The Confidential Report - October 2024
2 October 2024 By PDSNETAmerica
The Federal Reserve Bank’s decision to cut interest rates by half a percent at its September 2024 meeting shows some concern that they might be “behind the curve”. In other words, they have kept rates too high for too long pushing the economy towards a recession. Chair, Jerome Powell, denies this, but it is a real concern voiced by several prominent economists. Eleven of the twelve members of the monetary policy committee (MPC) voted to cut by half a percent showing that the decision was almost unanimous. Investors had been anticipating a 59% chance of a half percent cut and pushed the market up accordingly. The MPC also said that there would be two more rate cuts by the end of 2024. Powell also said that the economy was “in a good place” and that the speed of future rate cuts would now depend on the labour market. The rate of job creation over the past year has dropped from roughly 155 000 jobs per month at the end of 2023 to about 96 000 now. The Fed estimates that the unemployment rate will rise slightly to 4,4% in the fourth quarter and that inflation will drop to 2,2% in 2025. Quantitative tightening will continue at the rate of $60bn per month, sucking money out of the economy and reducing the size of the Fed’s balance sheet. In our opinion, it is looking increasingly likely that the Fed may well have managed to pull off a soft landing for the US economy and that fears of impending recession are probably over-blown.
The inflation rate in America came in at 2,2% in August 2024 – which was far earlier than anticipated and gave rise to speculation that the Fed would cut rates by a further fifty basis points when they meet in November 2024. At the same time, the Chinese central bank cut interest rates and increased borrowing limits to massively stimulate their economy. The stimulatory measures in China combined with a growing expectation that the Fed might cut rates by a further fifty basis points in November 2024 has kept the S&P500 breaking new record highs. Much will now depend on the job creation figures, which could show that the rate of job creation has dropped to as little as 75000 new jobs per month. Any increase in the unemployment rate above 4,3% could also impact the decision on rates. In our view, the Fed is proceeding very much according to their original plan which sought to avoid a recession next year and aimed at a slowing the rate of growth in an economy that was clearly running ahead of itself. However, the MPC’s unexpected 50-basis point cut, and the prospect of a further 50-basis point cut next month are pushing the S&P to new record highs - as we predicted in our tweet on 14th August 2024.
Consider the chart:
Following our tweeted warning on the 19th of July 2024, the S&P fell 8,5%. The correction was sharper than expected, as was the recovery – resulting in a V-bottom with a cycle low at 5186 on 5th August 2024. The subsequent upward move displayed considerable and excessive investor optimism with 8 successive days up. This was followed by a period of profit-taking and consolidation before the index broke to a series of new record highs which we again predicted in our tweet on 14th August 2024.
It is important to understand that the S&P500 is now dominated by Nvidia which has accounted for as much as a quarter of the 17% gain in the index this year. The Nvidia share price is now up more than 140% since the beginning of the year and its movements impact the prices of other shares both positively and negatively. For example, on Wednesday 11th September 2024, Nvidia shares rose by 8,2% in a single day and the S&P index rose by 1%. This reliance on a single share obviously makes the index far more volatile. The prospects of the artificial intelligence (AI) sector are heavily discounted into share prices and are driving the index up. This makes it more vulnerable to sudden changes in the perceived fortunes of that sector.
Of course, we are in the final stages of the election battle between Donald Trump and Kamala Harris. It is a tight race, but the evidence is that Harris is well ahead in the popular vote, and slightly ahead on an electoral college basis. The result will not have a major impact on markets and nor will the economic policies of the two contestants. The US economy is run independently by the Federal Reserve Bank and will not be managed by whoever is elected president. Both candidates will almost certainly continue to increase government spending above tax collections leading to a continuing widening of the deficit. Over the past 25 years it has become politically impossible to reduce the deficit, because that would mean putting the economy into a prolonged recession something that neither candidate wants to do.
As we have warned previously, however, at some point “the piper will have to be paid.” America cannot continue indefinitely running up huge deficits to finance their excessive spending – but in the immediate future we expect them to continue over-spending and thus pushing the stock markets of the world, including the JSE, to new record highs.
