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In our continued efforts to give our readers a broad number of views, opinions and information, we provide readers with Peregrine Treasury Services weekly market wrap below.
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Peregrine Treasury Services Weekly Wrap as at 16 August 2019
It’s been an eventful week all-round, with geopolitics, once again, taking the global center stage. While South African markets took a breather, in celebration of woman’s day, the rest of the world did all, but celebrate, as US President, Donald Trump, announced the implementation of a 10% tariff on all remaining Chinese goods, with effect from 1 September. Fast forward to Tuesday and this is no longer the case, with Washington announcing that the tariffs would now be delayed until at least mid-December. Attempting to read into Trump’s strategy is probably one of the hardest challenges the general investor can try and strive toward, in current times, as he continually moulds the market in a manner that’s becoming too unpredictable to navigate.
GLOBAL DATA AND POLITICS
With some of the more ‘key event risks’ being out of the way for the time being (the Federal Reserve interest rate announcement and the like), the general investor’s attention is now being drawn back toward regional economic data releases, especially the data flowing from US and Chinese soil. With these two economy’s being the largest, globally, the economic activity shown in these regions tend to be relatively crucial to the assumed economic growth of the greater world’s economy.
The most noteworthy focus in the US, this week, has been the elusive and somewhat-complicated concept of the inversion of the yield curve - an event that has not occurred since 2007. The ‘inversion’ of the yield curve roughly means that long-term interest rates tend to be lower than short-term interest rates, indication a potential recession, as well as a decrease in interest rates.
But is this sentiment reflecting in the economic data?
The Federal Reserve adjusted their tone to one of a hawkish nature, due to the continued upbeat spirit of the US economy. The question really is, ‘when we will really see a drastic deceleration in the powerhouse economy’. The Federal budget deficit widened to $120 billion, from the previous $8 billion, while consumer price index (CPI) numbers accelerated to 0.3% month-on-month (MoM), in July, while annual CPI crept up marginally to 1.8%. Retail sales surprised to the upside, gaining 3.45% year-on-year (YoY), during July, while unit labor costs also increased by 2.4%, versus the expected 2%. Initial jobless claims missed the mark, reaching 220,000, for the week, compared to the previous 211,000. Manufacturing production worsened more-than-expected, coming in at -0.4%, MoM, while industrial production grew by 0.48%, in July.
The cracks in the Chinese economy is becoming more visible, with data from the East leaving quite a dent in market sentiment. New loans issued undershot its target of CNY1.275 trillion, only reaching CNY1.06 trillion , while unemployment accelerated to 5.3% from 5.1%. Retail sales, year-to-date, grew by 8.32%. Industrial production saw the, already-fragile, market go in to panic mode, coming in at 5.8%, the lowest in 17 years. Friday will see the release of foreign domestic investment data, from the world’s second largest economy.
The story remains unchanged for the European Union, as the collective continues to face economic headwinds. Gross domestic product (GDP) annualized for quarter two remained flat at 1.1%, while annual industrial production contracted by 2.6%, in June. Friday will see the release of trade balance numbers that is expected to come in at 16.3 billion.
As if the emerging market environment wasn’t under enough pressure, Argentina sought to add even more pressure this week. The Argentinian financial markets plummeted, following the defeat of ‘trade and investor-friendly’ President Mauricio Marci in the latest election, with the Peso collapsing around 15.0%, while equities dropped by around 48.0%. Argentinian government 100-year bonds also tumbled, as market fears yet another government default. The crash sent shockwaves through emerging markets, adding pressure to the South African rand, which saw its currency dipping to its lowest levels since September 2018
US EQUITIES
A horrible month, to say the least, has generally been witnessed globally. Here’s are some of the movements for the month of August, so far.
The Dow Jones witnessed is fourth largest one-day drop ever during the week (down 3.05%), as the bond market shook investors into a recessionary state of mind. The US banking sector took the largest hit from this news this week – falling more than 10.00% from recent highs.
