SA Market News - 16 September 2022

Global Macro

Western media’s attention was squarely focused on the passing of Queen Elizabeth II last week and the announcement of Britain’s new prime minister, Liz Truss. But high inflation and the responses from the various global monetary authorities continued apace. The European Central Bank (ECB) hiked its repo rate by 75 basis points to %, a move that was widely anticipated. Inflation in the Eurozone printed at 9.1% in July but the ECB doesn’t expect recession. This seems remarkably optimistic, considering the highly negative factors currently assailing the single market. Us Federal Reserve (the Fed) chairman Jerome Powell hinted that the next move from the Fed at its next FOMC meeting later this month (20/21 September) would probably be another 75 basis point rise in Fed Funds rate.

Perhaps because of the sustained hawkish tone of the Fed, the US Dollar Index reached another record high and the euro and the pound sank back to multi-year low against the greenback. The euro is now below parity versus the US dollar while the pound is at its lowest level since 1985. The Japanese yen reached a 24-year low against the dollar last week. While the Fed maintains its hawkish standpoint, we should expect most other currencies to continue weakening.

US inflation printed at 8.3% year on year in August, down from 8.5% in July and 9.1% in June but nevertheless equity markets were softer in response. The food index was almost 12% higher, the highest 12-month increase since May 1979.
The war in Ukraine dragged on past the six-month milestone. What started out as a special operation (Russians can be jailed for referring to this conflict as a war inside Russia) that was supposed to only take three days and result in the overthrow of the Kyiv sovereign government has turned into a nightmare for the Russian military.

It’s always difficult to interpret precisely what is going on in Ukraine, thanks to the almost complete blackout of reliable news from Russia but there definitely appears to be a turning point in Ukraine’s favour in this war. It appears as if the Ukrainian army deliberately lured Russian troops to the south in order to defend a sustained Ukrainian counter-offensive in and around the Kherson Oblast region. Once those Russian troops had moved south, the Ukrainians appear to have mounted another successful counter-offensive in Kharkiv Oblast in the north of the country. Although not confirmed, it appears as if the Ukrainians have recaptured over 8 000 square kilometres of occupied territory. And the Russian troops have left behind hundreds, if not thousands of military vehicles which will no doubt be put to good use by the advancing Ukrainians. Anything that shortens this conflict has to be welcomed. Only time will tell if the reports reaching western media are accurate.
 
Local Macro

As widely anticipated, especially in light of the poor retail sales figures for June, South Africa’s GDP shrank by 0.7% in the second quarter of 2022, compared with a revised first quarter figure of 1.7%. Main culprits behind this contraction were the prolonged industrial action in the mining sector, continued rotational power outages (loadshedding in Eskom-speak) and the catastrophic floods in KZN. Manufacturing fell by 5.9% quarter on quarter and contributed the bulk (0.7 percentage points) of the GDP contraction. Agriculture fell by 7.7% and contributed -0.2 percentage points while mining fell by 3.5% and also contributed 0.2 percentage points.

The current account of the balance of payments also moved into deficit in the second quarter, caused mainly by dividend payments by South African companies to large overseas shareholders who own in excess of 10% of these companies.

The RMB/BER Business Confidence Index (BCI) fell further from 42 in the second quarter to 39 in Q3, suggesting that more than six out of ten respondents were unsatisfied with prevailing business conditions. Meanwhile, sentiment amongst consumers also stayed downbeat. The FNB/BER Consumer Confidence Index (CCI) rose by just 5 index points to reach -20 in Q3, from -25 in the previous quarter. The current reading remains at multi-decade lows.

Although the ZAR didn’t plumb new depths against the dollar, it remained under heavy pressure last week, as did most emerging market currencies. Inflation in South Africa is printing at considerably lower levels than many of its trading partners but not too much comfort should be drawn from this as there may yet be some upside momentum to local inflation. Having said that, over the next few months, the peak of inflationary pressure from fuel and food effects should be over. While the next interest rate hike from the SARB’s MPC on September 22 will most likely be another 75 basis points, beyond that, rate increases should “normalise” to levels nearer 50 basis points or even 25 basis points.

The dreary Eskom loadshedding saga continued into September, with rolling power cuts expected to remain in place until Friday 16 September.

Featured Stock-Shoprite (SHP)

Shoprite is the largest food retailer in South Africa and the largest retailer in the whole of the African continent. It boasts many superlatives such as turnover of R185 billion and employing over 140 000 people.  It ranks among the top 100 retailers globally in terms of turnover, according to international accounting firm Deloitte. Its market capitalisation of R133 billion is substantially larger than that of Pick n Pay, Spar and Massmart combined. And yet, even from such a high base, it managed to exhibit very strong earnings and dividend growth in the year to end June.
For the 52 weeks to 30 June 2022, Shoprite’s turnover grew by 11.9% to R184.1 billion and on a comparable basis, excluding the impact of new store space, it grew by 8.1%. Market share was gained but no indication was given as to which other chain lost market share to Shoprite. However, in its presentation pack, Shoprite gave a breakdown of market share in the various categories in which the group operates. In the very low-end segment of the market, the group estimates it has an 18.3% share with its limited assortment USave brand. It reckons it has 32.1% of the middle to lower-end market with the Shoprite brand and 13.8% of the middle to upper end market with Checkers & Checkers Hyper brands. 

Within the rest of Africa, Zambia was the best-performing market while the group exited Madagascar and Uganda last year and is now trading in 10 countries on the African continent outside of South Africa.

Basic headline earnings per share (HEPS) rose by 10.3% to 1 055c and a full year dividend of 600c was declared, also rising by 10.3%. At the current share price of 23210c, the historic PE ratio is 21.9x and the dividend yield is 2.6%. Not cheap, but not expensive either for this degree of quality.  

Winners & Losers
 

Winners	(%)
Labat Africa	+7.14
1nvest Gold ETF	+4.98
CA Sales Holdings	+4.48
Texton Property Fund	+4.48
Silverbridge Holdings	+4.21
Losers	(%)
Wesizwe Platinum	-7.83
Gemfields	-7.44
South32	-4.45
Jasco Electronics	-4.35
Lesaka Technologies	-4.05