Ukraine
The occupation of part of the Kursk region by Ukrainian forces continues despite various efforts by Russia to expel the invaders. This is a huge embarrassment to Putin and severely damages his status as the protector of Russia. At the same time, however, it is apparent that Russian forces have been making some gains in the Donetsk region, albeit at an enormous cost both in men and material. What has been interesting about the Kursk invasion is that it has relied on Ukraine’s notable advances in drone technology. Their drone technologies have enabled them to dominate the air which is critical in modern warfare. They have also enabled them to strike deep inside Russia with virtual impunity – and without relying on Western long-range weapons. Their increasing use of F16 fighter jets is limiting Russia’s ability to launch glide bombs which were becoming a major problem for both Ukrainian troops and civilians.
Perhaps the most dramatic example of the use of drones by Ukraine was the destruction of a series of Russian ammunition depots 300 km inside Russia at Tver. These clearly demonstrate the Russian air defences are almost completely ineffective and that the Ukrainians do not need Western long-range missiles to take the war onto Russian territory. One of these explosions was so large that it was visible from the space station and caused a 2,8-earthquake reading on the Richter scale. To us it seems apparent that Ukraine is moving steadily ahead of Russia in drone technology. In our view, the Russian army is in a shambles and probably cannot sustain the level of pressure on Ukrainian positions that it has in the past. Gradually the perception of Putin as the “strong man” who can protect Mother Russia is being eroded.
From an economic perspective, what is notable is the sharp drop of the ruble against the Chinese yuan since June this year. The Chinese trade with Russia has enabled them to avoid the full impact of Western sanctions, but as the ruble declines this becomes a less and less viable option.
To us, it is now apparent that Putin is hanging on by his fingernails militarily, politically, and economically. His only real hope is that Trump wins the US elections in November, which is not a certainty. He is facing increasing pressure at home as the body count rises, the economy deteriorates under Western sanctions, and Ukraine attacks vital targets deep inside Russia. The oligarchs who have been his staunch supporters from the beginning of his reign are beginning to question his ability to hold on to power and are actively looking at alternatives. In our view, Putin will eventually lose power in Russia and that will usher in a new era of peace and stability in Europe. When (not if) that happens, it will also be good for equity markets around the world.
The Knife-Edge
In the last few days, I have become very concerned about what is going to happen in the next month before the US elections on the 5th of November. As things stand now, Harris appears to be steadily moving ahead of Trump and the polling suggests that she could win by a landslide. At the same time, Putin is in a desperate place. He is losing ground at home both militarily and politically.
What if Russia attacks a US military base and kills, say, 20 US soldiers?
Then Trump will say he is the only one who can avoid World-War III. He has a good relationship with Putin. He can stop the Ukraine war in a few days. He is already blaming Biden and Harris for getting America into this war. I really hope I am wrong, but this could be the play that gets Trump re-elected and enables Putin to survive. Obviously, that outcome would be a disaster for equity markets and the free world. What I am saying is that for the next 33 days we will be on a knife-edge.
Economy
The continued existence and effectiveness of the government of national unity (GNU) is now critical to South Africa’s future and the future of listed companies. There are several areas where the GNU is still working out policy differences between the ANC and the DA. One of the most important is the Basic Education Law Amendment (BELA). The Bill was signed into law by President Ramaphosa before the GNU came into existence and is opposed by the DA, ACDP and FFP in its current form. The leader of the DA, John Steenhuisen, is planning to present his party’s objections to Ramaphosa together with some simple changes to the bill which would make it acceptable. The most contentious provision is that the bill confers on provincial authorities the right to determine which language is used in a school as its medium of instruction, which effectively contravenes the constitution. Ramaphosa is meeting with all leaders in the GNU to resolve this and other issues. Another problem area is the National Health Insurance (NHI) which was also signed into law prior to the elections by the ANC. In our view, the various parties will find a way to resolve their differences in due course.
The inflation rate slowed further in August 2024 to 4,4% from July’s figure of 4,6% and is now below the mid-point of the target range. The Reserve Bank only expected the inflation rate to fall below the mid-point of the target range by fourth quarter of 2024 – so inflation is falling more quickly than expected. Low prices for petrol were a major factor in the falling inflation rate. Expectations are now that the monetary policy committee (MPC) will reduce interest rates by one hundred basis points by March 2025. Lower interest rates combined with lower fuel prices will have the effect of stimulating consumer spending and economic growth.
