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Wood for the Trees | February 2024
12 March 2024


The US FED has been clear in its narrative, that it is only prepared to cut rates once they are confident that inflation is on a trajectory to return to 2%.

Entering 2024, the rates markets were betting on 6 rate cuts for the year with the first cut predicated for March. These expectations have quickly been marched back as the US economy continues to show no sign that higher interest rates are curtailing demand. 

The economic momentum we saw in 2023 has continued into 2024. 2023 closed out with fourth quarter GDP coming in at 3.2% resulting in 2023 GDP growth of 2.5%, not too shabby for an economy that was forecast to go into recession at the beginning of 2023.  

The general thesis going into 2024 was that economic activity would begin to slow allowing the Fed room to begin to reduce interest rates. This has not been the case. Economic data from retail sales to manufacturing and non-manufacturing PMI’s have shown no signs of an economy that is stalling out. 

The Job market in the US remains strong with recent months showing an uptick in new hires. The unemployment rate at 3.9% hardly points to an economy in distress. 


Graph: Month over month data on nonfarm employment

Economic data points are not only strong but have been increasingly beating the economic estimates as shown by the Citi Economic Surprise Index which measures the extent of beats versus estimates.

Graph: Data on Citi Economic Surprise Index

The very resilient economic environment has also meant that inflation has proven to be stickier than the doves would like. The last CPI data point for January came in at 3.1% for headline CPI above expectations of 2.9% and core CPI was 3.9% versus expectations for 3.7%. We await CPI for February, to be released this week to get an indication if inflation is moving toward the Fed’s 2% targets. 

With economic activity in the US humming along with no signs of any cracks yet, we have seen the market adjust its expectations for interest rate cuts to be more aligned with the Fed’s view of 3 cuts in 2024, with the first cut potentially in June. There is even a growing group for economists suggesting the underlying strength in the US economic supports a case for no cuts in 2024.

Graph: Data on Fed Rate probability

What does all this mean for markets? The S&P 500 continues to hit record highs despite rate cuts being taken off the table, it’s not only the magnificent 7 that is driving upside as the rally broadens. Investors are taking to heart that economic strength will drive higher earnings growth. 

We currently find ourselves in a “good data is good and bad data is good” environment. Good data drives earnings growth, while bad data increases the likelihood of rates cuts.   

In this month’s Wood for The Trees, we take a closer look at 4Q earnings coming out of the US where numbers keep topping estimates. With local elections on the horizon, we frame the various outcome scenarios.  Finally, we walk you through our recent decision to exit our MTN position.

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By the Numbers

Market performance accelerated in February with S&P 500 (+4.8%, +7.4% YTD) and Nasdaq (+4.8%, +8.3% YTD) hitting record levels as tech stocks rallied on continued enthusiasm for AI related names. Notably Nvidia (+28.8%, +60.7% YTD), who delivered earnings and guidance that exceeded already-high expectation. Meta (+24.4%) and Amazon (+13.4%) also delivered better-than-anticipated earnings. 

Other companies also wrapped up 4Q23 earnings season, with results ahead of expectations that earnings would be flat year-over-year. Constellation Energy (+37.2%), clean-energy producer, soared on anticipation of higher earnings in 2024 as demand grows for clean energy and benefits from tax credits in the Inflation Reduction Act. Ralph Lauren (+26.5%), luxury apparel brand, hit 9-year high as results showed steady demand from wealthier U.S. shoppers and a strong rebound in China. On the other hand, Paramount (-29.5%) and Warner Bros Discovery (-14.1%) were down as last year’s Hollywood strikes as well as a soft advertising market added pressure to earnings.

European markets also increased in February, DAX (+5%, +5% YTD) and EU (+1.9%, +3.1% YTD). Volvo (+40.2%) jumped after announcing that they will halt funding for Polestar and transfer control following challenging EV market conditions. Rolls Royce (+20.4%) moved higher on the back of a profit forecast upgrade and profits quadrupling by 2027.

Chinese equities, which have been a drag on Emerging Markets, rallied as the potential for supportive measures helped reverse negative sentiment towards the country’s equities. Shanghai Composite (+8.7%, +1.4% YTD) and Hang Seng (+6.4%, -3.6% YTD). Li Auto (+64.5%), Chinese EV manufacturer, rallied after reporting stronger-than-expected earnings driven by a surge in deliveries and ramped optimism over the health of Chinese EV demand despite declining EV sales across the rest of the globe. Trip.com (+26.4%), travel platform, climbed after beating expectations on higher China hotel bookings and post pandemic recovery in air travel.

