Local and global macroeconomic outlook for January 2024

Heightened geopolitical tensions, sustained higher interest rates, and China’s economic slowdown pose significant risks to global growth and supply chain stability in 2024. Only countries and companies with robust and relevant strategies designed to adapt to this reality will survive and prosper. 
 

Local Macro 
 

Eskom managed to operate uninterrupted without any loadshedding at all for 22 consecutive days until January 2. Although in a normal economy, this wouldn’t be regarded as anything out of the ordinary, in the South African economy of recent years, it is quite an achievement. It is to be hoped that this good performance can be sustained into the new year and improved. 
 

Integrated Resources Plan IRP 2023 sees 100 MW of new electricity capacity added by 2025 and sees loadshedding being eradicated fairly shortly.  
 

The date for the general election in South Africa has not yet been announced but it must be within 90 days of the end of the existing parliament, which will expire in mid-May. Therefore, the election could theoretically be held any time between mid-February and mid-August.  

Global Macro 
 

The price of Uranium has showed considerable strength for a couple of years now. This uptick in price is likely to continue for the foreseeable future due to two reasons – enhanced demand for Uranium by nuclear power plants due to its zero carbon emissions and geopolitical tensions in uranium-producing countries, mainly Kazakhstan and Russia.  
 

There is no doubt that the increased use of electric vehicles (EVs) in the future will result in greater demand for electricity production. As fossil fuels become labeled as unsustainable, nuclear energy, with its zero-carbon emission, rises in popularity. 
 

However, potential investors need to be aware that these dynamics can change rapidly, as was the case when the Japanese earthquake and tsunami caused the meltdown at the Fukushima nuclear plant in Japan in March 2011. Accidents such as these cause a rapid movement away from nuclear energy production.  
 

The price of gold (XAUUSD) broke through the psychologically important $2000/oz level late last year and has hovered just above that level ever since. The move higher has held following Fed chair Jay Powell’s dovish stance at the November 2023 FOMC meeting.  
 

This has resulted in US Treasuries staying around the 3.95% level for the 10-year, weighing on the dollar and supporting gold prices. Tensions in the Middle East is also adding to gold’s ‘war premium’, with the US intercepting Houthi missiles targeting its vessels in the Red Sea.  
 

The US Federal Reserve is signalling that the period of rising interest rates is over and that rates should start softening this year. However, the pace at which US equity markets have risen in recent weeks is probably discounting a far faster reduction in rates than is likely to be the case.  

After many years of strong economic growth, the outlook for China’s GDP is now quite grim in comparison. And although the country will still manage to eke out positive growth this year and next, it will likely be considerably lower than in previous years. A number of factors are at play in China’s slowdown.  
 

There is a gradual slowdown in the global economy and the knock-on effect on China, which has hitherto been the “world’s manufacturing plant” has been noticeable. It has resulted, among other things, in rapidly increasing youth unemployment, which currently stands at over 20% and rising. This doesn’t bode well for a society that, until recently, boasted the benefits of near full employment.  
 

Secondly, there is the well-signalled problem of the collapse of Chinese real estate sector, as reflected in the ongoing problems of companies such as Evergrande and Country Garden. These can’t just be laughed off by the Chinese authorities, as they were instrumental in directing the savings of small investors into these entities over a decade ago. Now that this has gone sour, Chinese citizens are naturally resentful of the way in which their savings have been decimated. 
 

And then finally there is the ongoing problem of poor demographics. The Chinese population is declining and the move from a one-child to a three-child policy is too little too late. 
 

These negatives are reflected in the continuing decline in the Chinese stock market.  

Although the UK economy grew slightly stronger than expected in November, the economy runs the risk of slipping into a mild recession in 2024. This would be a serious blow to the incumbent Conservative government ahead of the general election that is expected in the autumn. According to the Office for National Statistics (ONS), UK GDP rose by 0.3% in November, following a 0.3% decline in October. The main points in the ONS stats released on 12 January were as follows; 
 

Real GDP is estimated to have fallen by 0.2% in the three months to November 2023, compared with the three months to August 2023. 
 

Monthly GDP is estimated to have grown by 0.3% in November 2023, following an unrevised fall of 0.3% in October 2023. 
 

Services output grew by 0.4% in November 2023 and was the main contributor to the monthly growth in GDP; this follows a fall of 0.1% in October 2023 (revised up from a 0.2% fall in our previous publication). 
 

Production output grew by 0.3% in November 2023, following a fall of 1.3% in October (revised down from a 0.8% fall in our previous publication). 
 

The construction sector fell by 0.2% in November 2023 after a fall of 0.4% in October 2023 (revised up from a 0.5% fall in our previous publication). 
 

According to Time Magazine, National elections are scheduled or expected in at least 64 countries, as well as the European Union, which all together represent almost half the global population. Notable among these countries are the US with its presidential election in November, Russia and the UK. 
 

Donald Trump is currently the clear favourite to win the nomination from the Republican Party, but much can happen between now and November. Trump is facing a number of lawsuits in multiple US states, some of which could bar him from running for the presidency.  
 

Vladimir Putin is virtually guaranteed to win the presidency of Russia, while the governing Conservatives are likely to suffer a crushing defeat at the polls in the UK later this year, if current opinion polls continue their trend.  
 

Trade choke points have become increasingly vulnerable due to terrorism in recent times. And although the US and UK have sent warships to various middle eastern hotspots in an attempt to deal with terrorist attacks, the size and scale is often too daunting, even for these mighty navies. 
 

Pirates in the Red Sea, using the Israel/Gaza conflict as a convenient excuse for their actions, have attacked a number of vessels, often ships that have no connection to Israel at all. This type of action has resulted in a number of large ships being diverted around the southern tip of Africa to avoid trouble, but the cost involved, both in time and money, is considerable.  
 

And in the Malacca Straits, a 500km stretch of water that connects the Indian Ocean to the South China Sea/Pacific Ocean, incidents of piracy have been increasing. This is of particular concern to China, as the bulk of its imports and exports go through this sea lane and anything that disrupts this can have a major impact on Chinese supply chains. With this in mind, China and Thailand appear to have reached an agreement on dredging a wide canal in the southern Kra Peninsula of Thailand that would provide a safer, quicker route between the Indian and Pacific Oceans. 
 

Featured Stock 
 

City Lodge Hotel Group (CLHG) gave a voluntary trading update in late November last year in which management stated that average occupancies had exceeded pre-Covid levels. Both corporate and leisure travel have returned to normalised pre-Covid trading levels, which is really good news for this well-managed hotel chain. 
 

The group achieved a 62% average occupancy level for the three months ending on 30 September 2023, which compares with 54% for the corresponding period in 2022. The group managed to get an average of 9% increase in room rate compared with the previous comparative period, which follows a 12% increase for financial 2023. The breakeven occupancy level is around 38%, so at these types of occupancy, the group is making nice profits.   
 

CLHG’s interim results are expected on 23 February and strong earnings and dividend growth is expected. At the current share price of 490c, the historic PE ratio is 16.2x, which is quite demanding especially considering the tough times the group has experienced in recent years, especially during lockdown. But if the strong occupancy levels translate into further strong earnings and dividend growth, then the PE ratio will fall sharply. 

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