The monkey’s paw, News Flash, Dynasty Asset Management

The Monkey’s Paw, an early 20^th century short story by WW Jacobs about a cursed artefact that grants wishes, warns that getting what you want often comes with a price. Investors anticipating not only the end of interest rate hikes but looking ahead to central banks lowering lending rates should perhaps heed the moral of that cautionary tale.

Since the beginning of November, markets have rebounded strongly after a torrid September and October. One factor behind the renewed appetite for risk is undoubtedly a broad interpretation that a pause in interest rate hikes from the Fed and the Bank of England is a signal that the war on inflation has largely been won. That, in turn, should allow interest rates to glide down to a soft economic landing.

Interest rates swaps show that markets are not pricing in a hike over the next six months, according to data compiled by Bloomberg. They also indicate a 50-basis point reduction in the aggregated rate within a year, the biggest bet on easing since the Covid-19 crisis. Bond trades also show that the market is optimistic that the rate tightening cycle is over.

But Federal Reserve Chairman Jerome Powell yesterday poured cold water on those assumptions, saying Fed officials aren’t convinced they have tightened enough, and markets slumped after he spoke. Powell’s words, incidentally, contradict guidance from at least two other Fed officials, who said that the full impact of past hikes has yet to be fully felt and that the Fed has indeed done enough to cool inflation.

Given that inflation has been stickier than many investors and traders expected, it’s not inconceivable that interest rates will remain higher for longer than anticipated. If we see a premature cycle of rate cuts, it might be for all the wrong reasons. In other words, because central banks need to implement them as a countermeasure to an economic downturn.

Despite blockbuster Q3 GDP numbers and resilient employment figures in the US, not all signals are positive. A slowdown in credit extension and an increase in bad debts are weighing on US bank stocks; earnings guidance from CEOs has been tempered; and shipping giant Maersk has announced plans to cut 10,000 jobs on back of weak global trade, an indicator which often presages economic downturns.

The preferred outcome for investors continues to be that the central banks of the world’s major economies can bring interest rates down in an orderly and gentle manner. That will suggest that they’ve succeeded in stabilising prices without cratering economies, and in turn will set the stage for sustainable growth, which would benefit investors going forward.

However, should a downturn take place, we would expect commodities, banking, property, and durables companies to all suffer. But we have already seen many companies prepare for such an outcome by restructuring their workforces and improving operational efficiencies. In addition, companies with barriers to entry and high margins can be expected to outperform broad-based benchmarks during tough economic environments.

“If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.”

