Local and global macroeconomic outlook – March 2024

The S&P 500 continues to rise, with a number of commentators happily forecasting further strong gains in the benchmark index over the next couple of years. The latest mania on markets is Artificial Intelligence (AI) and stocks in this sector are being bought up across the board.

Dr Ed Yardeni, President of Yardeni Research, confidently predicts that the S&P 500 will easily top 5 400 points by year end 2024, buoyed up by tech stocks such as Nvidia and the relentless march of AI stocks. 

However, there are plenty of other signs that markets are nearing a bubble stage. For example, venture capital funds are piling into AI stocks that are, as yet, nowhere near making profits. 

And this exuberance is not confined to the US; the Japanese Nikkei Dow 225 index (JPN225) breached its all-time high, after a wait of over 30 years. The Nikkei 225 closed at 39,098.68, against 38,915.87 reached on December 29, 1989. It is probably the longest trough for share prices on any major market, anywhere, any time.

 

It is not clear where the Nikkei is going from here. After such a rapid rise, a period of consolidation appears likely, but only time will tell. 

One sector that has definitely lagged in recent years is commodities. The graph below shows the MSCI World index compared with the MSCI World Metals & Mining Index over the past 15 years. 

 

MSCI World has delivered more than twice the net return of commodities during the past 15 years.


Local Macro 

The National Budget took place on Wednesday February 21 2024 and, as expected, it didn’t contain much good news. The budget deficit is forecast to worsen from 4% to 4.9% of GDP this year and National Treasury had to finance a R59 billion hole in its finances. GDP is only expected to grow on average by 1.6% per year between 2024 and 2026. This is better than in recent years, aided by a possible improvement in loadshedding coupled with lower inflation and interest rates.  

The largest share of tax spending in the budget will go to social services (R480.6bn), social development (R387.3bn) and debt service costs (R382.2bn). 

One of the most controversial features of the budget is the proposal to tap into the deemed profits of the gold and foreign exchange contingency reserve (GFECRA), held at the SA Reserve Bank. The finance minister wants to take R150 billion of this money and use it to pay down debt, thus reducing debt servicing costs. Used wisely, this is a good thing, but there be little doubt that its main aim is not structural but is being done to buy time. If monies had been put into much-needed infrastructure development, it would perhaps have been more warmly received.  

Eskom’s Energy Availability Factor (EAF) reached its lowest ever figure last week, as shown in the table below: 


_{Source: Eskom Weekly Status Report} 

The EAF is directly related to the frequency of loadshedding, so this doesn’t augur well for the outlook for loadshedding relief anytime soon.  

However, coinciding with this rather sombre outlook from Eskom is the revelation that private rooftop solar-generated electricity has been growing apace in the past eighteen months and now constitutes around 5Gigawatts of useful electricity, which equates to approximately three power stations of the capacity of Koeberg on the Atlantic shore near Cape Town. 

 

_{Source:Eskom Weekly Status Report}

May 29th has been announced as the date for the South African national elections.  

Upcoming local data releases include the Absa Purchasing Managers Index (PMI) on Mar 1 as well as the NAAMSA new vehicle stats on the same day.  

Global Macro 

According to the Bureau of Economic Analysis, real US gross domestic product (GDP) increased at an annual rate of 3.2 percent in the fourth quarter of 2023, according to the “second” estimate. In the third quarter, real GDP increased 4.9 percent. The increase in the fourth quarter primarily reflected increases in consumer spending, exports, as well as state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. 

 

The UK is officially in a technical recession as it has suffered two consecutive quarters of negative economic growth. But this recession may be relatively shallow and short-lived event. When the latest figures are revised, the country may just avoid a recession altogether, albeit by a slim margin.

 

Wages and salaries are rising rapidly, outstripping inflation. Additionally, house prices and mortgage approvals are rising once more, as are financial transactions; NatWest reports a “slight uptick in demand for business loans” and retailers are doing well on the back of rising real wages, according to The Telegraph. 

 

According to the ONS, the UK’s real GDP is estimated to have fallen by 0.3% in Quarter 4 (Oct to Dec) 2023. This follows an unrevised estimated fall of 0.1% in the previous quarter. Across Quarter 3 (July to Sept) and Quarter 4 2023, ONS estimates that the UK economy contracted by a cumulative 0.5%. Compared with the same quarter a year ago, real GDP is estimated to have fallen by 0.2%. 

Some would argue unacceptably high immigration – net migration hit a record 745,000 in 2022 –  that the headline GDP figures would have been much worse. And the very low apparent rate of unemployment, which fell to 3.8% at the end of 2023, can at least be partially explained by people of working age voluntarily falling out of the workforce, a continuation of the Great Resignation.  

Today, almost 22% of working-age people in Britain don’t work, an increase of 700, 000 in 2019, with a record 2.8 million citing long-term sickness. Many of these people are claiming sickness and/or disability benefit of some description. One of the consequences is that often employers are having to recruit from overseas, further increasing pressure on housing and public services.

 

China’s central bank cut its five-year rate last week, but its one-year rate remained unchanged.  The People’s Bank of China kept its one-year loan prime rate steady at 3.45%,  while the five-year loan prime rate, was cut by 25 basis points to 3.95% in an attempt to support the Chinese real estate sector.

 

Featured Stock 

City Lodge Hotel Group (CLHG) recently released a solid set of interim results, for the six months to end December 2023. This was the first time since Covid restrictions ended that like-for-like comparisons ie without any Covid-related bases could be made.  

CLHG has survived the pandemic and metamorphosed into a far more sustainable business. Food and beverage are a much higher component than they previously were, and the group is now debt-free. Operating from 59 hotels with 7 534 rooms, CLHG currently owns the bulk (48) of the hotels, with 11 hotels being leased.  

For the interim period, group revenue rose by 18% to R1 billion, aided by average occupancy levels rising from 57% to 61%. The average room rate increase was 9%, which is a good achievement in such a tight market. Profit for the interim period grew by 10%, from R98 million to R107 million and headline earnings per share (HEPS) rose by 10% from 17.1c to 18.8c. HEPS excluding the business Interruption insurance receipts in the prior year together with the unrealised forex gains and losses rose by 66% to 20.0 cents per share. 

A 20% increase in the interim dividend, from 5c to 6c/share was declared. For the first time ever, the group bought back its own shares-2 million at an average price of R4-48 were repurchased and cancelled. A further 2 million shares were repurchased in the third quarter of the current financial year. There is no debt on the balance sheet and the group now has access to R600 million in debt facilities and a R115 million overdraft facility.

CLHG’s outlook for the remainder of 2024 looks promising, with occupancies and room rate increases looking similar to the first half. The group will continue with its extensive refurbishment programme and it now has the financial muscle to keep the properties looking fresh and inviting.  

At the current share price of 444c, the historic PE ratio is 14.7 times, based on HEPS of 30.3c. Assuming a 10% increase in HEPS for the year to end June 2024, the prospective PE ratio becomes 13.3 times. This is a reasonable rating in a market that is currently treading water. However, if the dividend increase of 20% is maintained at year end, taking the full year dividend to 15.6c, the prospective dividend yield is 3.5%, which is very attractive.