The level of producer price inflation rate (PPI) dropped sharply to 2,8% in August 2024, down from July’s figure of 4,2%. Much of the decrease was due to the drop in the price of fuel which comprises about a quarter of the PPI. With the rand strengthening to R17.11 to the US dollar and the price of North Sea Brent oil falling to around $72, we can expect further cuts in the price of petrol next month. The drop in the PPI will feed through to the inflation rate in the coming months and clear the way for further cuts in interest rates. The AA is projecting that the price of ninety-five octane petrol will fall by more than R1 a litre in October. However, the conflict in the Middle East could impact the price of oil negatively in the coming months.
The Bureau for Food and Agricultural Policy (BFAP) keeps track of the monthly cost of healthy food for a family of four. In July 2024 that cost was R3761, up 4% from a year ago. This shows that the current inflation rate of 4,6% in South Africa is probably close to accurate. A major component of the cost of food is the price of chicken, which has stabilized and even fallen for certain cuts. The price of a whole chicken has risen by 19% since 2021, but individual quick-frozen chicken pieces are almost 12% cheaper than they were a year ago. The chicken business is undoubtedly one of the toughest businesses in South Africa and over the past year has been hit by various avian diseases which have pushed costs up. Costs are now expected to remain fairly stable going forward for the next two years provided there are no more outbreaks of disease.
As expected, the monetary policy committee (MPC) cut interest rates by twenty-five basis points in October 2024, taking the repo rate down to 8% from 8,25% and initiating a downward trend in rates. The move followed the American decision to reduce rates by fifty basis points and will make South African debt instruments more attractive to overseas investors. The MPC expects growth of 0,6% in both the third and fourth quarters of 2024 as confidence levels improve and as a result of the end of loadshedding and the lower fuel price. We believe that GDP growth may surprise to the upside in 2025 coming in at closer to 2% than the MPC’s forecast of 1,6%. The Reserve Bank sees inflation falling to 4% in 2025. Rates are expected to drop by a further twenty-five basis points in November.
The Reserve Bank’s quarterly bulletin for the second quarter of 2024 shows that our government debt increased by R8,4bn due to lower tax revenues from mining and agriculture. The government debt is expected to peak at 75,3% of gross domestic product (GDP) in 2025/26 by which time the cost of interest on that enormous debt will be about 21,3% of all tax and other revenue collected. In other words, slightly more than R1 out of every R5 collected in tax will have to be used, just to pay the interest on the government’s debt. This puts South Africa very close to a debt trap where interest payments spiral out of control. Hopefully, the newly formed government of national unity (GNU) will be able to reduce the level of government debt as planned. This is an essential prerequisite for the international rating agencies to return us to investment status.
The Treasury says that it will achieve the projections for the budget which it set out in February this year. Of course, the mid-term budget policy statement (MTBPS) is about to be delivered on 30th October 2024, so that will determine whether this is true. At this stage, the budget indicates that the government’s budget deficit will peak later this year at just over 75% of gross domestic product (GDP) and then begin to decline. So far, tax collections have come in below estimates, largely because of the drop in commodity prices which has reduced tax received from mining companies.
The international rating agency, Fitch, has maintained South Africa’s status at BB- with a stable outlook. In their assessment they project that the economy will grow 0,9% this year and 1,5% next year – which we think is a bit conservative. One of the factors that they draw attention to is the fragility of the newly formed government of national unity (GNU) over certain issues, especially the National Health Insurance (NHI) bill which was signed into law prior to the elections despite considerable opposition from business and other parties like the DA. President Ramaphosa now says that the implementation for the bill is open for discussion and is planning to talk to those who oppose it in its current form. It is clear that Ramaphosa is genuinely concerned about the GNU and warns that its collapse would be a disaster. Obviously, the stability and continuance of the GNU is a major concern for private investors.
Growth in gross domestic product (GDP) came in at 0,4% in the second quarter of 2024 – slightly below economists’ expectations. The growth was a result of the end of loadshedding and positive sentiment about the new government of national unity (GNU). The growth in the first quarter was revised from -0,1% to 0%. Many economists are expecting that the second quarter will turn out to be a turning point and that growth will improve from here. Low inflation and the prospect of declining interest rates is adding to improved business sentiment.
