Local and global macroeconomic outlook – February 2024

The S&P500 closed above the 5,000 level for the first time ever on Friday, 9 February 2024 due to good earnings reports and expectations for lower interest rates. Although the market may be getting somewhat ahead of itself in terms of seeming irrational exuberance, the fundamentals in terms of earnings are looking very good indeed.  

With 2/3 of companies having reported their fourth quarter 2023 earnings, some 80% of index companies beat estimates, exceeding the 10-year average of 74%, according to Bloomberg. 
 

Local Macro 

The National Budget will be delivered by Finance Minister Enoch Godongwana next week, 21 Feb. The Minister is in an especially tight spot, as he will want to make this a giveaway budget for the poor. However, he may realise that he has an empty war chest with which to achieve this. 

A number of commentators have suggested that a VAT rise is on the cards, but this would have to be done delicately so as not to impact the poor. Taxes will undoubtedly rise even if it’s just via the impact of fiscal drag.  

The recent Mining Indaba, held in Cape Town since 1994, was the biggest in its 30-year history. Statistics SA released the December 2023 retail sales figures on 14 February and they were surprisingly strong. Year-on-year growth in constant 2019 sales grew by 2.7%, resulting in a -1% decline for 2023 as a whole. Only September and December produced positive growth in 2023.  


Following on from a very large decline in November, sales in the clothing, footwear, textiles & leather (CFTL) category bounced back strongly in December.  



The local home improvement category, as proxied by the hardware, paint & glass subset, remained in negative territory. However, the trend appears to be bottoming out. This is good news for JSE-listed shares such as Cashbuild and Italtile, which have been taking strain for a long time.  


 

Global Macro 

The US Labour market remained very tight in January 2024, with US nonfarm payrolls easily beating expectations, at 353, 000. This compares with an upwardly revised 333, 000 in December.



The S&P 500 Global US Composite PMI has remained above the 50% mark for at least the past year. 



On the other side of the Atlantic, however, things are not nearly so buoyant. The Euro Area Composite PMI remained in negative territory (<50%) for the sixth consecutive month.   



Now that the liquidation of Chinese property group Evergrande has been ordered, the process of attempting to restructure this extremely messy structure begins. But it puts the Beijing authorities in a difficult position. 

Foreign bondholders in Evergrande with be left with virtually nothing, which hardly paints the Chinese capital market in a positive light. Evergrande defaulted owing its creditors $300 billion and other property companies in China will be watching nervously to see what eventually happens to Evergrande and its creditors.  

The CSI 300, the benchmark of the Chinese (Shanghai) Stock Exchange, is more than 20% down over the past year and even the very long term picture is not good; over 20 years, the CSI 300 has only doubled, while the S&P 500 has quadrupled in the same time period and the Indian stock market has risen 10-fold. The only positive factor is that Chinese stocks are cheap, trading on an average PE ratio of less than 10 times.  

Meanwhile, both Chinese producer price and consumer price inflation remain in deflation territory.  The only bright spot in an otherwise fairly depressing economic landscape was that the Caixin PMI remained above the 50 marks, signifying an expansion in the economy, for the 13th consecutive month.  


 

Featured Stock 

Woolworths Holdings had a poor trading update recently, with Headline Earnings Per Share (HEPS) expected to decline for the six months to end December 2023.  

Woolies Food delivered solid growth, re-enforcing its strength and resilience. Turnover and concession sales grew by 8.4% and by 7.2% on a comparable store basis, notwithstanding the impact of increased levels of loadshedding. 

Underlying product inflation for the period averaged 9.1%. Space grew by 3.3% over the prior period, while online sales increased by 46.6%, contributing 5.1% of South African sales, driven primarily by increased penetration of the on-demand Woolies Dash offering. 

Sales in the clothing division for the 26-week period were impacted by poor availability, due in part to the late arrival of certain summer ranges arising from congestion at the ports. Turnover and concession sales only grew by 2.2%, with comparable store sales increasing by 1.5%.  

Trading conditions in Australia and New Zealand have deteriorated further, with consumer sentiment in Australia at near-record lows, and household savings the weakest since the global financial crisis. In addition, the retail industry has been disproportionately impacted by the shift in spending away from goods to services.  

Country Road sales for the current period declined by 5.0% and by 9.5% in comparable stores, off a high prior period base in which sales grew by 25.5% following the strong recovery from the Covid-impacted lockdowns. Sales growth in the last six weeks of the period was positive, at 1.3%. Trading space increased by 6.6% during the period, supported by the ongoing expansion of wholesale and concession channels. The contribution from online sales increased marginally to 26.8% of total sales. 

Even allowing for the fact that David Jones is no longer part of the group, adjust HEPS are still forecast to decline in the region of -3% to -8% for the interim.  

Woolies is currently trading on a somewhat rarefied PE ratio of over 13x, which appears unjustified in this type of environment.