Graphs: Market indicators by international Markets
Graphs: Market indicators by international Markets

4Q23 US Earnings Above Expectations

And just like that, another earnings season has come to pass. As we delve into the financial performance during the fourth quarter of 2023, several key trends and insights emerged. 

Looking at overall earnings growth trajectory, companies have demonstrated robust earnings growth during the fourth quarter of 2023. As per FactSet Research, for 4Q23, 73% of S&P 500 companies have reported a positive EPS surprise, with 64% reporting a positive revenue surprise. Earnings growth rate of 4% for the S&P 500 surpassed analysts’ expectations that earning would barely grow year-over-year.

While the overall earnings picture appears positive, it’s essential to recognize variance across different sectors. Let’s take a deeper dive with industry-specific insights.

Tech Sector – AI continues to drive strong growth

Results and comments from management underscored robust demand for AI-related products and services. Notably, Nvidia – a leading manufacturer of high-end semiconductor chips – reported blowout quarterly earnings, with revenues surging 265% year-over-year and strong guidance for the year ahead. Management noted on the analyst earnings call that AI-driven demand continues to surpass supply as the “world has reached a tipping point of new computing era.”

Companies emphasized the acceleration of investment in AI, machine learning, and data analytics. Microsoft is a posterchild for this, as the company reported stronger-than-expected revenue growth (+18%) driven by interest in AI and strong spending on cloud computing. A sign that investment is starting to translate to growth. Keeping in mind that we are still in the early days of AI adoption and earnings growth won’t show up overnight. We are still at the beginning of the wave.

Meta (formerly known as Facebook) has been making a lot of progress on their vision for advancing AI and the Metaverse. The CFO noted on the earnings call that they “continue to invest heavily as we progress on our efforts to develop the next computing platform.” Consequently, capital expenditure guidance for the full year was raised, driven by investments in servers, data centers and network infrastructure. Beyond 2024, Meta expects these investments to grow as it continues to invest in AI.
We are confident about the structural importance of semiconductors in the rapidly digitizing era and the exploding need for semiconductor chips given AI and big data. Analysts estimate chip demand will increase 10-fold over the next decade. TSMC – a producer of these semiconductor chips – will play a key role for customers across multiple industries and geographies. The CEO noted on their earning call that revenue is expected to grow low to mid 20%, “supported by our technology leadership and broader customer base,” as “almost everybody [is] working with TSMC.”


Consumer – Volumes to be the key factor in 2024

Starting with consumer staples, companies have showcased their ability to push pricing with only a marginal drop in volume. Robust brand portfolio and operational efficiencies remain competitive advantages for companies like Unilever. 

Unilever’s quarterly results showed underlying sales growth of 4.7%, with pricing up 2.8% and volumes up 1.8%. For the full year, sales grew 7%, with pricing up 6.8% and volumes up 0.2%.

Graph: Unilever Price and Volume

For staples, 2022 was about costs, 2023 was about price, and 2024 is about driving volumes. As inflation and pricing moderates, it becomes a volume game.

Looking at consumer discretionary, Nike reported earlier on in December, and saw stable demand trends with elevated foot traffic. However, they are still experiencing a promotional environment and noted that they are seeing signs of more cautious consumer behaviour globally. Positively, management noted that they feel good about inventory and saw strong consumer response to newness and innovation.

Visa also offered insights on the consumer, stating that spending remained resilient and volumes growth stable. Strong U.S. economic data continues to support expectations of a soft landing, fueled by robust consumer spending.

Energy Sector – Capital Dicipline

Management discussions within the energy sector highlighted ongoing challenges stemming from volatile commodity prices, geopolitical uncertainties, and global energy transitions. 

Despite the weaker refining and oil environment, strong LNG trading results boosted earnings for big oil companies like Shell. Shell continues to be a leader in capital discipline with sustainable shareholder distributions and deleveraging. Management announced a share buyback program of $3.5bn over the next 3 months, with shareholder distributions of 30-40% of cash flow from operations. Using these numbers, by 2030 Shell will be able to repurchase close to 50% of the shares outstanding.

We remain bullish on the price of oil on a fundamental basis and have high conviction in resource scarcity names such as Shell. A unique combination of supply constraints and years of underinvestment has resulted in favourable multi-year outlook.