International investors have taken about more than R1 trillion out of bonds and equities in South Africa over the past decade. These withdrawals were mostly caused by their low confidence in the ANC government’s ability to implement reforms. That situation has now changed and with the advent of the GNU, fund managers now see the SA equity and bond markets as underpriced. Combined with a general shift in international investor sentiment towards risk-on, this has led to a sharp increase in money flowing into the country. A recent survey by Bank of America shows that asset managers are expecting shares on the JSE to go up by 17% and bonds to go up by 13% this year. Obviously, the flow of funds into the country is having a strong positive impact on the rand and that, in turn, is bringing the fuel price down and causing inflation to fall. Lower inflation means that interest rates will continue to drop, putting cash into the hands of mortgage bond holders.
The FNB consumer confidence index improved to -5 in the third quarter of 2024. This is the second 5-point improvement in the last six months and takes the index to its best level in five years. Consumers are benefiting from the sharp and persistent drop in fuel prices over the past few months. This, in turn, is a result of the decline in oil prices and the relative strengthening of the rand against the US dollar. At the same time, interest rates are now on a downward trend which will put more money into the pockets of anyone with a mortgage bond. The end of loadshedding is also having a positive impact on the economy. Combined with the effects of Operation Vulindlela and the newly appointed government of national unity (GNU) these developments are causing a surge of business and consumer optimism.
The ABSA purchasing managers’ index (PMI) came in at 43,6 for August 2024 – down sharply from July’s 52,4. The index is displaying considerable volatility as the prospects of manufacturers fluctuate. Economists blamed the uncertainty of the local elections, high interest rates, and sluggish overseas demand for our exports. Local demand was also poor with consumer spending down. Business activity and new sales orders both showed sharp declines from July. The PMI figure for August probably indicates that July’s PMI was unusual and did not reflect the true situation.
Manufacturing production rose by 1,7% in July 2024 compared with a decline of 5,5% in June. Food and beverages were up 9,5% and metals and machinery was up 5,2%. The automotive industry fell by over 12% and was a major drag on the index. Demand for new motor vehicles has been subdued because of high interest rates and low consumer spending.
The BankServ take-home pay index shows that salary-earners took home 6,7% more in August 2024 than in August 2023. Average take-home pay was R16582, and this came at a time when inflation for the year fell to 4,4% - so that in real terms consumers are considerably better off. At the same time, the 25-basis point drop in interest rates puts almost R500 a month into the pockets of bond holders with a R2,5m bond. Combined with lower fuel costs, consumers now have far more cash than they had a year ago and can be expected to begin spending.
BankServ operates the largest electronic transaction clearing house in South Africa. This enables it to produce the BETI, an index of transactions cleared through its system every month. In August 2024, the index inched up to 137 from July’s figure of 136,9 – showing a period of consolidation and slight growth. The economy is benefiting from the steady decline in the price of fuel as well as renewed optimism over the new government of national unity (GNU). We are expecting the economy to begin growing more strongly next year as interest rates come down and some of the problems at our ports and on our railroad, system are resolved.
Water is likely to become the next major resource to be rationed in South Africa, especially on the Highveld. Already, there has been some “watershedding” in parts of Johannesburg. The major problem is the maintenance of water infrastructure which is paid for by the water boards. They in turn rely on the municipalities to pay for the water that they provide. Collectively, the municipalities owe water boards R21,3bn, and the water boards are seeking a bailout from the government to keep them operational. The financial collapse of many municipalities has become a major problem in South Africa with many of them unable to provide services to their communities. The Treasury maintains that it does not have the money for any bailouts, but they may be forced to help the water boards.
The civil service unions have opened negotiations for the 2024/25 year by demanding a 12% wage increase and a R2500 housing allowance across the board. So far, the Minister of Finance, Enoch Godongwana, has managed to keep the civil service wage bill of around R700bn under control, but these new demands may become a problem for the newly appointed government of national unity (GNU). Investec has already warned that tax collections could be as much as R80bn below what was budgeted. A wage dispute could lead to a civil service strike.
The bond market is rallying on the strength of the prospects for the GNU. As bonds go up in price, the effective yield that they offer goes down. Right now, the R2030 – the government bond that matures in 2030 – is trading at an effective yield of just above 9%. Overseas investors find our bonds particularly attractive because they pay an effective return, which is far higher than the 3,8% offered on US Treasury bills. The advent of the GNU has reduced the political risk in South Africa making our bonds much more attractive.
