When we look back at March 2020, financial markets were gripped by Covid- induced panic. The S&P500 Index dropped by a staggering 34% within 5 weeks, registering one of the steepest and fastest falls on record. Yet by the end of the year, markets had staged a dramatic recovery even though a vaccine was not yet available, and countries seemed set to go through constant cycles of locking down and opening up.
This unexpected market outcome, which people could not have anticipated as the world started to shut down in response to the pandemic, was the consequence of the Fed and other central banks pumping unprecedented liquidity into markets. This helped to keep economies and job markets going, in turn, inspiring enough investor confidence for the S&P500 to end 2020 18.4% up.
We recap the events of the start of the pandemic because the whirlpool of news this week reminds us of them. When we issued our news update last week Friday, we noted that investors were digesting the news about the sudden collapse of Silvergate Capital and a run on Silicon Valley Bank (SVB). Since then, Credit Suisse’s capitalisation woes have come to the fore.
Yet rather than signalling the start of a systemic crisis, these events may well result in a positive outcome for markets. When it comes to SVB, the Fed moved swiftly to reassure markets that customers’ deposits are safe. There is no small degree of irony in the fact that it is the Fed’s steep and rapid hiking of interest rates to quench inflation that contributed in large part to SVB’s woes. Perhaps this outcome could have been anticipated.
In the aftermath, markets are pricing in a softer interest rate curve for the rest of the year, whereas a week ago they were pricing in higher interest rates for longer. And we’ve seen oil prices fall to the lowest levels since the outbreak of the war in Ukraine – lower than the start of 2022. The unexpected outcome? Rather than the banks’ woes signalling a systemic crisis and the start of a recession, their afflictions could be the start of a soft economic landing in the US.
There is always a possibility, of course, that more problems hide in the banking sector and global capital markets. However, most large, systemically important banks worldwide are better capitalised (and regulated) than they were back in 2008. There is a reasonable chance that the mini-banking crisis, paired with falling inflation, will allow the Fed to pivot. And that could mean good news for equities in the months to come.
“At the edge of chaos, unexpected outcomes occur “
– Michael Crichton, American Author and Filmmaker
Global News
- Global bond markets have decided that the steepest global monetary tightening campaign in a generation has nearly run its course. Over the course of a few days, traders have dramatically undone bets on further rate hikes. The current pricing shows the Fed is likely to increase rates twice more, at most, with the next hike pencilled in at 25bps instead of 50bps. It is a similar picture in the UK, where investors are pricing 50bps of tightening over the next four meetings, half of what was expected last week, while Australia’s central bank has, based on pricing, completed its hiking cycle. The European Central Bank hiked rates 50bps on Thursday.
- Concerns about a spreading banking crisis and how badly it will hit an already fragile economy caused markets to shudder mid-week with stocks and bond yields tumbling in the US. Wall Street’s punitive spotlight has intensified across the banking industry on worries about what may crack next following the second-and third-largest bank failures in US history.
- The worry is the collapse of SVB and Signature Bank are just the start of a longer list of casualties with First Republic being the latest to need a bail out to ease fears of consumers and investors that the banking industry is in the midst of a growing crisis. The collapses have been blamed on the Fed’s shift to the highest rates since policymakers began slashing borrowing costs in 2007. Fed governor Jerome Powell’s legacy will be that of higher rates, and he may be tainted by the SVB collapse.
- The crisis surrounding banks has expanded to Europe, causing Credit Suisse Group’s shares to plummet. The Swiss bank is in turmoil after shareholder, Saudi National Bank, elected not to add to its 10% stake in the bank, deepening the crisis at the storied Swiss bank and leaving its leaders struggling to shore up confidence amid market chaos. The company’s crisis is partially the result of years of steady decline. The once-mighty lender went from $1.2 trillion in total assets on the eve of the 2008 financial crash to less than half as much now. Credit Suisse’s stock plunged to the lowest level on record following the news and its credit spreads surged. The Swiss National Bank has stepped in and will lend it $54 billion, which caused the bank’s share price to recover as much as 40% at one point on Thursday.
- Backing up news that interest rate hikes could slow is the fact that US inflation cooled to 6% in February, compared with 6.4% in January. This was the lowest increase since September 2021. When excluding volatile food and energy costs, prices advanced a slightly slower 5.5%. Underscoring better conditions, producer prices declined in February, dropping 0.1% month-on-month, although it was up 4.6% from a year earlier.