Earnings season is slowly drawing to an end, with most companies actually having outshone analyst expectations. Macy’s, on the other hand, missed analyst expectations by quite a margin due to unsold inventory/merchandise and the impact of mark-downs thereon.
FAANGs performance for August, so far:
In South African rand-terms, add 6.12% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added. There’s some nice currency-hedging playing out for the local investor.
COMMODITIES
Month-to-date, both Brent Crude and West Texas Intermediate (WTI) oil also found themselves bowing to the powerful winds of the current global economic sandstorm. Down around seven percent for August, fears of a recession and drop-off of global oil-demand sent Brent Crude below the $60 a barrel mark, once again. Along with the political tussles shrouding the globe, both Germany and China released weaker export and industrial data which supported fears of an approaching recession and a lesser need for fuels as the global economy grinds slower.
Brent Crude opened Friday’s trading day at $59.00 per barrel, while US West Texas Intermediate (WTI) opened at $55.30. Unlike oil, gold seems to be living up to its age-old ‘safe haven’ designation. Up over seven percent since the beginning of August, gold was seen touching highs of around $1,535.00 per ounce, last seen in 2013. Palladium is down around 4.91% in August, while platinum slid by around 2.90% over the last two weeks. It seems that palladium is finally cooling off.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,520.84 $837.50 and $1,449.34 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
This week, Cyril Ramaphosa addressed the African National Congress’s (ANC) woman’s league, advocating for unity to drive sentiment and growth in the country. This call for unity sprouts from the festering divisions within the ANC. The past couple of months revealed the ugly truth about South Africa’s government, private sector and politicians, as the state capture continues to play itself out in front of the Zondo commission. The threat, however, is far from over, with divisions and witch-like hunts continuing, as part of the complex political power struggle. While it’s hard to keep track of exactly what is unfolding behind the closed doors of government, the view from the rest of the world seems relatively dim. Continuous divisions eroding faith in Ramaphosa’s ability to drive the economy in the right direction and the instability within the National Executive Committee, has placed the country on uneasy grounds.
The key headline this week was certainly the anticipated implementation of the National Health Insurance act (NHI), with fears and concerns causing a massive decline in the share prices of top medical companies. So exactly what is the NHI, and how will it impact on the average South African?
In short, the vision is to have a state run medical aid scheme, of which all South Africans will be members. The aim is to provide quality health care to all South Africans, and not only those who have the ability to afford private care and medical aid. It sounds great though doesn’t it? So what is all the fuss about?
Key concerns at this point will be:
While much of the bill is still murky, the biggest fear is the complete collapse of healthcare in SA and the exodus of medical professionals who will ultimately seek opportunities outside of the country. It was a quiet week on the data front, with the only release being retail sales, marginally beating expectations, reaching 2.4%, YoY, in June.
SOUTH AFRICAN EQUITY
SA equities haven’t enjoyed the best of months so far, within the turmoil of the global political chess game being played. With the risk-off environment being witnessed, it’s been tough to find any one company that’s been able to hold themselves together, especially where business operations utilize rands. For the month of August, let’s have a look at some of the carnage that’s been happening:
ABSA bank reported a three percent increase in headline earnings to R8.3 billion for the six months to end June. These are promising and positive results for the bank, especially considering the current pressured economic climate, and the rollout of the companywide reorganization strategy seems to have been successfully managed so far. Although ABSA still has a way to go before achieving its long-term growth strategies, it appears to be heading in the right direction. ABSA opened Friday’s trading day at R152.10 per share
Gaining support, through a handful of financing arrangements, Steinhoff have managed to keep their heartbeat going until at least 2021. The heavily debt-laden company, due to one of the biggest South African corporate scandals ever, will now focus wholly on becoming a holding company focusing on retail businesses vs an actual operating retail business. For the foreseeable future, Steinhoff will continue selling off assets in order to claw its way out of its hairy debt situation, as underlying revenues from their current business operations aren’t enough to make a dent. Steinhoff opened Friday’s Trading day at R1.18 per share.
