TFSA Newsletter November 29 2023

ThinkMarkets outlook: South Africa's economic landscape and global ties 
 

Local Macro 
 

The SA Reserve Bank’s Monetary Policy Committee (MPC) left the repo rate unchanged at 8.25% at the final meeting of the year on November 24. The MPC’s decision was unanimous, with all members voting to keep rates unchanged.  



Meanwhile, SA inflation moved up to 5.9% in October from 5.4% in September and is the third consecutive month of increase. Ordinarily, this would have resulted in an increase in the repo rate in an attempt to curb inflation, but the MPC is no doubt aware of the damaging consequences that a rise in the repo rate would have on the SA economy at this point in time. Apart from anything else, most global central banks are now adopting a pause position with respect to interest rate increases.  



 

Last week the Competition Commission announced that the Standard Chartered Bank of the UK had been fined ZAR42 million in terms of an administration fine relating to the manipulation of the rand.  
 

According to the Commission, the; Standard Chartered Bank (SCB) participated in the manipulation of USD/ZAR currency pair by fixing bids, offers, bid offer spreads, the spot exchange rate, and the exchange rate at the FIX. Further, SCB participated by dividing the markets by allocating customers in terms of which one trader withholds or pulls his/her existing bid or offer from the  market  to  allow  the  other  trader  to  execute  and  complete  his/her trade.  This  conduct contravenes section 4(1)(b)(i) & (ii) of the Competition Act, 89 of 1998, as amended. 
 

The settlement comes at a time when respondent banks are currently appearing before the Competition Appeal Court (“CAC”) seeking an order to set aside a Competition Tribunal (“Tribunal”) order of 30 March 2023 which ordered respondent banks to file their answers to the complaint referral. 
 

This case drew a lot of public attention. Many observers and commentators had to go to great lengths to demonstrate that the impact was always short-term movements in the rand, not a consistent reduction in its external value. But to no avail,the damage had been done and politicians made huge political capital out of it.  
 

Eskom unexpectedly pushed loadshedding to stage 6 last week, after the utility used up its reserves of diesel and hydro resources. Loadshedding for the first nine months of 2023 is already significantly worse than it was for the whole of 2022 with few if any signs of improvement in prospect for next year. Having said that, intuitively at least there appear to be signs that the overall situation is improving. The private sector is generating significant new capacity and the Koeberg upgrade comes into force next year as well. An additional unit at Kusile has been synchronised to the grid. Additionally, it is an election year, and the governing ANC will no doubt be trying hard to keep the lights on, at least during the run-up to the election.   

Global Macro 
 

In a wide-ranging critique of UK chancellor Jeremy Hunt’s Autumn Statement last week, the Office for Budget Responsibility (OBR) made the following observations;  
 

 1.1 The UK economy has proved to be more resilient to the shocks of the pandemic and energy crisis than anticipated. By the middle of this year, the level of real GDP stood nearly 2 per cent above its pre-pandemic level and around 3 per cent above our March forecast. But we now expect the economy to grow more slowly over the forecast period, leaving the level of real GDP only ½ a per cent higher in the medium term than in our March forecast. Inflation is expected to be more persistent and domestically fuelled than we previously thought, falling below 5 per cent by the end of this year but not returning to its 2 per cent target until the first half of 2025, more than a year later than in March. Markets now expect interest rates will need to remain higher for longer to bring inflation under control. Despite the more challenging outlook for the real economy, higher inflation leaves nominal GDP nearly 5½ per cent higher by the start of 2028 than we forecast in March. 
 

1.2 More persistent, domestically driven inflation boosts nominal tax revenues compared to March. But it also raises the cost of welfare benefits, and higher interest rates raise the cost of servicing the Government’s debts. It is mainly due to the Chancellor’s decision to leave departmental spending broadly unchanged that higher inflation and other forecast changes reduce borrowing by £27 billion in 2027-28 compared to our March forecast. The Chancellor spends this windfall on cuts in National Insurance Contributions, permanent up-front tax write-offs for business investment, and a package of welfare reforms, which together provide a modest boost to output of 0.3 per cent in 5 years. He still meets his target to get debt falling as a share of GDP in 5 years’ time by an enhanced margin of £13 billion, but mainly thanks to the rolling nature of the rule giving him an extra year to get there. And while personal and business tax cuts reduce the tax burden by ½ a percentage point, it still rises in each of the next 5 years to a post-war high of 38 per cent of GDP. 
 

