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Local Macro
There was plenty of controversial news in South Africa during the past two weeks. At long last, parliament passed the National Health Insurance (NHI) Bill though as yet, no details regarding its funding have emerged. This bill aims to provide free healthcare at the point of delivery, in similar vein to Britain’s NHS, but critics of NHI point out (correctly) that NHS is funded by significant tax contributions by working people in Britain. National insurance (NI) contributions in Britain comprise about 20% of the total budget and people contribute according to their salary bands. Higher salaried employees pay proportionately more than more lowly paid employees. The point to be made is that NHS is not free; it is rather expensive but it has been a feature of British life since 1948 and for all its faults, works reasonably well.
NHI is being proposed at a time when South Africa’s tax base is tiny and shrinking so it doesn’t take a genius to work out that it’s unlikely to succeed, at least in the short term. It is probably being bandied about for political purposes by the Governing ANC to show its supporters that it really does mean business, hoping that these voters don’t ask too many probing questions.
The bottom line is that, even after this bill is passed by the National Council of Provinces and signed into law by president Ramaphosa, it will probably take many years to reach fruition, if indeed it ever gains any material traction at all. The costs involved are just way too much for any government to contemplate when it is sitting with a material budget deficit and a small and shrinking tax base.
Last weekend, president Ramaphosa and other African heads of state embarked upon a peace initiative to Ukraine in an attempt to help negotiate an end to the bitter conflict in that country, caused by the Russian invasion. Unfortunately, it was overshadowed by a shambolic attempt to bring weaponry and journalists in on a separate SAA plane, which appeared to be jinxed almost from the start. The first problem arose when Italy refused to allow the plane to pass through its airspace, resulting in the aircraft circling in the Mediterranean at least six times.
Eventually it reached Poland but the Polish authorities wouldn’t allow anyone off the plane until the manifest had been checked. The journalists spend most of the day cooped up on the tarmac while diplomatic efforts to resolve the situation were made. Apparently, the documentation relating to the crates of weaponry was photocopied and not the original documentation. Eventually the journalists were allowed off the plane and escorted to their hotel. But they never got to interview people and flew back to South Africa the following day. It was a fiasco and the war in Ukraine carries on regardless.
South African consumer price inflation (CPI) for May was released on 21 Jun and printed at 6.3% from 6.8% in April.
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The annual rate for food and non-alcoholic beverages (NAB) was 11.8%, lower than April’s print of 13.9%. The price index for this category increased by 0.3% between April and May, the lowest monthly reading since November 2021 (0.1%).
Most food and NAB categories recorded lower annual inflation rates in May, with the exception of sugar, sweets & desserts, and cold beverages.
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Global Macro
The US Federal Reserve (The Fed) paused its upwards trajectory in interest rate rises in July but warned that there could be further rate hikes in H2.
US Fed Funds Rate (%)
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The European Central Bank (ECB) was more forthright, raising the repo rate by 25 bsais points and cautioning the market that there were more rate rises to come. ECB president Christine Lagarde warned that there would be another 25 basis point rise in July.
ECB repo rate (%)
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The Bank of England (BoE) will make its interest rate decision on Thursday 22 June and is likely to raise the bank rate by 25 basis points in an attempt to squeeze out the very rate of inflation in Britain.
Bank of England Prime Rate (%)
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UK debt to GDP surpassed 100% for the first time since 1961. This puts not stark relief why it is so important for the BoE to curb inflation. The following graph from the Office for National Statistics (ONS) demonstrates how the UK compares with other European countries in this regard.
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Inflation in the UK is proving to be very sticky, with consumer price inflation (CPI) remaining at an elevated level of 8.7% in May, unchanged from April. The graph below shows CPI, CPIH (CPI excluding housing costs) and OOH (Owner-Occupier Housing costs).
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Although significantly below the peaks of last year, natural gas prices in Europe have surged in the past few weeks.
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Natural gas futures in Europe jumped to as high as €50 per megawatt-hour, the highest in ten weeks after it was reported that the Netherlands will close Europe's largest gas site near the Groningen gas field due to the risks of earthquakes from October 1st.
European natural gas prices have been on the rise in the last two weeks as demand is expected to increase while the production in Norway, the biggest European supplier, was reduced. Several outages at Norwegian gas fields have been extended and works are set to continue into July.
Currently, Europe's gas storage is 72.6% full, and the European Union aims to achieve a storage inventory target of 90% by November 1.
Feature Stock
The Spar Group (SPP)
Spar is the second-largest food & drug retailers in South Africa after Shoprite and is the second largest Spar grouping after Spar Austria. So it’s a serious player in the JSE-listed retail space. But for the past year or so it has been struggling, both in SA and overseas. Locally, its operating profit margin fell by a full percentage point, from 3.2% to 2.2% and in Europe it’s taking strain with its Polish subsidiary. It also owns Spar Switzerland and because of the high price of good in Switzerland, Swiss shoppers are regularly getting their groceries in neighbouring countries such as Austria, France and Germany.
For the six months to 31 March 2023, group turnover increased by 7.9% to R72.9 billion, while operating profit fell by 17.5% to R1.5 billion. Diluted headline earnings per share (HEPS) fell by 30.2% to 447.7c and the dividend, which in March 2022 was 175 cents per share, was passed completely in an attempt to conserve cash. Debt:equity is now at 119% and a number of debt covenants with banks have been breached.
Spar is now faced with making some difficulty decisions. Such is the extent of this group’s problems that it cannot just trade its way out of the mess. Spar Poland will probably have to be sold, if a buyer can be found and the balance sheet will need to be beefed up via a rights issue, though management denies that this is being considered.
At the current share price of 10120c, Spar is trading on PE ratio of 10.5 times, which seems expensive for a company that doesn’t pay dividends and which has a lot of hard work ahead of it in terms of restoring profitability. The share price is trading at roughly half of its peak of 21871 in early 2018 and is back at levels last seen in 2012.
Best avoided for the time being.
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The Spar Group chart shows its price is in a clear short-term downtrend (light pink ribbon) and a long-term downtrend (dark pink trend ribbon). On balance, these ribbons demonstrate investors are providing greater supply of The Spar Group shares into the market than they are demanding. This implies there is a lack of confidence among investors with respect to the future prospects for the company, and that investors are perceiving better investing opportunities elsewhere.
The short term-trend ribbon is impeding price appreciation around 11,000. We are indeed seeing the manifestation of supply at that level with the prevalence of long upward pointing candle shadows as well as black candle bodies. The 14 June peak of 10,963 is the key point of supply going forwards, and it would be best to wait for a close back above this price before considering buying The Spar Group as this will most likely revert the price action back to higher peaks and higher troughs.
For those who are existing owners, I can see a reason to hold The Spar Group while it continues to trade above the 6 June low of 8945. Below that, it resumes the prevailing downtrend.
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