- The UK is facing a depleted workforce following Brexit, with businesses in many sectors struggling to fill vacancies. However, there is a large counterweight to these trends due to an unanticipated strong bounce back in all forms of migration to the UK, including in the recruitment of overseas workers, providing some relief to companies despite the costs and regulations involved.
- China this week opened visas up to all Westerners, dropping the final cross-border control measure it imposed three years ago to guard against the spread of Covid-19. Authorities last month declared victory over a recent surge in the virus. The move is expected to help rekindle a $17 trillion economy that has suffered one of its slowest rates of growth in nearly half a century last year.
- The Biden administration is insisting that the Chinese company ByteDance, sells TikTok or it will face a possible ban due to national security concerns. This hardens the White House’s stance toward the popular video app, which has been under scrutiny over fears that Beijing could request Americans’ data. The UK has banned the video-streaming app on government phones.
- Apple’s iPhone manufacturer in Taiwan has indirect exposure to SVB’s meltdown of about $100 million. Hon Hai Precision Industry invested capital with investment funds that in turn funnelled money into startups that banked with the California lender. It anticipates minimal impact since the Fed has guaranteed SVB’s deposits.
- The world’s biggest software provider, Microsoft, has advised that its plans to overhaul its entire line-up with OpenAI technology, have spread to one of the company’s oldest and best-known products: Its Office apps. The software, including Excel, PowerPoint, Outlook, and Word, will begin using OpenAI’s new GPT-4 artificial intelligence platform. AI-powered assistants called Copilots will be able to generate whole documents, e-mails, and slide decks from knowledge the software has gained scanning corporate files and listening to conference calls!
- As at Thursday’s close the S&P was up 2.56% for the week, despite all of the turmoil outlined above.
Local News
- In response to our home-grown crises, we don’t yet observe any reason for positivity to turning around our local economy. President Cyril Ramaphosa’s Cabinet has not inspired confidence and can be considered a lame duck, with no new plans to move the country forward. There is a lack of political will to resolve serious infrastructure issues that have been neglected since 1994, despite elections looming large next year and with the ANC likely to lose its majority for the first time since the initial free-and-fair elections. South Africa, some say, is on the verge of being a failed state, while others argue we are already there thanks to an economic battering, greylisting, and S&P’s downgrade of the country’s outlook. At present, our base case scenario is that we will muddle along, with a massive gap between our potential economic activity and what is actually achieved.
- It’s not news that law, order, and leadership are in crisis. There has been a wave of protests across the country, including in the health sector, leaving patients at risk of dying when members of the National Education, Health, and Allied Workers Union, which represents public servants allied to the ANC, went on strike, demanding government fulfills last year’s promised raises. Workers have since ended the protest.
- EFF leader Julius Malema is taking broken promises and South Africa’s unresolved socio-economic issues to the streets, using the party’s loud voice, in a bid to close the country down on Monday. Ironically, Malema has dismissed the fact that private security will aid police in trying to keep the protest under control, because this would infringe on the party’s constitutional rights. They are also calling for Ramaphosa to step down, while the president, showing leadership, has said he will not tolerate violence, with government saying Monday will be like any other working day. The army is on standby. Several other organisations will not support the strike, such as the taxi industry. Although exact locations, other than airports, have not been revealed, you can read more on how this could affect you here. This is a developing story, with more news likely to emerge over the weekend.
- Ismail Lagardien, writer, columnist, and political economist, has compared Malema to Italian fascist Benito Mussolini, especially to Mussolini’s statement that armed action was “needed at once or we shall never do it”. The EFF, whose protests have rarely been peaceful, have always blamed the violence on others. Likewise, BusinessLIVE asked in an editorial whether EFF’s members can find it possible to look like the grownups in the room. The City of Cape Town is trying in court to stop the march.
- Political scientist RW Johnson believes South Africa could have an ANC/EFF government after the 2024 election, although it is not likely to last long given the antagonism between the two parties in the past. A coalition with the EFF — which berates Ramaphosa whenever it can, with Malema even saying he is a hollow shell — would be difficult to swallow for the ANC’s new national executive committee, most of whose members are aligned with the president. Previous experiences in Gauteng and KwaZulu-Natal have not been successful. Despite this, former Gauteng premier David Makhura is heading a team tasked with formulating a coherent approach to coalitions.
