TFSA Newsletter May 8 2024

Market Sentiment

The S&P 500 (SPX500) continued a gradual uptick over the past two weeks, following the mid-April selloff. But it is still struggling to get back to its recent all-time high of 5 247 in late March. There was a synchronised improvement in demand for commodities, notably Copper, during April.



Apple reported a quarterly revenue of $90.8 billion, down 4 percent year over year, and quarterly earnings per diluted share of $1.53. Although not great, these earnings were better than the market was expecting. Apple has declared a cash dividend of $0.25 per share, an increase of 4 percent.

The dividend is payable on May 16, 2024 to shareholders of record as of the close of business on May 13, 2024. The board of directors has also authorised an additional program to repurchase up to $110 billion of Apple’s common stock, a record share buyback.

However, iPhone sales dropped by 10% year over year during the quarter and by 8% alone in China. The iPhone is taking serious strain from competitively priced rival products made by Chinese companies such as Huawei. It is also perceived to be slow in adopting Artificial Intelligence (AI) in its products.

Over the past weekend, at the annual Berkshire Hathaway shareholders event in Omaha Nebraska, founder Warren Buffet revealed that he had reduced his stake in Apple recently, though he bemoaned the fact that he is struggling to find another stock to “move the needle” in the way that Apple has done over the years. Berkshire Hathaway’s cash pile now stands at $189 billion.



The biggest news on the JSE in the past fortnight has undoubtedly been the M&A activity surrounding Anglo American. Anglo, once the largest company by market capitalisation listed on the JSE, found itself on the receiving end of an all-share bid from a much larger rival, Australian mining conglomerate BHP. The bid valued Anglo at $38.9 billion. And while the Anglo board has rejected the bid, it seems likely that this will not be the end of the story, with possible suitors emerging from China or India and BHP itself making a revised bid.

BHP’s initial offer for Anglo was highly conditional but the net effect on Anglo (apart from a probably gradually improving share price) is likely to be that management will be distracted by having to fend off competing bids, all the while having to cope with anti-competition and other regulatory challenges.

Despite statements to the contrary, BHP doesn’t want the South African assets of Anglo, hence the conditionality on unbundling Anglo Platinum and Kumba Iron Ore.

The reason for BHP’s interest in Anglo is copper. If successful, the combined group would produce around 10% of global copper production, an essential metal in the growing electric vehicle fleet worldwide.

In the normal course of events, Glencore would have been a natural suitor, but its plate is currently full of its recent acquisition of Elk Valley Resources.  However, Glencore shouldn’t be ruled out, as a bid for Anglo from this source might be less conditional and thus more palatable to both the Anglo board and its main shareholder, the Public Investment Corporation (PIC) in South Africa.


 

Local Macro

According to Reuters, South African manufacturing activity improved in April, the Absa Purchasing Managers' Index (PMI) survey showed last week, helped by there being no rolling power cuts for the whole of April. The seasonally adjusted PMI rose to 54.0 points in April from 49.2 in March, rising above the 50-point mark that separates expansion from contraction.



According to Engineering News, South African vehicle exports soared to record levels in 2023. Despite a tough domestic economy undermining a recovery in new-vehicle sales to pre-pandemic levels, record vehicle exports in 2023 ensured that the South African automotive sector still managed to outperform the rest of the manufacturing sector, says Naamsa | The Automotive Business Council chief trade and research officer Dr. Norman Lamprecht.

The value of vehicles and automotive components exported from South Africa last year increased by R43.5-billion, or 19.1%, from the R227.3-billion recorded in 2022, to a record R270.8-billion – taking it to 14.7% of total South African exports.

The South African General Election is now only three weeks away, on 29 May. Opinion pollsters are working overtime to try and second-guess what the result will be and what the impact may be on the ZAR and the SA economy. Moody’s Investor Services has warned that the administration that takes power following the election will face a handful of long-standing structural issues that weigh on the country’s economic growth and creditworthiness. These issues included stimulating years of sluggish economic growth, curbing chronic power shortages and reducing very high unemployment.
 

Global Macro

According to the Bureau of Economic analysis (BEA) real US gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024, according to the “advance” estimate. In the fourth quarter of 2023, real GDP increased 3.4 percent. The increase in the first quarter primarily reflected increases in consumer spending and housing investment that were partly offset by a decrease in inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.



Following the May Federal Open Market Committee (FOMC) meeting last week, it appears that interest rates are destined to remain higher for longer, as many market participants had anticipated. According to the Financial Times, the US Federal Reserve (the Fed) has signalled that US borrowing costs are likely to remain higher for longer as it wrestles with persistent inflation across the world’s biggest economy.

The FOMC said after its meeting on Wednesday 1 May that there had been “a lack of further progress” towards its 2% inflation goal in recent months - new language that implied rate cuts will be delayed until the second half of the year at the earliest.

Ahead of the meeting, futures traders were betting on between one and two cuts this year, with the first reduction not fully priced in until December. Those expectations held true through the meeting, although traders added to their conviction about a cut towards year-end.



Total US nonfarm payroll employment increased by 175 000 in April, and the unemployment rate changed little at 3.9 percent, the US Bureau of Labor Statistics reported Friday, May 3 2024. Job gains occurred in health care, in social assistance, and in transportation and warehousing. The change in total nonfarm payroll employment for February was revised down by 34 000, from +270 000 to +236 000, and the change for March was revised up by 12 000, from +303 000 to +315 000.



According to S&P Global, The Caixin China General Composite PMI was at 52.7 in March 2024, up from 52.5 in the prior two months. It was the highest reading since May 2023, pointing to the fifth straight month of growth in private sector activity, as manufacturing output and services activity expanded at quicker rates. New order growth picked up, lifted by the strongest rise in export orders in 13 months. Meanwhile, employment fell marginally for the second straight month. Turning to prices, input costs eased amid the first fall in manufacturing input prices for eight months and slower service cost increases.



The Japanese yen sank to a 34-year low, trading as low as ¥160 to the US dollar on Monday 29 April. Japan’s currency has shed more than a third of its value over the past three years. The Bank of Japan (BoJ) has held interest rates “extraordinarily low”, even as they rise in other countries. It finally raised them in March – the first hike in 17 years – but only to just over 0%. At a meeting in late April, the BoJ held rates steady, signalling that it is in no rush to hike again and precipitating “another round” of yen selling.

While yen weakness does increase inflationary pressure, that is still not a pressing concern in Tokyo, since a weak currency has other advantages: it is helping exporters to stay competitive and driving a tourism boom.

The yen’s new low didn’t last long. In wild trading last week, it quickly gained 3% against the US dollar, triggering suspicions that the Japanese government had intervened to stem the bleeding. While Tokyo may not mind a steady decline, it wants to avoid a destabilising currency crash.