The rising gold price has resulted in the trade surplus and that has had a positive impact on the current account deficit. The Reserve Bank said that the deficit had dropped to 0,9% of GDP at the end of the second quarter – down from the first quarter’s 1,5%. Gold exports increased by 34%. The gold price in US dollars has been climbing steeply since it broke above resistance at $2060 earlier this year. We expect it to continue performing well.
The price of electricity, which is determined annually by the National Energy Regulator of South Africa (NERSA), has become a major problem for businesses and households alike. Those that could afford to have installed alternative, usually solar, sources of power, but for many, especially poorer people, the problem is becoming unsustainable. Many poorer households are now spending as much or more on electricity as they do on rent. NERSA just increased the cost of electricity by a further 12,4% in the 2024/2025 year, and Eskom is planning to ask for increases of over 30% for next year. The price of electricity has risen by 945% since 2008 when loadshedding began and South Africa now ranks as one of the most expensive countries in the world. Small businesses, which cannot afford to implement solar power, are also negatively impacted, often leading to their closure or down-sizing. Right now, about ten million poor people in South Africa are supposed to get 50kw of electricity free of charge and it is proposed to increase the amount that they get. Only two million people are currently getting this benefit because of the inefficiencies at local governments and within Eskom. It should be remembered that, on top of its rampant price increases, Eskom has recently received a R254bn bailout from the government which means it has been heavily subsidized by the South African taxpayer.
The South African economy is moving rapidly towards online purchases followed by physical deliveries. In 2023, e-commerce accounted for 6% (more than R70bn) of total retail spend and that is expected to rise to 10% by 2026. This rise in the use of e-commerce has been accompanied by a rise in organised hijacking syndicates preying on motor-cycle deliveries. Incidents have risen from less than 20 per day in 2023 to more than fifty per day in August 2024. The poor state of policing in South Africa is partly to blame, but the increase can also be blamed on the sharp increase in the use of this method of buying. Companies involved in getting products to consumers complain that the cost of these crimes directly affects the cost of delivery.
The Road Accident Fund (RAF) now has a debt of R23,9bn and received an adverse opinion from the Auditor General. In the 2022/23 year alone the organization made a loss of R8,4bn. The fund is burdened with paying huge legal costs and many of its payments go to foreigners. For example, in 2008 the fund paid a Swiss billionaire R500 000 and right now over R450m is owed to Belgian nationals. Many payments have to be made to people who were in South Africa illegally when they were involved in a motor car accident. Altogether, foreigners are owed a total of R1,5bn. Clearly, the RAF is becoming a major financial problem for the government. It is constantly running at a loss and needs to be re-financed. The rules need to be changed so that their payouts are lower. Obviously, the high level of payouts is a direct reflection of the appalling and deteriorating standards of driving on South African roads which the police seem to be powerless to stop.
According to a recent survey, only about 5% of South Africans regard climate change as a major concern. This compares with 47% who rank crime as a major problem and 36% who say that corruption is the country’s worst problem. Despite this, there are indications that South Africa is beginning to experience more climate-related events and as the world average temperature moves higher, those events are likely to become more impactful. The floods in Natal and the unusual closure of the N3 in September 2024 due to an exceptional snowstorm are examples. In our view, climate is gradually becoming a more important component of investment decision making with more and more listed companies being affected. Notably, 2023 was the world’s hottest year on record, and 2024 is expected to have been even hotter. From South Africa’s perspective, the most dangerous prospect is a prolonged drought which would force us to import maize and threaten our food security.
The Rand
The strength of the rand is influenced by two major factors, local political and economic developments, and the international attitude of investors towards emerging economies. Over the past 16 months, with the improvements in the prospects for the local economy and the strong bull trend on Wall Street, both of these factors have favoured the rand. It has been strengthening steadily since its low of R19.75 against the US dollar made on 25th May 2023. Technically, the rand broke out of a triangle formation in April this year and has been strengthening consistently since then. Consider the chart:
On 19th September 2024, the rand strengthened to close at R17.46 to the US dollar, breaking below the previous cycle low of R17.75 made on 24th July 2023. It has since strengthened even further and is close to breaking below R16 to the US dollar. This indicates that the strengthening trend will continue. As the most liquid of the emerging market currencies, the rand is preferred by international investors when sentiment moves from risk-off to risk-on. Now that Wall Street is making new record highs again and the correction is over, we should expect sentiment to remain risk-on for the foreseeable future which will be beneficial for the rand. The stronger rand has a direct impact on business and consumer confidence in this country. That in turn affects the level of spending and investment. The strength of the rand is a direct measure of how our economy is faring and what its prospects are. At the moment everything is very positive.
