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Local Macro
The violent and disruptive minibus taxi strike in Cape Town and environs ended last week after a bitter and acrimonious situation was resolved between the City of Cape Town and the taxi association, Santaco.
The commission of enquiry that investigated the circumstances surrounding the Russian ship Lady R in Simonstown in December 2022 has completed its reported and presented its findings to president Cyril Ramaphosa. A few elements appear to have been leaked, though these have not been corroborated. The suggestion from these leaks is that the vessel loaded and unloaded food in the naval dockyard under cover of darkness. Interestingly, this happened after the vessel had sailed down the west African coast, round the Cape Of Good Hope and into Simonstown harbour with its transponder switched off, presumably to avoid detection. The mystery will remain until the report is declassified and made public.
Statistics SA released the June retail sales figures on 16 August and the downwards trend continues. Year on year, retail sales at constant 2019 prices declined by 0.9%, following a revised -1.6% decline in May.
Source: StatsSA, Gilmour Research
Every single month since the start of 2023, retail sales in total have declined. This hasn’t happened for many years and just underlines how badly the consumer is feeling the pinch at present.
Only two categories of spending experienced positive growth-clothing, footwear, textiles and leather (CFTL) and food, beverages and tobacco in specialised stores, with 5.8% year on year growth and 1.0% respectively. Furniture & household appliances (F&H), continued to experience the negative effects of high interest rates and this category saw another decline in sales in June.
Source: StatsSA, GilmourResearch
Hardware, paint & glass, a proxy for home improvement/ DIY, continued its long-term dismal decline, exhibiting a -4.4% decline in sales year on year.
Source: StatsSA, Gilmour Research
Global Macro
Russian rouble tanks to levels last seen in Feb 2022 and the outbreak of war in Ukraine.
On August 14, the RUB broke upwards through the psychologically-important 100 RUB/USD barrier, though it has subsequently strengthened, presumably after intervention from the Russian central bank. As can be seen from the graph, the RUB has been weakening considerably against the USD for the past eighteen months, as Russia’s trade balance with the rest of the world deteriorates. Cut off from many imports and exports to Europe and the rest of the west, Russia has turned increasingly to China and India for its trade. Its trade with both countries has increased substantially in recent months, notably Russian exports of heavily discounted crude oil. But neither China nor India are interested in buying Russian refined oil products, neither are they prepared to pay for their crude oil imports in RUB, insisting on payment in RMB or INR. China and India are eating Russia’s lunch, metaphorically speaking, by using their own refining capacity to refine Russian crude oil and selling the higher value refined products onto global markets. Once refined, these oil products can no longer be identified as Russian.
The US Consumer Price Index (CPI) rose slightly in July to 3.2% from 3.0%in June. In July, the CPI for All Urban Consumers increased 0.2 percent, seasonally adjusted, and rose 3.2 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.2 percent in July (seasonally adjusted); up 4.7 percent over the year (NSA).
According to Reuters, China's economic activity data for July, including retail sales, industrial output and investment failed to match expectations, fuelling concern over a deeper, longer-lasting slowdown in growth. This isn’t the first time that deep-seated concerns about China’s so-called “economic miracle” have surfaced, but this time, things appear to be quite different. Back in the 2007/08 Global Financial Crisis and the capital outflow scare in 2015, the Chinese Communist Party (CCP) just turned the infrastructure taps on and encouraged property speculation to pull out of the downturn. But this time around, the property boom has burst with major casualties still around and the infrastructure boom has created far too much debt. Which really only leaves consumer spending as the only feasible way out of this situation.
But this is easier said than done. Chinese consumers don’t like spending money sa they prefer to save for their old age and medical care. China’s social care system is relatively poor, which is why consumers like to save rather than spend. Until this feature is comprehensively addressed, China’s consumer economy will liley languish and the overall economy may stay depressed.
Household consumption expenditure (HCE) as a percentage of GDP in China is extremely low by world standards at around 40%. This compares with over 70% in most west countries and around 60% in South Africa.