Economic outlook 
 

1.3 The economy recovered more fully from the pandemic and weathered the energy price shock better than anticipated. ONS revisions now show that the economy recovered its pre-pandemic level at the end of 2021 and was 1.8 per cent above it in mid-2023, rather than 1.1 per cent below as we had assumed in March. Revisions to growth rates in the last couple of years were more muted, but the economy has so far also proven more resilient than we expected in the face of higher energy prices, inflation, and interest rates, with cumulative growth nearly 1 percentage point stronger in the first half of 2023 than our March forecast. The combined effect of the historical revisions and latest outturns leaves the level of real GDP at the start of this forecast almost 3 per cent higher than we thought in March. But survey data suggest that much of that unexpected economic strength can be attributed to a modest degree of excess demand, rather than the excess supply we anticipated in March. 
 

1.4 We therefore expect inflation to remain higher for longer, taking until the second quarter of 2025 to return to the 2 per cent target, more than a year later than forecast in March. Inflation is also more domestically fuelled with a more positive starting output gap and stronger nominal wage growth more than offsetting the faster-than-expected decline in gas prices. From a peak of 10.7 per cent in the last quarter of last year, CPI inflation is now expected to fall to 4.8 per cent in the final quarter of 2023. As a moderate degree of spare capacity in the economy opens and gas prices fall further, inflation dips slightly below the 2 per cent target between 2025 and 2027, before returning to it at the forecast horizon. 
 

A temporary ceasefire began in Gaza last weekend, seeing an exchange of hostages by both Israel and Hamas, as well as much-needed humanitarian aid into the Gaza Strip. However, this ceasefire is unfortunately short lived and hostilities appear to have resumed.   
 

No sooner had Argentina been invited to join BRICs that politics came along and dealt the organisation a massive blow. On the weekend of 19 November, far right candidate Javier Milei won the Argentine presidency with a convincing 56% share of the vote. A populist, Milei has some extreme views including the dollarization of the economy in an attempt to rein in the country’s pernicious inflation. Milei is also no friend of Russia or China, two of the founding members of BRICs. And he has made it clear that he doesn’t want Argentina to join BRICs at all.  
 

It’s not at all clear what Argentina would have gained by being a member of BRICs. It’s a jaded old second-world economy that’s had more than its fair share of political and economic upheavals in the past few decades. But in the early 1950s, Argentina was at the forefront of scientific research into nuclear fusion with its short-lived Huemul project.  
 

The economy today is struggling with hyperinflation, but Argentines are used to this state of affairs and have for many years been avid hoarders of physical US dollars in an attempt to immortalize their savings. And successive governments have been addicted to debt but are not so happy to repay it to the IMF and other bodies when required to do so. BRICs membership may conceivably have been viewed by the previous government as a way of tapping China and the BRICs Development Bank (effectively the same thing) for more debt. The Milei government certainly won’t be having any of that.  
 

Milei and his far-right government will not be alone in South America. Chile recently moved very far right in its politics, and the winds of political change appear to be blowing in many other South American countries. Some of its neighbours may not like what has happened in Argentina’s politics, but they are putting a brave face on it for now.  
 

Featured Stock 
 

Mr Price released its interim results to 30 September last week. For a value retailer, offering fashion at a low, these were extremely poor results, but the share price finished 8% higher on the day, presumably on the expectation that this was the low point in the current cycle and the only way forwards is up. There may be some merit in this argument, however it also needs to be remembered that Mr Price is encountering strong competition from the likes of far eastern online-only suppliers such as Shein and that situation is likely to persist unless the SA authorities move to limit their operations. 
 

For the six months to end September 2023, group revenue rose by 27.8% to R16.1 billion, although if the recently acquired Studio 88 is excluded from the calculation, comparable turnover growth was only 3.8%. And if the effect of all new stores is excluded, in order to show true like-for-like turnover growth during the period, it reduces even further, to-0.8%.  
 

Operating profit fell by -0.4% to R1.9 billion and the operating margin slumped by 320 basis points to 11.5%. Diluted headline earnings per share (HEPS) fell by -9.6% to 439.5c and a 283.5c per share dividend was declared. There is no interest-bearing debt on the balance sheet.  
 

At the current share price of 15739c, the historic PE ratio is 13.6x, which compares with 12.3x for TFG and 9.1x from Truworths. Unless and until there is some clarity surrounding what will happen with the competition from online Chinese retailers, Mr Price is best left alone for the time being. 



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