Commodities
PLATINUM GROUP METALS
The production of platinum group metals (PGM) in South Africa has been declining by about 1,7% per annum on average since 2006. This decline is due to a steady fall in PGM prices which has made certain shafts unprofitable. It is estimated that the industry has retrenched as many as 10 000 employees as a result - which is roughly 6% of its workforce. It is expected that the production of PGMs will continue to decline by about 2% per annum going forward, with production already below pre-COVID-19 levels. Implats has cut four thousand jobs, Amplats 3700 and Sibanye 2600. Ironically, the platinum market is operating with demand exceeding supply for the second consecutive year, but so far this has not resulted in any significant increase in the price. The drop in demand for auto-catalysts because of electric vehicles (EV) is a major factor. New demand from hydrogen fuel cells may compensate in time. Obviously, the South African government is heavily dependent on the tax revenues it derives from the miners of PGMs and is experiencing tax shortfalls as a result. It is notable that Amplats fell out of the JSE Top 40 index on Friday 20th September 2024 as a result of declining international PGM prices and the fact that Anglo American is in the process of selling their stake in Amplats and divesting from the platinum industry. Consider the chart of platinum in US dollars:
You can see here that the platinum price has been falling since the sub-prime crisis of 2008 and was negatively impacted by COVID-19. It has been moving sideways for many years now, but there is no indication of a new upward trend.
COAL
The coal price has collapsed from $450 a ton in 2022 to current levels around $113. This sharp drop in prices combined with the problems at Transnet is causing the industry to undergo significant restructuring. Seriti Resources, which runs six coal mines supplying Eskom, is having to retrench workers to remain profitable. It is issuing section 189 notices to as many as 1240 workers. The action is being opposed by the National Union of Mineworkers (NUM). Glencore, a massive international commodities company listed on the JSE is in the process of reducing its exposure to coal in South Africa and has written the value of its coal assets down by more than $660m in its latest interim results.
GOLD
Gold production in South Africa has declined from one thousand tons in 1970 to current levels under one hundred tons per annum. The primary cause of this decline has been the fact that most of the economically viable underground reserves of gold in this country have been exhausted. The decline has been accelerated by the rising cost of electricity which has added to the cost of extraction and significant union action which has pushed up the cost of labour. Against that background, the gold price has been in a strong bull trend when other precious metals, like PGMs, have seen falling prices. In the past six months, the US dollar price of gold has risen from $2060 to $2653. Some of the benefits of this rise has been lost because of the strengthening rand, but some shares, like Harmony, have benefited. Unfortunately, we expect the decline in South African gold production will continue unless there is a technological breakthrough that makes deep-level mining economical.
We have been drawing your attention to the bull trend in physical gold since it broke above the $2060 resistance level in March 2024.
The upward trend has been sustained and may even be accelerating. Of course, the recent fifty basis point cut in US interest rates makes gold more attractive compared to other low risk investments and we can expect it to continue performing well as interest rates continue to decline.
OIL
Since the last Confidential Report on 4th September 2024, the downward trend in the price of North Sea brent oil has continued. The drop in the oil price has been a major factor in bringing US inflation down and allowing the US monetary policy committee (MPC) to reduce interest rates. This is helping Kamala Harris in the US presidential elections because Americans are doing better financially. As Vice-President in the incumbent Biden administration, she can take credit for that.
At the same time, the low price of oil is negatively impacting Russia and thus helping to constrain their funding for the war in Ukraine. In our view, Joe Biden made some kind of deal when he visited Saudi Arabia in June 2022 to keep oil prices low – at least until after the 2024 elections. Consider the chart:
You can see here the impact of the war in Ukraine in early 2022 and the timing of the Biden visit to Saudi Arabia. The floor price of $72 has been well established over the ensuing years. Now it appears that Brent may be breaking below that level.
