What a great start to the year for equity investors! Combined forces such as a slowdown in the pace of rate hikes in the US; a record quantum of share buybacks; the re-opening of the Chinese economy; resilient cash-flow generation of leading quality companies for calendar year 2022, upward revisions to global GDP for 2023, and asymmetrical downside risk having previously been priced into markets, served to pivot global investor sentiment to “risk-on.”
Yet, the real sweet spot for financial markets is that this positive momentum has not detracted from the prospect of disinflation, which is currently priced by the interest rate curves to be at 1.9% by year-end, within the Fed’s target range of 2%.
Although risk-on sentiment has caused the dollar to weaken, it has boosted the currencies and markets of many emerging market economies. In performance terms, the S&P 500 was up 8.86% for the year to Thursday, the MSCI Emerging Markets Index was up 10.16%, and the JSE/ALSI was up 9.35% (as measured in ZAR).
The sweet spot extends in a political context to our Local section, where seasoned commentator Mark Barnes outlines a positive scenario for South Africa in which political parties and the private sector set aside their ideological differences to find a middle ground, thereby placing the country on a much-needed positive trajectory.
“The data that keeps coming out month after month shows that we continue to move forward. The evidence is not consistent with what a recession typically looks like. The signs all point to ongoing recovery and robustness in the labour market “
– Heather Boushey, American economist and member of Joe Biden’s Council of Economic Advisors
Global News
- As widely anticipated, the Federal Reserve raised its target interest rate by 0.25 percentage points on Wednesday. The hike was less aggressive than previous increases, but nonetheless brings the total hiked to 4.5% since January 2022, the most aggressive monetary tightening in 40 years. Our research shows that, although another 25bps hike is likely, the interest rate curve is pricing that the Fed could cut rates by the end of the year.
- The International Monetary Fund this week raised this year’s growth forecasts for the global economy to 2.9% from a previous 2.7% in its October World Economic Outlook report. This improvement is being pushed by China’s reopening and the ebbing of worldwide inflationary pressures.
- Job openings in the US unexpectedly increased at the end of 2022, illustrating a solid appetite for labour that the Federal Reserve sees as one of the last hurdles to bring down inflation. The number of available positions climbed to a five-month high of just over 11 million in December from 10.4 million a month earlier, the largest since July 2021. News just released shows that US employers added 517000 jobs in January, causing stock futures to weaken.
- In a vote of confidence, companies in the US are investing in their own shares in the form of buybacks, which is driving the new year rally. At the start of 2023, planned buybacks more than tripled to $132 billion from a year ago, reaching the highest total ever to start a year, according to data compiled by Birinyi Associates.
- On the negative front, shaky property markets in many countries may pose a risk to the global economy as higher interest rates erode household finances and threaten to exacerbate falling prices. The US housing slump stretched into a fifth month, China’s home sales slide continued, and price declines persisted in both Australia and New Zealand. In Britain, prices are now on their worst losing streak since 2008.
- In Europe, the economy is showing signs it may avoid a recession this winter, despite elevated inflation, rising interest rates and a war in Ukraine that shows no signs of abating. The zone’s economy grew 0.1 percent in the last quarter of 2022, compared with the previous quarter. The UK will be the only G7 member whose economy will shrink this year, with a contraction of 0.6%, the IMF said, downgrading its outlook by 0.9 percentages points from October on the back of higher interest rates and taxes along with government spending restraints, which will worsen the cost-of-living crisis.
- China’s manufacturing and services expanded for the first time in four months in January after its reopening from zero-Covid continued and the Lunar New Year holiday pushed travel and spending. Its manufacturing purchasing managers’ index rose to 50.1 from 47 in December, matching economists’ estimates. The non-manufacturing gauge – which measures activity in both the services and construction sectors – increased to 54.4 from 41.6, topping expectations for 52 in a Bloomberg survey of economists.
- It is finally farewell to the production of the Boeing 747, the so-called “queen of the skies”. In an unimaginable feat, a team led by Boeing engineer Joe Sutter designed and built the jumbo in less than two-and-a-half years half a century ago. In total, Boeing built 1,574 of the 747 model, from passenger versions to freighters to special editions like a NASA-commissioned version that carried the Space Shuttle or the Air Force One for US presidents. The last 747 to be produced left the Boeing factory on Wednesday this week.
- Apple, Amazon and Alphabet, technology heavyweights with a combined market value of almost $5 trillion, posted results on Thursday that show that a slower economic slowdown is throttling demand for electronics, e-commerce, cloud computing and digital adverting. However, this negative news was already factored into their share prices, with weekly gains of 3.35%,10.44% and 8.42% respectively.
- Meta shares gained more than 20% after good fourth quarter earnings were released on Wednesday night. This was attributed to Meta’s decline in ad revenue for the third straight quarter being less than expected; a US$40-billion buyback for shareholders; and daily active users — Meta’s “North Star” for years — passing the psychological two billion barrier. The company also put out an optimistic forecast for the current quarter, in which it thinks revenue could reach $28.5bn. That would be more than in the first three months of 2021, before Apple introduced privacy rules for its iDevices that made it considerably harder for advertisers to track users across the internet. The Meta share price is now up 112% since its intra-year low on 3 November 2022. (Meta is a holding within one of our active manager’s offshore portfolios).
