Today marks the halfway mark for 2023 and what a ride it has been for equities so far, despite persistent high inflation; ongoing rate hikes; a protracted war in the Ukraine; a banking crisis in March, which included regional banks in the US as well as the failure of Credit Suisse; and predictions about an upcoming recession.
The S&P 500 is up 15.47% for the first half, the Nasdaq 100 Index with a gain of 36% has chalked its best performance ever for the first six months of a year, and the MSCI Word Index has climbed 14.15%. In sharp contrast however is the JSE, down 10.21% as measured in US dollars over the same period, representing a performance divergence of 25.68% against the S&P 500, with the difference being primarily attributable to increased South African specific risks. To further illustrate this point, the S&P 500 has only experienced one negative month (February at -2.44%) year-to-date, whereas the JSE has experienced four negative months – in USD as well as in ZAR.
On the global equity front, undoubtedly the hero of the first half of the year is a basket of stocks that some analysts are calling the magnificent seven: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. These stocks – most of them beasts with market capitalisations near or above trillion dollars – have surged on the back of optimism about the digital economy and the rise of AI.
The magnificent seven has had a disproportionate positive effect on the markets, accounting for an outsized portion of the gains.
In the second half of the year, the key questions will be how much longer markets will ride the Big Tech rally; at what level the rate hike cycle will peak; and whether corporate earnings in general will hold up. Should forward earnings prove to be resilient, further market gains can be expected over the balance of the year, although these are very unlikely to match the extent of the first half’s gains!
“So far, so good.”
– Steve McQueen as Vin in The Magnificent Seven
Global News
- The Fed Chairman, speaking this week at Sintra in Portugal and at a conference in Madrid at the Bank of Spain has affirmed that the interest rate could go up next month as well as in September as the central bank tries to quell persistent price pressures and cool a surprisingly resilient US labour market. Inflation is twice as high as the 2% target.
- US consumer confidence increased to the highest level since the start of last year, moving to 109.7 this month from 102.5 in May as greater optimism about the labour market and economic expansion aided the growth. The entity responsible for the figures, the Conference Board, said its index gauge of current conditions jumped to 155.3, the highest level in almost two years.
- Wall Street’s biggest banks have made it through the Fed’s annual stress test, clearing a key hurdle toward paying billions of dollars to stockholders. Banks JPMorgan Chase & Company, Morgan Stanley, Goldman Sachs Group, and Wells Fargo & Company saw their balance sheets indicate an improved resiliency in this year’s test. However, Citigroup, and Citizens Financial Group, were less resilient in the scenario. The Fed’s report, which covers the US’ largest lenders is closely watched by the financial industry. The latest round showed all the firms can withstand a severe global recession and turmoil in real estate markets.
- The Bank for International Settlements has emphasised the need for central banks across the globe to persist in their efforts to control inflation, even when faced with the most challenging phase of achieving price stability. Failing to do so would pose a significant risk of financial instability. While inflation has started to decrease from its multi-decade highs in most countries, the UK stands out as an exception as inflation continues to rise. Additionally, the Bank has called on governments worldwide to adopt tighter budgetary measures to stabilise their economies and financial systems. This approach would help reduce the reliance on monetary policy to maintain higher interest rates for an extended period.
- New Zealand may well emerge from a recession in the current quarter before quickly stumbling into another one. This is according to three economists at the nation’s biggest banks, who predict a second recession beginning later this year. Output is being buffeted by sharply higher home-loan interest rates that have hit consumer spending as the central bank tries to tame inflation.
- M&A dealers around the world are about $1 trillion down in one of the worst years for takeovers and stock market listings in a decade. This figure is the year-on-year drop in the value of mergers and acquisitions and initial public offerings in the first half, a period in which inflationary pressures, financing constraints and geopolitical tensions nixed activity across regions and sectors.
- The failed mutiny by the Wagner mercenary group in Russian may have repercussions for Africa, where the Wagner group has a significant presence and business interests. Wagner’s operations in Africa are primarily driven by profit, while also serving Russia’s diplomatic and economic interest. While it is unclear if Wagner leader Yevgeny Prigozhin will continue to run the private army from Belarus, untangling their presence in Africa from the Kremlin could be difficult and risky. The Kremlin has stated that Prigozhin would be pardoned, however President Vladimir Putin said officials will be opening a money probe into the chief, whose businesses received $2 billion from the government in the past year.
