June 2024 Update A

Making The News

Narrow US market rally

S&P 500 up +14% for the first half of the year with 60% of the gain driven by 5 stocks (Nvidia, Microsoft, Amazon, Meta, and Apple). Nvidia alone accounted for almost a third of the market’s YTD return. In Q2, these “Fantastic 5” stocks were whittled down to the “Thrilling 3” (Nvidia, Apple, and Microsoft). Together, they accounted for more than 90% of the 4% index return. Returns for the equal-weighted version of the S&P 500 were negative for the second quarter.

Signs of a slowing US economy

Core CPI further declined in May to +3.4% YoY from +3.6% in April, despite the MoM figure increasing by 0.2%. While retail sales increased by just +0.1%, core personal consumption expenditure increased to only 2.6% YoY which is the lowest figure since March 2021. The US Federal Reserve (Fed) left rates on hold at its June meeting (as expected), while across the Atlantic, the European Central Bank (ECB) cut rates for the first time in almost five years.

The impact of the French Elections on European Equities

Europe’s equity market performance was among the most disappointing in June, with French equities (-6.6%) leading European declines (-3.1%). French President Emmanuel Macron rattled investors with the surprise announcement of snap elections after his political alliance suffered a heavy defeat in European elections to Marine Le Pen’s far-right National Rally party.

Outside China, Taiwanese chipmaker TSMC and general Indian stocks lifted the EM bourse higher

Emerging markets had a strong month (up +4%), with AI computing again having a significant impact via Taiwanese chipmaker TSMC (+18%), which accounted for c. 40% of June’s EM Index performance. Indian stocks (+7%) also contributed strongly to EM performance as Indian Prime Minister Narendra Modi won crucial backing from two coalition allies, allowing him to form a government and extend his decade in power.

SA Inc. rally in June

In South Africa, a relief rally drove ‘SA Inc.’ assets higher after a volatile month concluded with the announcement of a Government of National Unity. The rand (3%), bonds (5.2%) and domestically focused shares, such as property (6%) and financial (14.5%) shares, all surged. Rand hedge shares and resources (-3.6%) lagged on rand strength and lower commodity prices — excluding oil (4.8%), which gained. The local currency was also a significant beneficiary of the improving SA sentiment, overcoming a strong US dollar to make it one of the best-performing major global currencies in June. The rand ended 1H24 as the only major currency (besides the heavily sanctioned Russian rouble) that has strengthened against the US dollar YTD (+0.9%).

Global Markets in USD

Local Markets in ZAR

CWM Global Model Portfolios USS Returns: One Year, Three Years, Five Years and Since Inception (November 2016)

CWM Global Model Portfolios GBP Returns: One Year and Since Inception (October 2021)

CWM Local Model Portfolios ZAR Returns: One Year, Three Years, and Five Years and Since Inception

SA Equities: Chasing the Sun

Covid rally from market lows – is there still an opportunity for SA equity?

SA equities trading at a depressed forward multiple valuation relative to DM and EM counterparts – are these multiples justified?

Drivers of growth going forward:

• Loadshedding becoming a distant memory
• Ongoing improvements in the logistical constraints
• Positive SA election outcome

SA equities, relative to its own history, is trading at multiple lows. However, the structural changes are expected to be tailwinds for earnings growth and increased foreign investor appetite for SA assets.

Investors that may have missed out on the rebound in SA equities in the 36 months following the Covid pandemic, when the SA market rebounded over 90% from its lows, may now be wondering given the low valuations of the SA market, is this opportunity now exhausted

The South African market (light orange line) has derated dramatically from 2018 and trades at a material discount to both developed (dark brown line) and emerging market  (dark orange line) peers. We believe the local equity market presents an attractive investment opportunity and several of the headwinds (i.e., loadshedding & logistical issues) are expected to turn into tailwinds. On top of this, South African management teams have been resourceful and innovative when navigating their businesses in the face of these headwinds, resulting in a more resilient business landscape for multiple listed companies going forward. There are three key drivers that could affect the market in the medium term.

Driver 1 (Eskom): We saw a marked increase in the level of load shedding mid-way through 2022, with unprecedented levels of load-shedding in 2023 that not only affected investor sentiment to the local market but had a very negative impact on local consumer and business sentiment. Fast forward to today, the latest figures show that SA has now had 100 days straight without loadshedding which is the longest continuous period without scheduled loadshedding since 2020. Fuelling the optimism is the announcement of Kusile’s unit 5 now in operation, adding an extra 800MW to the grid.

Driver 1 (Eskom) (Cont’): The government continued to deregulate the energy sector. After the removal of the cap, the market has seen a surge of new private-sector energy projects being registered with NERSA (National Energy Regulator of South Africa). Since 2022, over 900 independent energy projects with an estimated capacity of over 6.5 GW have been registered and starting to come online. This capacity, together with a large amount of residential rooftop solar capacity that has been installed since 2022, is helping to curb the demand Eskom has experienced for electricity in 2024. It is expected that the end of 2024 will be the end of material load-shedding which would add to GDP growth as it is estimated that every stage of load-shedding costs the economy c.0.3% of GDP.

Driver 2 (Transnet): To alleviate the logistical constraints of the country, the government has established the National Logistics Crisis Committee (NLCC) in collaboration with the private sector. One initiative was the selection of ICTSI (largest independent terminal operator across 6 continents) as the preferred bidder and private sector partner to run the Durban container port Pier 2 (a port accounting for c.46% of SA’s container traffic). This, along with multiple other initiatives involving private sector partners, including a focus on areas such as the coal and iron ore railways, could have a material impact on the GDP growth for the country going forward, with some experts estimating that more than 5% of GDP is lost due to the network problems. It is expected to take 3 – 5 years to get Transnet back to its previous levels of operation, but the ongoing improvements will be another tailwind for GDP growth in the country.

Driver 3 (SA Elections): The dominant ruling party had consistently lost voter support since 2004, when it won 70% of the national vote. This points to a fair democracy where a ruling party that does not deliver on their required outcomes and services to the population, eventually loses support. It is expected that the GNU will result in an acceleration of the structural changes (i.e., loadshedding and logistics constraints).

Currently, the South African market is trading on what looks like attractive valuations from a historical perspective. We believe the market is pricing in a large amount of risk and a low growth environment into the foreseeable future. A positive election result, combined with continued momentum around structural changes implemented by the government in conjunction with the private sector, could drive an increasingly positive GDP growth trajectory for South Africa. This would result not only in growing earnings prospects for listed companies, but also increasingly positive investor sentiment towards the local market. We believe that the local equity market thus currently presents a very interesting opportunity for investors to generate attractive returns going forward.