- As at Thursday’s close the S&P 500 was 2.68% up for the week.
Local News
- Writing for Business Day, Mark Barnes – the former post office CEO and now general commentator – outlines a sweet spot scenario for South Africa in which ideologists (both political and the business sector) should take a step towards the middle, despite the fact that they are generally intolerant of each other. Politicians are placating each other, while business (the creator of most capital) is being left behind and needs to stand up for itself. However, this ideological middle ground may remain a pipedream as argued by the Brenthurst Foundation this week: The troubled ANC, which is facing electoral decline and losing its grip on power, is finding the Putin model attractive. Russia’s president is at the apex of a capitalist oligarchy surrounded by a small, super-rich elite that benefits from the state’s actions with little (no) risk of losing power at the polls, no matter his abuses. His way of doing things, including how to rule and make money, suits many in the ANC — from its old ideologues to many younger cadres. The Foundation concludes that in this scenario, “we are not on our merry way to coalitions, but rather a more sinister political future”.
- Business Day’s editorial on Thursday believes that, when Ramaphosa delivers his state of the nation address next week, he will, as usual, discuss unemployment and the need for job creation, but his repeated assurances are becoming emptier amidst high rates of unemployment, loadshedding and tepid economic growth. Whilst a cabinet reshuffle is in the offing, this is unlikely to lead to any serious reform.
- The ANC has warned that Eskom’s inability to keep the lights on could lead to civil unrest and a reduction in the ANC’s support in next year’s national elections as the country considers declaring a National State of Disaster over the rolling blackouts. The ANC has identified load-shedding as one of the factors that could lead to voters looking to other parties in the 2024 polls, threatening its position as a governing party. This has led to questions, by Arena editor-at-large Peter Bruce as to whether the ruling party is deliberately introducing a new National State of Disaster to get Ramaphosa out of a political hole.
- Solly Moeng, brand reputation advisor, has investigated the question as to why the DA is solid on service delivery, yet its image is a disaster. “The DA has convincingly won several elections over the years and retained its grip on Cape Town and the Western Cape. Yet psychologically, it seems to remain on the backfoot, pushing back against fears and accusations or suspicions regarding its real aims. The official opposition party seems caught up in psychological warfare driven by a plethora of such narratives and lacks a convincing strategy to push back.”
- Johannesburg has a new mayor, Thapelo Amad, from the minority Al Jama-ah party, which has only three seats in the council. While this may provide short-term gains for those political parties involved in the overthrow of the DA mayor, the people of Joburg have nothing to gain, writes Stephen Grootes for Daily Maverick. Any moves by players towards coalitions will involve severe long-term risks, with not much strategic thinking being applied. Furthermore, there appears to be a total lack of principles. Paradoxically, “the ANC claims to be trying to govern better but will negotiate with a party that wants to overthrow government,” whilst “the EFF wants to overthrow the government but now gives the impression of being perfectly happy to work with the party in control of that government.”
- As the country awaits fourth quarter GDP figures, research from PwC, Investec and Nedbank shows that South Africa’s economic activity probably stalled in the fourth quarter, with a high risk of contraction — and is set to decline further this year as the government fails to allay investor concerns over the electricity crisis.
- It has been reported that Eskom is paying excessive prices for the diesel it buys in bulk from PetroSA, another State Owned Enterprise. Its main diesel supplier is also insisting on upfront payments, as it too, is financially distressed. Eskom will have paid R22 billion for diesel this financial year amidst a continued deterioration of the grid. Compounding Eskom’s cash-flow problems is the R56 billion owed to it by municipalities and energy distributors, a debt which is growing by R1 billion per month.
- South Africa is missing out on the global expansion in emerging market bond investments. The Bloomberg gauge for local-currency sovereign bonds in emerging markets rallied 3.63% in January, the best start to a year since 2012. Locally, however, January’s net inflows of $327 million marked the slowest start for local debt sales since at least 2019, when the JSE began reporting the data.
- Ironically, Eskom has so far this year, provided an excellent return of 10% on its dollar bonds due in 2028. According to Bloomberg, bondholders are confident the National Treasury will make good any debts Eskom can’t pay, meaning the bonds offer a yield pickup over the sovereign, without additional risk. The yield on Eskom dollar securities, which are due in 2028, was 8.91% as at yesterday.
- Kumba has blamed Transnet for poor quarterly production in Q4. It also warned of an expected decline in full-year earnings. It said this follows a two-week wage strike in October 2022 and the annual maintenance shutdown in November 2022, limiting production to 10.0 Mt, representing an increase of 3% in Q4 2022, while sales decreased by 35% to 6.9 Mt. A slowdown in commodity production in general is a concern for the country’s fiscal metrics.
- Despite saying it will slash its workforce by a third, Naspers’ share price was not negatively impacted by this news. The group, which includes Amsterdam-based subsidiary Prosus, added R197 billion to its market value through the week of trading, driven by improving prospects for technology companies in China.
- As at the time of writing, the rand was 0.38% stronger for the week and the ALSI was 1.17% down.
Sources: Dynasty, Bloomberg, News24, Fin24, Business Day, New York Times, Daily Maverick, BizNews.com, ITWeb, Politics Web, The Economist, Global Analytics, etc.