Year-to-date, the JSE All Share index is up 2.09% and the Top 40 up 2.98%. Sector-wise, industrials have now returned 9.06%, resources 3.56% and financials -9.92% for the 2019 year so far.
THE WEEK AHEAD
With a weakening of over 10%, against the US dollar over the past two weeks, the South African rand is considered to be oversold, however, one shouldn’t brace for a recovery just yet. Local fundamentals, slowing global growth and geopolitical tension mean a perfect storm. The rand remains in treacherous terrain, with a sovereign credit rating downgrade considered to be imminent. Recognising the negative signs, foreigners have sold a net R14.4bn SA bonds so far in August – equal to R1.8bn a day A close eye should be kept on global and local data, as well as the geopolitical landscape that continues to set the tone for risk appetite. The rand starts the day off at R15.22 per US dollar, R16.91 per euro, R18.41 per British pound and R4.30 to the Israeli new shekel. The rand’s expected trading range for the upcoming week is fairly wide, given the current volatility, between R15.10 and R15.48
GLOBAL DATA AND POLITICS
With some of the more ‘key event risks’ being out of the way for the time being (the Federal Reserve interest rate announcement and the like), the general investor’s attention is now being drawn back toward regional economic data releases, especially the data flowing from US and Chinese soil. With these two economy’s being the largest, globally, the economic activity shown in these regions tend to be relatively crucial to the assumed economic growth of the greater world’s economy.
The most noteworthy focus in the US, this week, has been the elusive and somewhat-complicated concept of the inversion of the yield curve - an event that has not occurred since 2007. The ‘inversion’ of the yield curve roughly means that long-term interest rates tend to be lower than short-term interest rates, indication a potential recession, as well as a decrease in interest rates.
But is this sentiment reflecting in the economic data?
The Federal Reserve adjusted their tone to one of a hawkish nature, due to the continued upbeat spirit of the US economy. The question really is, ‘when we will really see a drastic deceleration in the powerhouse economy’. The Federal budget deficit widened to $120 billion, from the previous $8 billion, while consumer price index (CPI) numbers accelerated to 0.3% month-on-month (MoM), in July, while annual CPI crept up marginally to 1.8%. Retail sales surprised to the upside, gaining 3.45% year-on-year (YoY), during July, while unit labor costs also increased by 2.4%, versus the expected 2%. Initial jobless claims missed the mark, reaching 220,000, for the week, compared to the previous 211,000. Manufacturing production worsened more-than-expected, coming in at -0.4%, MoM, while industrial production grew by 0.48%, in July.
The cracks in the Chinese economy is becoming more visible, with data from the East leaving quite a dent in market sentiment. New loans issued undershot its target of CNY1.275 trillion, only reaching CNY1.06 trillion , while unemployment accelerated to 5.3% from 5.1%. Retail sales, year-to-date, grew by 8.32%. Industrial production saw the, already-fragile, market go in to panic mode, coming in at 5.8%, the lowest in 17 years. Friday will see the release of foreign domestic investment data, from the world’s second largest economy.
The story remains unchanged for the European Union, as the collective continues to face economic headwinds. Gross domestic product (GDP) annualized for quarter two remained flat at 1.1%, while annual industrial production contracted by 2.6%, in June. Friday will see the release of trade balance numbers that is expected to come in at 16.3 billion.
As if the emerging market environment wasn’t under enough pressure, Argentina sought to add even more pressure this week. The Argentinian financial markets plummeted, following the defeat of ‘trade and investor-friendly’ President Mauricio Marci in the latest election, with the Peso collapsing around 15.0%, while equities dropped by around 48.0%. Argentinian government 100-year bonds also tumbled, as market fears yet another government default. The crash sent shockwaves through emerging markets, adding pressure to the South African rand, which saw its currency dipping to its lowest levels since September 2018
US EQUITIES
A horrible month, to say the least, has generally been witnessed globally. Here’s are some of the movements for the month of August, so far.