- Car manufacturers must pay compensation for diesel vehicles that have been fitted with illegal emissions controlling devices. This ruling, by Germany’s highest federal court, could potentially cost Volkswagen, Mercedes-Benz, and others, millions of euros. Companies could owe owners between 5% and 15% of the purchase price of their vehicle if they suffered damages due to the fitment of these illegal devices. “Defeat devices” are mechanisms or software that can change vehicle emissions levels, which could be used improperly to cover up the true pollution levels of their vehicles. Car makers argue they turn on at certain temperatures to protect engines.
- Ford Motor Company is heading towards letting go of hundreds of staff, primarily engineers, in the US this week to boost profit, become more cost effective, and lower costs as it spends $50 billion to shift to electric vehicles. This is according to sources. It is cutting engineers in EVs, traditional internal combustion-engine models and commercial vehicles – all three of its units. T.R. Reid, a company spokesman, said “We’re not cost competitive… We have specific priorities and ambitions that have implications for skills, assignments, and staffing needs. These changes are consistent with that. They’ll make us cost effective.”
- UBS Group is going to fire more than half of Credit Suisse Group’s 45,000-strong workforce starting in July because of the recent emergency takeover. An additional two rounds of cuts are expected, in September and October, according to the source. Bankers, traders, and support staff in Credit Suisse’s investment bank in London, New York, and in some parts of Asia are expected to bear the brunt of the cuts, with almost all activities at risk.
- As at Thursday’s close the S&P was 1.1% up for the week.
Local News
- A new term that has emerged is ‘friend-shoring’, which refers to a reorientation of bilateral trade flows to countries that share broad political values. In recent times, this has risen sharply, according to a recent report by the United Nations Conference on Trade and Development (Unctad). The trend is a serious issue for South Africa when it comes to its so-called stance of neutrality with Russia because the communist country is not an important trading partner. The US and the EU between them account for over 30% of South Africa’s exports compared with 0.23% for Russia. If that wasn’t enough in terms of export losses, South Africa could be down by more than another R600 billion in exports if the West acted against Pretoria over perceptions that its neutrality in Russia’s war in Ukraine is a sham.
- In an edited speech by former deputy finance minister Mcebisi Jonas, delivered at the Black Business Council Summit 2023, he has asked where the country is going, pointing out that there is no quick fix for South Africa. He focused on seven issues that need to be addressed to change course towards a better-functioning, better-performing country. These are as follows: growth, the environment given our fossil-fuel heavy power sources, a lack of equality that pervades even almost 30 years after democracy. These are followed by the state capture issues, geopolitical changes across the world, a lack of civil society, and a lack of serious leaders across all sectors – political, economic, and social. “Protecting democracy, staying the course on reforms, halting a capital and brain drain, tackling inequality, and addressing the livelihoods crisis will take exceptional leadership. Now is not the time to lament that we don’t have the right leadership. We urgently need a national conversation to develop and get behind a common agenda.” Read more here.
- Minister of Electricity Kgosientsho Ramokgopa says Eskom estimates that upgrading the transmission grid needed to connect renewable power would cost as much as R210 billion, which is an increase on previous estimates. Eskom aims to ask the private sector for funding, for which it has a plan, but still wants to own the grid. Government is considering a model which would see the private sector financing, building, and operating a project for a short period before transferring it back to government. He also said that, despite the demand for electricity increasing, Eskom can maintain a much lower stage of load shedding because there has been an improvement of the energy availability factor (AEF). Eskom is much closer to achieving its target of 70% EAF. The power utility is aiming for stage 0 during the day, 3 in the afternoon, although this could increase to 1 and 4 respectively.
- Jobs are declining, with formal employment losing 21,000 jobs in the first quarter, which shows up South Africa’s inability to create sufficient employment opportunities to absorb new entrants into the labour market and the government’s inability to drive employment-stimulating policies. There are currently almost 10 million South Africans who have employment.