Companies
OVERALL
The JSE Overall index hit a series of new record highs in August and September 2024, following Wall Street. The leading sectors in our market have been property and banks. The world economy is now in a phase of declining interest rates which is always good for equities. Consider the chart:
As our market has moved higher the Winning Shares List (WSL) has expanded because more and more shares have been looking like winners. At the close of trade on Friday 27th September last week, there were 118 shares on the list of which 116 were above the prices at which they were added and only one was below. The best performing shares were Kore (up 265% in 136 days) and Stefstock (up 214% in 99 days). The only share to fall since being added to the list was Bidvest, which was down 1,53% in the five days since it was added.
PROPERTY
For some years now the property sector on the JSE has been significantly undervalued, with many shares trading well below their net asset values (NAV). With the prospect of interest rates beginning to fall from September 2024, that situation is changing rapidly. The recently-published FNB Commercial Property Broker survey showed a sharp improvement in confidence with 44% of respondents in the second quarter 2024 saying conditions were satisfactory – up from 30% in the first quarter. The JSE property index (J253) has been in a strong upward trend since October last year – a trend which we expect to continue. Consider the chart:
The chart shows a strong upward trend supported by touchpoints in April and May this year. Private investors should be trawling through the property shares on the JSE looking for exceptional value.
BANKING
Banking in South Africa has changed dramatically over the last few years. More than twenty million people now have a digital bank account and almost never have cause to visit their bank’s branch network. This shift to digital banking has seen a far greater percentage of the country’s population obtain and use a bank account and it has enabled the banks themselves to vastly improve the management of their customers, especially those who take out various types of loans. In the six months to 30th June 2024 the big four banks saw their average credit loss ratio drop as a result of improved credit management and data mining. Operating income rose by 5% while profits were up 2,5%. But this was during a period of extremely high interest rates. Rates are now entering a period where they should fall steadily over the next few years and that will reduce credit losses and stimulate economic growth. In our view the big banks have been excellent long-term investments for private investors. Consider the chart:
The JSE Banks index (JS3011) shows the progress of the banking sector over the past 4 years. The impact of COVID-19 can be clearly seen as well as the sharp recovery of banking shares over the next two years. There then followed a period of sideways movement and consolidation which lasted until the appointment of the government of national unity (GNU) in June this year. Since then, banking shares have been performing extremely well. We expect this to continue.
HYPROP (HYP)
Hyprop is a real estate investment trust (REIT) which owns some of South Africa's best-known shopping malls like Rosebank Mall, Canal Walk, Hyde Park Corner, and Clearwater. The company has a loan-to-value (LTV) of 36,4% and a strong cash position with R803m in the bank. We regard this as one of the best REITs on the JSE and we expect that it will benefit directly from the improving South African economy and the fall in interest rates. Consider the chart:
You can see here that we added Hyprop to the Winning Shares List (WSL) on 15th August 2024 at 3439c and that it has subsequently risen to 4600c – a gain of 33,75% in six weeks. We expect it to continue going up and it represents a very low risk investment.
OUTSURANCE (OUT)
OUTsurance (OUT) took over the listing of Rand Merchant Insurance (RMI) with effect from 7th December 2022 when RMI unbundled all its other assets (Discovery, Mommet, Hastings etc.). In its results for the year to 30th June 2024 the company reported earnings up 20,3% and a special dividend of 40c per share. The announcement of this special dividend caused the share price to jump on 17th September 2024, but we had already put the share onto the Winning Shares List (WSL) on 14th June 2024 at a price of 4457c. It has subsequently risen to 5879c – a gain of 31,9% in 106 days. We consider this to be a blue-chip share and expect it to continue to perform well. Consider the chart:
YORK (YRK)
York Timbers is a producer of various wood products and is closely linked to the performance of the construction industry. In a trading statement for the year to 30th June 2024 the company estimated that HEPS would be between 28,22c and 36,02c compared with a loss of 75,89c in the previous period. This shows that York is beginning to benefit from the new optimism in the construction sector, especially since the formation of the government of national unity (GNU). The share is risky because it has relatively little volume traded, and it is dependent on the level of building and construction. Consider the chart:
You can see here that York was doing very well back in 2021, but produced a clear head-and-shoulders formation before beginning a downward trend in 2022. We advised applying a downward trendline and waiting for a clear break up. That break came on 19th April 2024 when the share was at a price of 165c. It has subsequently risen to 225c. It remains risky and thinly traded, but should continue to benefit from the GNU.
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