The deflation that China is currently experiencing, both at a producer and a consumer level, could exacerbate an already bad situation; if consumers perceive the prices of goods to e cheaper a year hence, they will be further dissuaded from buying.
The Chinese central bank is cutting interest rates in an attempt to stimulate demand but it is too little, too late. Deeper cuts would have the disadvantage of causing the RMB to depreciate on global currency markets, something the CCP is keen to avoid.
So for the time being, China is caught in a lower growth scenario, from which it is finding great difficulty in extricating itself.
In a hard-hitting article in the Financial Times, BRICs creator Lord Jim O’Neill rubbished the idea of a BRICs currency to rival the USD ahead of the BRICs summit in Johannesburg later this month. O’Neill said that BRICs had “never achieved anything since they first started meeting@ eight years after he first count the term BRIC in a 2001 research note he prepared for Goldman Sachs when he was chief economist at that investment bank. O’Neill said that creating a common currency for the five strongly diverging economies would not be feasible. Referring to calls for a “trading currency” as “just ridiculous”, O’Neill said “They’re going to create a BRICs central bank? How would you do that? It’s embarrassing almost”.
The UK economy edged higher than consensus in Q2 2023, but still remains below pre-COVID levels.
According to the Office for National Statistics (ONS), monthly real gross domestic (GDP) is estimated to have grown by 0.5% in June 2023, following a fall of 0.1% in May 2023 and growth of 0.2% in April 2023, both unrevised from the previous publication.
A range of businesses cited the additional bank holiday in May as a reason for increased output in June 2023 compared with May 2023.
Looking at the broader picture, GDP has shown 0.2% growth in the three months to June 2023.
Production output grew by 1.8% in June 2023 after a fall of 0.6% in May 2023, unrevised from the previous publication; this sector was the main contributor to the growth in monthly GDP in June.
The construction sector grew by 1.6% in June 2023, following a fall of 0.3% in May 2023, revised down from a fall of 0.2% in the previous publication.
Services output was up 0.2% in June 2023, after showing no growth in May 2023, unrevised from the previous publication; output in consumer-facing services grew by 0.5% in June 2023, following an unrevised fall of 0.2% in May 2023.
Source: ONS
Feature Stock
Cashbuild released a truly horrific trading update last week. On a statutory basis, Cashbuild expects: - Headline earnings per share (HEPS) for the year ended 25 June 2023 of between 1 157.6 cents and 1 254.1 cents, being a decrease of between 35% and 40%, compared to HEPS of 1 929.4 cents for the prior year ended 26 June 2022; and - Earnings per share (EPS) for FY 2023 of between 418.9 cents and 523.7 cents, being a decrease of between 75% and 80%, compared to EPS of 2 094.7 cents for the prior year. The reason for the variance between HEPS and EPS noted above is mainly due to an impairment to the P&L Hardware goodwill and other store impairments based on rate changes as well as subdued forecasts within the current constrained economic environment.
Cashbuild is an extremely well-managed company and this poor performance I mainly as a result of the exceptionally difficult ambient economy. As the earlier graph of hardware, paint & glass from the paragraph on StatsSA shows, the home improvement sector is still languishing badly, with no signs of recovery. At some point, Cashbuild will offer value but not yet.
Click to enlarge chart
The Cashbuild chart shows the price is in a fledgling short-term uptrend (light green ribbon) but a well-established long-term downtrend (orange ribbon). The price action shows higher peaks versus lower troughs. The candles up until the last two weeks are predominantly supply-side in nature (i.e., black bodies and/or downward pointing shadows). In combination, these technical factors demonstrate very short-term excess demand versus long-term excess supply for Cashbuild shares.
The most recent peak on 15 August at 18,900 is now a key point of supply. If Cashbuild can set a trough higher than the 4 August low of 14,766, and then close above 18,900, the price action will have reverted decisively back to higher peaks and higher troughs. This would confirm the new short-term uptrend and begin to turn around the long term downtrend.
Analysts view: I would be comfortable adding risk to Cashbuild on a close above 18,900 with a candle which closes at the high of the session. Long positions could be maintained while the price continues to trade above the short-term trend ribbon.
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