- S&P 500: down 5.47%
- NASDAQ: down 5.08%
- Dow Jones: down 5.78%
The Dow Jones witnessed is fourth largest one-day drop ever during the week (down 3.05%), as the bond market shook investors into a recessionary state of mind. The US banking sector took the largest hit from this news this week – falling more than 10.00% from recent highs.
Earnings season is slowly drawing to an end, with most companies actually having outshone analyst expectations. Macy’s, on the other hand, missed analyst expectations by quite a margin due to unsold inventory/merchandise and the impact of mark-downs thereon.
FAANGs performance for August, so far:
- Facebook: down around 7.54%
- Amazon: down around 5.05%
- Apple: down around 5.80%
- Netflix: down around 8.44%
- Alphabet: down around 3.82%
In South African rand-terms, add 6.12% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added. There’s some nice currency-hedging playing out for the local investor.
COMMODITIES
Month-to-date, both Brent Crude and West Texas Intermediate (WTI) oil also found themselves bowing to the powerful winds of the current global economic sandstorm. Down around seven percent for August, fears of a recession and drop-off of global oil-demand sent Brent Crude below the $60 a barrel mark, once again. Along with the political tussles shrouding the globe, both Germany and China released weaker export and industrial data which supported fears of an approaching recession and a lesser need for fuels as the global economy grinds slower.
Brent Crude opened Friday’s trading day at $59.00 per barrel, while US West Texas Intermediate (WTI) opened at $55.30. Unlike oil, gold seems to be living up to its age-old ‘safe haven’ designation. Up over seven percent since the beginning of August, gold was seen touching highs of around $1,535.00 per ounce, last seen in 2013. Palladium is down around 4.91% in August, while platinum slid by around 2.90% over the last two weeks. It seems that palladium is finally cooling off.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,520.84 $837.50 and $1,449.34 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
This week, Cyril Ramaphosa addressed the African National Congress’s (ANC) woman’s league, advocating for unity to drive sentiment and growth in the country. This call for unity sprouts from the festering divisions within the ANC. The past couple of months revealed the ugly truth about South Africa’s government, private sector and politicians, as the state capture continues to play itself out in front of the Zondo commission. The threat, however, is far from over, with divisions and witch-like hunts continuing, as part of the complex political power struggle. While it’s hard to keep track of exactly what is unfolding behind the closed doors of government, the view from the rest of the world seems relatively dim. Continuous divisions eroding faith in Ramaphosa’s ability to drive the economy in the right direction and the instability within the National Executive Committee, has placed the country on uneasy grounds.
The key headline this week was certainly the anticipated implementation of the National Health Insurance act (NHI), with fears and concerns causing a massive decline in the share prices of top medical companies. So exactly what is the NHI, and how will it impact on the average South African?
In short, the vision is to have a state run medical aid scheme, of which all South Africans will be members. The aim is to provide quality health care to all South Africans, and not only those who have the ability to afford private care and medical aid. It sounds great though doesn’t it? So what is all the fuss about?
Key concerns at this point will be:
- Probably the key concern at this point is the additional stress it will place on the fiscus, with cost estimates running as high as R350bn and even R450bn;
- The ability for the state to run and administer an undertaking of this magnitude efficiently, given its track record with Eskom, SAPO, SAA, and most other state-owned enterprises;
- All South Africans will be members, but only those earning an income will contribute by way of a tax. Note that 29% of the labour force is unemployed and only 39% of those employed earn enough to be taxpayers: the already constrained tax base will become even more constrained;
- The fund will cover necessary medical treatments, and doctors’ visits with no co-payment due by the patient. In effect, the state will become the debtor, and payment terms to medical facilities becomes a major concern;
- Government will determine the prices for medical procedures and services;
- One will no longer be able to visit a specialist such as a gynecologist or pediatrician without a referral, extending the waiting period by even more than currently experienced and raising the cost through forcing two consultations.
