Howard Marks, the legendary investor, wrote that investment markets swing between euphoria and depression and between celebrating positive developments and obsessing over negatives. We’ve experienced both sides of the pendulum this year, most recently with a strong month-to-date rally that has erased the losses of a dismal September and October for equities.
At the time of writing, the S&P 500 and MSCI World were up 7.6% and 7.5% respectively for November, bringing the indices back to levels that were last seen in August before the market slump. Even though markets can be volatile by nature, it is unusual to see such a rapid recovery in equities after a sharp correction.
What makes the surge even more remarkable is that it isn’t based on any earth-shattering positive developments, but rather on isolated data points. The rally accelerated in early November, when the Fed announced that it might be done with hiking interest rates. With October’s headline inflation number coming in at 3.2%, being just 0.1% below consensus forecasts, the markets used this single date point to price in rate cuts in 2024, a lot earlier than they were just a few weeks ago. Even a more optimistic scenario of three rate cuts next year has been put forward by UBS Investment Bank’s economists.
It’s not just equities that have benefitted from the market’s change of mood. Most currencies, including emerging markets currencies like the rand have strengthened against the dollar. After foreigners dumped South African bonds for most of the year, they have snapped them up in November. With markets expecting that the dollar will weaken as interest rates fall, risk is back on the menu.
The irony is that there are many known risks still in play. The war in Ukraine drags on, the situation in Gaza and Israel may yet spread to a wider conflict, CEO earnings guidance remains cautious, and there are reasons to fret about China’s property market and the wider economy. But, for now, markets are tuning off the negatives and amplifying the positives.
This echoes what we saw last year, when the S&P 500 and MSCI World Index fell by 24% and 25.5% for the year by mid-October before recovering by 14.4% and 15.2% respectively, by the end of November. The rand also strengthened by 7.2% last November – and, like this November, for reasons that were totally non-South Africa specific. In words attributed to Mark Twain: “History never repeats itself, but it does often rhyme.”
As Marks points out, the oscillation of the pendulum between optimism and despondency is one of the markets’ most reliable features. But with a long-term view on your investments, you will find that investments do appreciate over time — even if the pendulum seldom settles into a happy medium.
“Although the midpoint of its arc best describes the location of the pendulum ‘on average,’ it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc.”
– Howard Marks, the co-founder and co-chairman of Oaktree Capital Management
Global News
- US prices are rising at the slowest rate in two years as inflation continues to cool. The Consumer Price Index rose 3.2% for the 12 months that ended in October, down from 3.7% in September, the lowest annual rate since March 2021.
- The Fed is expected to cut interest rates by 275 basis points next year, nearly four times more than what markets are pricing, according to UBS Investment Bank. UBS says there is nothing wrong in markets pricing three rate cuts in 2024 – which seems the most likely outcome. But abrupt reactions to a single data release reflects the damage that excessive reliance on “data dependence” can produce.
- Americans cut their retail spending in October for the first time since March, albeit at a smaller decline than economists were expecting. Stripping out inflation, sales declined 0.1% in October month-on-month. This decline in retail spending is potentially an early sign of a slowing economy as US consumers get squeezed by higher borrowing costs and continue to rack up credit card debt.
- Bonds are heading towards their third consecutive year of losses in what some analysts are calling the worst bear market in history. But optimism this week that inflation is coming under control could be enough to turn things around.
- Moody’s threatened the US with the loss of its remaining top credit rating, indicating it may downgrade because of wider budget deficits and political polarisation. US Treasury Secretary Janet Yellen said she disagrees with this change in outlook as she remains confident in the economy and its status as an investment destination.
- A majority vote by US Senators approved a temporary funding measure to avert a government shutdown. Already approved by the house, it delays a partisan clash over federal spending until the new year, while leaving out emergency aid to allies Ukraine and Israel. It will now go to President Joe Biden, who is expected to sign off on the interim funding package before the shutdown deadline late Friday night.
- In his meeting with China President Xi Jinping this week, President Biden said that four hours of discussion with Xi had brought about two significant agreements: curbing fentanyl production and military-to-military communications. The US and China have agreed to resume military-to-military communication to “avoid miscalculations on either side” and avoid accidents. On Thursday, Biden said the world expects the US and China to better manage their competition, making the case for sustained US involvement in the Asia-Pacific region, noting that neither country wants conflict.
