The S&P 500 Index continues to set records despite known risks, such as growth slowdowns, supply chain issues, geo-political tensions between the US and China, rate hike probabilities, and persistent inflation.
This has led to the S&P 500 Index now appearing very expensive, even as measured on a forward PE metric.
However, it is likely that US equity market prices are partly supported by the ability for companies to push higher input prices through to the consumer. According to The Economist, price increases now exceed central banks’ targets, with consumer prices in October 2021 being 6.2% higher than a year ago.
This is the highest year-on-year price inflation since 1990. According to Jeffrey Sachs, professor and director of the Centre for Sustainable Development, “swings in demand and supply, because of lockdowns and government policies, are bigger than the 1970s oil shocks and the 2008 financial crisis”.
Nonetheless, current valuations have led Goldman Sachs CEO David Solomon to state that markets could face a rocky road ahead as global economies seek to emerge from the abrupt impact of the pandemic, which has whipsawed the US and global economies more than any other shock since World War II.
At Dynasty, we remain pro-growth in our equity investment positioning, with a preference to invest in companies that have pricing power to protect earnings should inflation prove to be more enduring than simply transitory. Our portfolios comprised of these companies tend to outperform their benchmarks in moderate or negative market environments.
“When I step back and think about my 40-year career, there have been periods of time when greed has far outpaced fear – we are in one of those periods. My experience says those periods aren’t long lived. Something will rebalance it and bring a little bit more perspective.”
– David Solomon, Goldman Sachs
Global News
- Recent guidance from the US Fed is that inflation is reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizeable price increases in some sectors. In other words, the Fed is sticking to its transitory view of inflation, although there is clearly more of an acknowledgement that inflation has remained higher for longer than expected.
- This is a global trend, with inflation surging around the world and prices accelerating at rates that are beyond central banks’ targets. However, Japan is a notable holdout. Although policymakers there have long sought to generate inflation, consumer prices still refuse to budge.
- President Biden has signed the bipartisan infrastructure bill, the largest investment in a generation in roads, rails, pipes, power lines and more. The bill does not address the entirety of the nation’s backlog of needed infrastructure investments, and it falls short of Biden’s initial $2.3 trillion proposal. But economists largely agree that it could soon begin to pay dividends for a wide range of businesses and people, from electric vehicle manufacturers to rural web surfers.
- In company news, newly listed Rivian Automotive surged to a market value of $107 billion. This shows how much money there is to be made when one considers the increasing investment in renewables. Rivian is now the fifth largest automaker by market cap!
- Musk is the prime example of a “green” billionaire. His vast fortune stems from a company that’s revolutionised electric-powered transport and is hastening the demise of the internal combustion engine, responsible for 10% of global carbon emissions. While Musk courts outrage and embraces drama – just last weekend he polled Twitter over whether he should sell 10% of his Tesla stake – he’s also made clear the serious wealth-building potential of green investments.
- According to Bloomberg sources, Apple is accelerating development of its electric car and is refocusing the project around full self-driving capabilities. The company aims to solve a technical challenge that has bedevilled the auto industry and is exploring two simultaneous paths: creating a model with limited self-driving capabilities focused on steering and acceleration, or a version with full self-driving ability that doesn’t require human intervention.
- Facebook-owner Meta Platforms and Alphabet may have ventured earlier than many into the next big thing, but it is Apple holds the key to success, Morgan Stanley says. Facebook and Google have been investing in virtual reality and augmented reality technologies – a gateway to the virtual worlds in the “Metaverse,” but mass-market adoption of “either AR or VR will occur when Apple enters the race,” a research note from the bank said. The consensus belief was based on a survey and chats with several upcoming AR/VR companies.
Local News
- In line with expectations, South Africa’s annual consumer price inflation was 5% in October, unchanged from last month. The headline consumer price index (CPI) increased by a modest 0.2% month-on-month. South Africa’s inflation numbers, which were released on Wednesday morning, come amid record price spikes abroad as supply bottlenecks take their toll.
- Yesterday, the prime lending rate was increased by 25 basis points, taking the repo rate to 3.25%. However, the interest rate increase by the South African Reserve Bank provided little support for the rand, which fell to R15.75/USD today, its weakest level this year. While the South African Reserve Bank delivered on market expectations, its policy makers’ comments were taken to be dovish, as they said further tightening would be gradual. Rand movement was heightened by a risk-off mood in currency markets, impacting other developing-nation currencies such as the Russian ruble and the Chilean peso that also dropped against the greenback.
- Reflective of global trends and boosted by a weak rand, the JSE was at an all-time high this week Tuesday. Measured in dollar terms year-to-date, the ALSI performance is up 17.61%, but remains below the MSCI World’s return at 21.96%.
- In an apparent politically motivated statement, finance minister Enoch Godongwana has become the latest voice to criticise Eskom CEO Andre de Ruyter over constant power cuts. He argued that De Ruyter has been allowed to do more planned maintenance than his predecessors and South Africa has not seen the results. This is a very simplistic opinion and is not at all supportive of the anti-corruption rhetoric of the ANC. To add insult to injury, Eskom this week handed over evidence to the Hawks of alleged sabotage at the Lethabo Power Station.
- Ultimately, there is no substitute for higher economic growth in resolving South Africa’s fiscal constraints. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence, improve private sector fixed investment, and enhance skills development and productivity. This is going to require a much greater effort in implementing key policy reforms, without which private sector investment is likely to continue to stagnate, exacerbating the already high level of unemployment and increasing the risk of further social unrest.
- Perhaps surprisingly, the domestic housing market remains on track for a bumper 2022, as the residential property market has not just rebounded in recent months – it has boomed. This is thanks to a higher number of loan registrations and house price inflation according to BetterBond CEO Carl Coetzee. What bodes well for further consolidation is the fact that buyers in all price ranges have been able to make the most of the favourable lending environment.
- South Africa, which has the most confirmed coronavirus cases on the continent, is set to be hit by a fourth wave of infections. However, according to new modelling prepared for the government, the virus’s impact is unlikely to be as severe as during earlier surges. Data indicates that an estimated 60% to 70% of the population has already contracted Covid-19, which together with vaccinations will provide protection from severe disease.
Sources: Dynasty, BusinessLive, Bloomberg, The Mail & Guardian, The Guardian, New York Times, The Economist, etc