While much of the bill is still murky, the biggest fear is the complete collapse of healthcare in SA and the exodus of medical professionals who will ultimately seek opportunities outside of the country. It was a quiet week on the data front, with the only release being retail sales, marginally beating expectations, reaching 2.4%, YoY, in June.
SOUTH AFRICAN EQUITY
SA equities haven’t enjoyed the best of months so far, within the turmoil of the global political chess game being played. With the risk-off environment being witnessed, it’s been tough to find any one company that’s been able to hold themselves together, especially where business operations utilize rands. For the month of August, let’s have a look at some of the carnage that’s been happening:
- All Share and Top 40 indices: down around 5.47%
- Resources: down 5.86%
- Industrials: down 4.17% (Naspers: down 4.42%)
- Financials: down 6.64%
ABSA bank reported a three percent increase in headline earnings to R8.3 billion for the six months to end June. These are promising and positive results for the bank, especially considering the current pressured economic climate, and the rollout of the companywide reorganization strategy seems to have been successfully managed so far. Although ABSA still has a way to go before achieving its long-term growth strategies, it appears to be heading in the right direction. ABSA opened Friday’s trading day at R152.10 per share
Gaining support, through a handful of financing arrangements, Steinhoff have managed to keep their heartbeat going until at least 2021. The heavily debt-laden company, due to one of the biggest South African corporate scandals ever, will now focus wholly on becoming a holding company focusing on retail businesses vs an actual operating retail business. For the foreseeable future, Steinhoff will continue selling off assets in order to claw its way out of its hairy debt situation, as underlying revenues from their current business operations aren’t enough to make a dent. Steinhoff opened Friday’s Trading day at R1.18 per share.
Year-to-date, the JSE All Share index is up 2.09% and the Top 40 up 2.98%. Sector-wise, industrials have now returned 9.06%, resources 3.56% and financials -9.92% for the 2019 year so far.
THE WEEK AHEAD
With a weakening of over 10%, against the US dollar over the past two weeks, the South African rand is considered to be oversold, however, one shouldn’t brace for a recovery just yet. Local fundamentals, slowing global growth and geopolitical tension mean a perfect storm. The rand remains in treacherous terrain, with a sovereign credit rating downgrade considered to be imminent. Recognising the negative signs, foreigners have sold a net R14.4bn SA bonds so far in August – equal to R1.8bn a day A close eye should be kept on global and local data, as well as the geopolitical landscape that continues to set the tone for risk appetite. The rand starts the day off at R15.22 per US dollar, R16.91 per euro, R18.41 per British pound and R4.30 to the Israeli new shekel. The rand’s expected trading range for the upcoming week is fairly wide, given the current volatility, between R15.10 and R15.48
Our highlight for the week:
Yesterday we covered the latest financial results from Truworths International (TRU) and below a short extract from the article published yesterday.
Based on Truworths financial results, their issues in the UK, their strong balance sheet and cash generation capacity and the healthy dividend yield of 6.6% all things considered we value Truworths International (TRU) at R80.68 a share. So at the current price we do believe the group offers value. Its recent decline due to the news about their problems in the UK has created a great buying opportunity for long term investors. The group's share price has declined almost as much in the last month as it has over the last 5 years. We think there is strong long term gains to be made if the shares are bought and the current price and the fat divided yield doesn't hurt either.
Read full article here
Based on Truworths financial results, their issues in the UK, their strong balance sheet and cash generation capacity and the healthy dividend yield of 6.6% all things considered we value Truworths International (TRU) at R80.68 a share. So at the current price we do believe the group offers value. Its recent decline due to the news about their problems in the UK has created a great buying opportunity for long term investors. The group's share price has declined almost as much in the last month as it has over the last 5 years. We think there is strong long term gains to be made if the shares are bought and the current price and the fat divided yield doesn't hurt either.
Read full article here