on propaganda. The rand and bonds rallied after the vote paving the way for Ramaphosa to be re-elected at the national elective conference that starts tomorrow. But while the result might have spared the president from such a probe, uncertainty will continue to prevail until the outcome of all the other investigations by the likes of the Hawks, the public protector and the Reserve Bank are known.
- The outcome of the ANC’s elective conference this weekend will determine South Africa’s trajectory for decades to come: Stability and the reinforcement of constitutional democracy, or the onset of total economic collapse, or a continuation of the status quo. This is according to a must read report compiled by The Brenthurst Foundation and the In Transformation Initiative, titled The Good, The Bad and The Ugly: Scenarios for South Africa.
- Ramaphosa suspended Western Cape judge president John Hlophe on Wednesday, who was found guilty of gross misconduct by the Judicial Service Commission after a complaint by 11 judges of the Constitutional Court that he had attempted to influence the outcome of certain cases.
- The South African Chamber of Commerce and Industry says that the country must return to greater economic stability at home and not pin its hopes on the global economy avoiding a recession. Its confidence index declined by 1.4 points to 109.4 in October before recovering by the same margin to 110.9 in November. This sentiment is echoed by Peter Attard Montalto, who states that SA needs a fundamental political realignment of its broad body politic — politicians and electorate as well as media and the rest of the ecosystem.
- Meanwhile, Inflation eased to 7.4% in November from 7.6% the previous month, despite food and non-alcoholic beverages being up 12.5% year-on-year and transport being up 15.3% when compared to this time last year. Housing and utilities increased by 4.3% year-on-year and miscellaneous goods and services increased by 4,8% year-on-year. In November the annual inflation rate for goods was 10.4%, down from 10.5% in October; and for services it was 4.5%, down from 4.6% in October. The lower aggregated inflation number makes for a compelling case that the pace of rate hikes should slow going forward.
- Mining production fell by a more-than-expected 10.4% year-on-year in October, the lowest rate since April that suggests a softening in demand for commodities. The mining industry was also hobbled by logistical challenges in October after workers at state-owned Transnet went on strike, limiting the rail carrier’s ability to haul bulk minerals to ports for export. Of dire concern is that a mining mafia is targeting the mining industry by pushing for as much as 30% of their procurement contracts, often with no skills or services to offer.
- The government needs to start spending the extra tax it collects on repairing and building roads, improving railways, getting ports back on track and expanding access to more energy, according to economist Roelof Botha. The composite index of the level of activity within the building and construction sectors rose 7.2% in the latest quarter and is 2.7% higher year on year, driven largely by the private sector, which is doing government’s job.
- As Eskom lurches from Stage 5 to 6 and back again, its CEO, André de Ruyter, has resigned allowing Ramaphosa to dodge a bullet. A toxic blame game is getting in the way of a solution to the 14-year-old electricity crisis. ANC chair Gwede Mantashe has said that Eskom management is trying to overthrow the state; public enterprises minister Pravin Gordhan has said outages must be resolved without providing guidance; and finance minister Enoch Godongwana has said there is no money for the diesel Eskom needs to keep the lights on.
- Cash-strapped consumers are in for another shock when Eskom’s next year’s tariff increase is announced next Wednesday. However, independent energy analyst Clyde Mallinson expects the regulator to do what it has in the past: to try to find a balance between the increase that Eskom has asked for and the prevailing rate of inflation. He does not see the hike going as high as 20%, while lobbyists have asked that it be capped at inflation.
- MTN South Africa and MTN GlobalConnect, along with a consortium, have landed a 45,000-kilometre subsea cable in South Africa, which is part of plans to build a subsea network to connect African countries to Europe and the Middle East as data traffic is growing.
- Aspen Pharmacare has concluded deals to secure funding of $30 million from the Gates Foundation and the Coalition for Epidemic Preparedness Innovations to help make affordable vaccines for Africa. It wants to make better use of its Covid production facilities, which are almost idle.
- As at the time of writing, the rand was 0.16% weaker for the week and the ALSI was 1.56% lower.
Sources: Dynasty, BizNews.com, BusinessLIVE, Reuters, Bloomberg, TechCentral, Wall Street Journal, New York Times, Daily Maverick, Business Insider, Moneyweb, UBS, Stanlib, etc.