- Consumer confidence plummeted to its second-lowest reading since 1994, which both FNB and the Bureau for Economic Research believe is indicative of tremendous concern among consumers about the country’s economic prospects and their household finances. It is now back at the level it last was in the second quarter of 2022 (-25). The index has varied between a low of -36, recorded during the hard Covid lockdown in the second quarter of 2020 and a high of +26 when President Cyril Ramaphosa was elected as the country’s president in the first quarter of 2018.
- Valuation effects, thanks to domestic and foreign share market indices, rose in the fourth quarter of 2022, resulting in South Africa’s net balance of foreign assets ownership increasing. This has improved the country’s financial standing and creditworthiness. According to the South African Reserve Bank’s Quarterly Bulletin for the first three months of the year, net international investment position improved, rising from a revised R1 trillion at the end of September 2022 to R1.209 trillion at the end of December as foreign assets increased more than foreign liabilities.
- Public Interest SA described Deputy President Paul Mashatile’s “apparent links to individuals fingered for state capture corruption” as worrisome as they are foreboding. Mashatile reportedly lives a life of luxury, living in expensive homes owned by businessmen benefitting from state contracts. One of Mashatile’s alleged largest benefactors is Edwin Sodi, the politically connected businessman currently on trial on charges of corruption and fraud linked to a R255 million Free State asbestos eradication tender, together with former Free State premier, Ace Magashule, who was recently expelled from the ANC.
- The insolvent Post Office, which reported a R2.2 billion loss in the year to March, is getting another bailout as it cries that it needs R3.8 billion more. The bailout amount for future funding has not been disclosed, but R2.4 billion and any additional funding would be made available only if the Post Office goes into business rescue and is not liquidated. This is in addition to the R2.4 billion it received in the February budget. Since 2014, Sapo has received R10.4 billion in government bailouts. Its liabilities exceed its assets, and it owes money to the employees’ retirement fund, the Revenue Service, and considerable amounts to landlords.
- Medical schemes will have to carry losses of up to R2 million a day after the high court in Pretoria dismissed Discovery Health’s bid to make the Road Accident Fund (RAF) immediately process medical scheme members’ legitimate claims until the Constitutional Court decides on the dispute. The country has about 800,000 road accidents a year, or about 2,200 crashes a day.
- Naspers and Prosus’ share prices jumped on Wednesday after they announced their intention to remove the cross-holding structure that has added complexity for shareholders and increased the discount of the stocks to their underlying net asset value. Naspers gained R260 billion in market capitalisation on the announcement. The proposal will eventually unwind the crossholding so that Naspers will simply own 43% of Prosus N ordinary shares instead of via a complex structure. Naspers will continue to hold a voting interest in Prosus of 72%. Prosus eventually won’t own a stake in Naspers. The South African Reserve Bank has granted the necessary approvals for the implementation of the proposed transaction.
- BMW is investing R4.2 billion in its local subsidiary to make electric cars as it celebrates its 50th birthday this year. From the second half of next year, BMW Group SA will add plug-in hybrid versions of the X3 sports utility vehicle to its existing petrol and diesel versions and export it globally. The company’s Rosslyn assembly plant in Tshwane will be the only one in the BMW world to make a hybrid version of the next-generation X3. Rosslyn has built the current X3 since 2018.
- Sun City will be taking advantage of its position in the North West, where it benefits from a large amount of sun by planning to build a huge solar farm that could generate enough power for the resort as well as the surrounding villages. Sun City has two phases to the project, with the first being scheduled for completion by the end of July, which will take care of about 14% of its demand through solar. The second phase, once it has established the exact yields and outputs, will be to embark on a very large-scale project, which would cover peak yields, as well as another 20% of power at least.
- As at the time of writing, the rand was 0.85% weaker and the ALSI was 1.94% up for the week.
Sources: BusinessLIVE, Daily Investor, Bloomberg, News24, Reuters, BizNews.com, Financial Mail,
NYT, Moneyweb, Daily Maverick, Financial Times, EWN, TechCentral, etc.