- Recently elected deputy president Paul Mashatile has been tasked with several jobs including leading the South African National Aids Council and the country’s response to HIV and AIDS; heading up the Human Resource Development Council of South Africa; leading peace missions on the continent; and promoting social cohesion initiatives with a particular focus on traditional and Khoi-San leaders, as well as military veterans. However, it is his character that will determine whether he succeeds. Mashatile has been described, by those who know him, as a hard-working man who cares about the plight of the poor. However, his life has not been without controversy as he is allegedly a kingpin in the Alex Mafia, a network of powerful political activists hailing from the Alexandra township. He has also been accused of not declaring his stake in various companies to the tune of R50 million and awarding dodgy tenders.
- Transnet is yet another SOE that has faced corruption, setbacks and delays costing the public billions. Although some key figures have been criminally charged, others at the centre of Transnet’s capture and near-collapse have walked away almost unscathed. New information seen by non-profit Open Secrets, which exposes crime, sheds light on how one company and its directors made payments seemingly to various companies and individuals to flush Transnet money out of sight. The piece is a detailed composition of corruption and is worth a read. Another piece in Financial Mail argues that a settlement with Switzerland-based Liebherr, which benefitted from corruption at the logistics company and will pay a R54 million fine as a result, lets a key corporate participant in state capture off the hook.
- South Africa’s mining and manufacturing output declined in January year-on-year, but the degree of contraction in both sectors was better than market expectations. The readings also improved when measured on a month-to-month basis, raising hopes that the country can escape a technical recession — defined as two successive quarters of economic contraction. BusinessLIVE has published an editorial on this, stating that blackouts and railway issues are the cause of the mining sector’s woes. Production has declined for 12 consecutive years, while South Africa has had to deal with loadshedding for 15 years.
- MTN Group has moved to quantify the impact of load shedding on its South African operation’s earnings, saying on Monday that Eskom’s woes cost it R695-million in Ebitda in the financial year ending 31 December 2022. The group said the power cuts are placing “enormous strain” on the MTN South Africa network, “impacting availability as well as some business functions, including those supporting recharge and upgrade activity”. Despite all of this, MTN South Africa reported full-year service revenue that rose by 3.6%.
- Absa believes its balance sheet is strong enough to handle rising impairment charges and support its growth ambitions in Africa, even as accelerating inflation and higher interest rates weigh on the disposable income of its customers. Load shedding cast an R18 million shadow in the form of expenditure on diesel over the year, with more than half of that cost attributed to the fourth quarter alone. The company declared a full-year dividend of 300 cents per ordinary share, up 65.6% from 785 cents the year before as normalised headline earnings gained 13% to R21 billion. It raised impairments to cater for cash-strapped consumers.
- Tech giant Naspers has closed its R1.4 billion South Africa-focused technology investment fund, Foundry, as it slims operations and venture capital takes a hit globally. It will, however, maintain the investments it has made through the four-year-old fund, which include successful start-ups such as online home-cleaning business SweepSouth and agritech firm Aerobotics, while continuing to put money behind such local companies. Its move, which will be aligned with the approach it adopts internationally, could see pushback from those who see it as Naspers reneging on its commitment to invest in South Africa.
- Transaction Capital’s share price plummeted more than 40% on Tuesday after it said it would restructure its taxi division to cover debt at a time when investing in the industry makes no sense because of the fuel price. It increased its bad debt provision for SA Taxi to R1.85 billion, while reducing repossessed vehicle stock by about R150 million. Questions are now being asked about Transaction Capital CEO David Hurwitz’s sale of shares worth R51 million late last year. FY2022 headline earnings attributable to the group will remain below FY2021 earnings.
- As at the time of writing, the rand was 0.3% weaker for the week and the ALSI was 4.1% down.
Sources: Dynasty, BusinessLIVE, Daily Investor, Bloomberg, Tech Central, Daily Maverick, AP, News24, Reuters, Wall Street Journal, BizNews.com, Financial Times, CNBC, Financial Mail,
NYT, etc.