- As part of China’s efforts to bolster the economy, it will be putting the most cash since 2016 into the financial system with one-year policy loans The People’s Bank of China offered $200 billion of cash through its medium-term lending facility, which is the most in nearly seven years, while the rate on the loans has been kept unchanged at 2.5%.
- UK consumer prices rose 4.6% year-on-year in October to the lowest level in two years, which has solidified bets that the Bank of England will be able to cut rates as early as the middle of next year. This is due to energy prices declining and will allow Prime Minister Rishi Sunak to declare victory in his goal of cutting inflation in half in this year, one of five priorities he hoped would improve his party’s poll number ahead of a looming general election.
- Nvidia shares could well extend gains for a 10th consecutive session, the longest streak of advances since a record-setting dash in December 2016, as the world’s most valuable chip maker updates its artificial intelligence processor. It has climbed about 20% during this latest rally, adding about $200 billion in market value.
- Glencore is ready to get out of coal, an area in which it made its name — and minted a generation of billionaires. It has come under growing pressure to stop producing the dirtiest fuel, despite profits from its mines having hit eye-watering levels over the past two years.
- As at Thursday’s close the S&P was up 2.07% for the week.
Local News
- Regular BusinessLIVE columnist, Justice Mahala, writes that fighting corruption, and addressing the issues of migration and xenophobia are evidently not a priority for government. He suggests that, if they were, legal amendments would be enacted as swiftly as the dissolution of the Scorpions in 2008. In fact, Micheal Avery opines, on BusinessLIVE, that President Cyril Ramaphosa has not taken the step of forming an independent anti-corruption entity because too many comrades and cabinet members will be impacted if it is established.
- The real cause of South Africa’s socio-economic mess is government, according to Jabulani Sikhakhane, writing for BusinessLIVE. Government, he says, has become too obsessed with financial survival and has done little about its stewardship role.
- Ricardo Hausmann, the economics professor leading Harvard University’s Growth Lab, has released a 170-page report into South Africa’s economic deterioration. Issued this week, he states that the country is facing the economic consequences of collapsing state capacity. There are four reasons for this, the report states, including gridlock in the ANC “that prevents action”; “an ideology that justifies excluding society from participating in state-reserved activities”; overburdening state entities with goals beyond their core mission and capability; and political patronage that has corrupted the state and the ANC.
- Overall, the country’s official unemployment rate dropped to 31.9% in the third quarter of 2023, a decrease of 0.7 percentage points from the second quarter of this year. The data, released by Statistics South Africa on Tuesday, showed a drop that took the figures back to pre-COVID-19 levels.
- The rand extended gains on Wednesday, as a rally in government bonds lured back foreign investors and saw the strongest demand from local banks at a government bond auction since July 2021.
- UK-based bank Standard Chartered will pay R42 million to settle a charge of foreign exchange manipulation of the rand in a case where the Competition Commission charged 18 banks in 2015. After the initial charge, 10 more banks were added to the list. Citibank settled the issue with the Commission in 2017.
- Liberty Two Degrees (L2D), co-owner of Sandton City, is now part of Standard Bank Group following Liberty’s acquisition of L2D minority shares at R5.55 per share. The company’s shares were suspended on the JSE on November 14.
- South Africa’s largest asset manager, Ninety One, reported a 5% drop in profit for the six months to end-September because of volatility in global financial markets that triggered net outflows. Basic headline earnings per share were down 5% to 8.9p, while the interim dividend was cut by 9% to 5.9p.
- Woolworths shares dropped as much as 5.1% on the JSE in morning trade on Wednesday after a statement that it had sold less clothing and food items for the 20 weeks to 12 November, with revenue growth coming from inflation.
- At the time of writing, the rand was 2,0% stronger and the ALSI was up 3.5% for the week.
Sources: Dynasty, News24, Bloomberg, BusinessLIVE, Financial Mail, CNN, The Economist, Bloomberg, NYT, TechCentral, UBS, etc.