– Jerome Powell, Fed chairman

Global News

Treasury yields surged, while stocks finished lower as Fed chairman Jerome Powell threw cold water on Wall Street’s dovish wagers on Thursday evening. The S&P 500 finished 0.8% lower, snapping what would have been its 32nd nine-day winning streak since 1928, according to Dow Jones Market Data.
Powell believes the central bank must be willing to think beyond the complex mathematical simulations it traditionally uses to forecast the economy. Officials still want to hit the 2% inflation goal but need to be cautious as the risks between doing too much and too little have come into closer balance. The Fed interest rate remains at its September level of 5.25% – 5.50%
Economists and political strategists are battling to understand why the US economy is doing well, yet American citizens feel almost the opposite. All data indicators – from inflation to the job market as well as consumer spending – are positive, but in a CNN poll released on Tuesday night, 72% of all Americans say things in the country today are going badly, and 66% said the economy will be “extremely important” when deciding who to vote for next year.
Speaker Mike Johnson, the house leader, is short on both time and experience to avert a US government shutdown. The little-known Louisiana congressman has barely a week before the shutdown deadline to make his opening gambit and choose how far to go in his demands to bolster his support among ultra-conservatives who ousted his predecessor, Kevin McCarthy.
A new growth strategy is emerging in China as political leaders, under pressure to support the country’s fragile recovery, are slowly steering the economy on a new course. Without the ability to rely on real estate and local debt to drive growth, they are instead investing more heavily in manufacturing such as in the semiconductor and EV car sectors as well as increasing borrowings by the central government.
Oil fell further on Wednesday after closing at a three-month low as a forecast drop in US gasoline consumption added to a growing array of indicators suggesting the demand outlook is worsening.
Meta will now require political parties posting adverts to disclose any use of artificial intelligence in their ads, starting next year. The company, which owns Facebook and Instagram, will require this of all political parties as several countries, including the US, go to the polls in 2024.
WeWork has filed for bankruptcy as the company, which was worth $47 billion at its peak in 2019, battled a series of issues, including a failed initial public offering, COVID-19 lockdowns, and slow return-to-office trends. Under Chapter 11, it will be allowed to continue operating while working out creditor repayment terms. Former CEO and co-founder Adam Neumann, who was forced out after the failed IPO attempt, remains a billionaire.
Eli Lilly & Company has secured US approval for its diabetes drug, Zepbound, to treat obesity, unlocking blockbuster sales potential and sparking a battle for dominance of a market expected to hit $100 billion by 2030. The drug is cheaper than Wegovy, a similar weight-loss drug made by Novo Nordisk.
By the end of 2023, Walt Disney aims to start paying dividends again. It posted fourth-quarter profit that beat analysts’ expectations and said on Wednesday that it will cut an additional $2 billion in expenses. Interestingly, AI will cut the cost of making movies by 90%.
As at Thursday’s close the S&P was down 0.25% for the week.

Local News

As elections approach, suggestions that the ANC may lose its majority mean that the knives could well be out for President Cyril Ramaphosa and he could lose his title to either deputy Paul Mashatile or mineral resources & energy minister Gwede Mantashe, writes regular BusinessLIVE columnist Justice Mahala. Click here to read the article.
The African Growth and Opportunity Act (AGOA) looks likely to be signed again, yet South Africa’s inconsistent foreign policy threatens its membership. South Africa has raised the possibility of a two-stage renewal and improvement programme. The current pact expires at the end of 2025.
National Treasury is changing how it provides increases to public servants, only increasing the salaries of those on the front-line and in labour-intensive professions. This comes as it seeks to trim the rising cost of the public sector wage bill. National Treasury has allocated R111.4 billion over the next three years to adjust the pay of public servants in the departments and professions that it deems to be critical.
Part of government’s fiscal dilemma is lower tax collections, which is partially caused by broken infrastructure providers Transnet and Eskom. The estimated economic impact of the poorly performing freight rail system is R100 billion, and South Africa lost another R100 billion to load shedding through loss of productivity, according to SARS boss Edward Kieswetter.
The Public Investment Corporation has given Transnet a four-month debt reprieve on a R7 billion bond, which was due this week. Transnet is struggling under a R130 billion debt pile. Transnet also plans to refinance another R10 billion in debt. It needs R122 billion over the next five years for its turnaround plan and is now considering using outside contractors to fix the dysfunctional port of Cape Town.
The South African listed property index (J253) has underperformed other asset classes since 2018, with an annualised total return of a dismal -3.5% in the five years to end-September. As a result, investors betting on a strong rebound in listed property prices shouldn’t hold their breath, as there is no end in sight to the sector’s five-year losing streak. Challenges in the sector include rental relief packages, higher debt funding costs, softer retail sales and a spike in operating expenses such as municipal rates and utilities.
Ford is spending R5.2 billion to turn its Tshwane plant into the only global manufacturer of plug-in, hybrid-electric Ranger bakkies. By the time the investment is complete late in 2024, Ford will have spent R35 billion on its local operations since 2011.
MTN aims to spend R10 billion in 2023 and the early months of 2024 as it sacrifices higher profits to make its network reliable during Eskom blackouts. Competitor Vodacom is spending R12 billion on backup power measures. MTN has spent close to R7 billion in recent months. Loadshedding is expected to remain an issue for at least the next five years.
At the time of writing, the rand was 2.6% weaker and the ALSI was 2.2% down for the week.