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By the Numbers

The JSE lagged behind major global and emerging markets, with the ALSI down 2.4% in February (-5.4% YTD). The property sector emerged as the best performer and is the only sector showing positive returns YTD (4.5%). Meanwhile, Resources continue to be the worst-performing sector YTD (-13.1%), followed by general retailers (-6.8%), Financials (-2.6%), and Industrials (-2.6%).

NEPI saw a notable increase of 10.4%, after reporting record distributable earnings per share, up by 9.3% for their 2023 financial year. On the flip side, MAS PLC and Burnstone experienced declines of 11.8% and 11.1%, respectively.

Multichoice emerged as the best-performing stock on the JSE this month, posting a remarkable 35.6% increase. This surge followed an announcement by the company that it had received an offer from Vivendi’s Canal+ Group to acquire the remaining shares for R105 per share. In the food sector, RCL and AVI showed robust performance, with gains of 15.8% and 8.8%, respectively. Despite ongoing operational challenges, both companies reported strong headline earnings per share growth. PPC (9.5%) and Richemont (7.7%) also experienced decent gains this month.

Cashbuild (-17.0%), Metair (-15.0%), Bytes (-14.5%), and MTN (-13.4%) weighed on the industrials sector. Cashbuild witnessed a 20% decline in profits following an impairment of its P&L business, while the weakening naira continued to weigh on MTN.

Transaction Capital gained 17.8% in February after announcing its intention to unbundle WeBuyCars and list it separately on the JSE. Other notable gains in the financial sector came from Santam (+6.2%), Sanlam (+3.1%), and Reinet (+3.0%), while NinetyOne (-5.5%) and Brait (-4.9%) experienced declines for the month.

The poor performance in the retail sector was led by Pick n Pay (-14.5%) after the company reported weak trading in a recent update. Further, the company announced that the board had approved a new strategy to raise R4 billion through rights offer and a separate listing of its successful Boxer business, aiming to stabilize the balance sheet. Additional pressure came from Woolworths (-7.0%) and Truworths (-5.7%) following the release of the companies’ interim results.

While Pan African gained 11% for the month following results indicating a 46% rise in profits, other resource counters faced declines. Northam fell 15.6% after reporting a loss on the disposal of shares it held at Implats and an expected decline in HEPS. Thungela (-12.7%) also reported a decline in earnings, while Sasol dropped -12.0% after reporting a 40% decline in diluted earnings per share. This was attributed to weaker oil and petrochemical prices, unstable product demand, and continued inflationary pressures.

Graphs: Market indicators by local Markets
Graphs: Market indicators by local Markets

Time for Some Change

The date has been set and on the 29th May 2024, South Africans will once again head to the polls. Elections will always be an emotive topic and as we get closer, the electioneering “noise” will continue to build. The local equity market may experience some volatility over this period, but we caution investors to look through the noise and remain focused on the main market driver for 2024 which remains dominated by interest rate cuts.


The ANC in Poll Position?


The word vote with the South African Flag in

Since the 2004 general elections, the ruling ANC have consistently lost share of the vote and 2024 is the first election year where the outcome may see the ANC lose its majority share.

Graph: ANC's Share of vote in SA's National Election

If this outcome materialises, the implications may be small or far reaching, as the size of the ANC’s share of the vote will guide the action they choose to take, which in most cases features a coalition party. While the outcome remains to be seen, political analysts have shared their insights, and here is what we are hearing on the streets.

The ANC Receives >50% of the Vote

If we see the ANC scrape through the majority of the vote, it is business as usual. Policy will not change and we will continue along the path set by Cyril Ramaphosa following the 2019 election.

The ANC Receives between 41%-50% of the Vote – BASE CASE

In this scenario, the majority is lost, and a coalition will need to be formed. Contrary to populist thought, it is unlikely the EFF would be brought in. Instead, it is more probable that a coalition will be formed with the IFP or a number of minority parties. Previously, the ANC has been able to work fairly effectively with the IFP, and this outcome is unlikely to create turmoil in the markets. This relationship leads to little policy risk and potential for improved economic reform momentum, according to some analysts. Thus, there is the potential for a rerating of SA Inc stocks during the second half of the year, in conjunction with the rate cutting cycle.

The ANC Receives <41% of the Vote

Here, we would see the ANC lose a significant amount of the vote, requiring a coalition to be formed with a larger party, namely the DA or the EFF. Again, given analyst expectations, it is more likely than not that the ANC would partner up with the DA over the EFF. Historically, the EFF and ANC have been unable to work together on the provincial front. Given the fractious relationship they share and the inability to look through the politics and work together, there is very little weight being placed on an ANC/EFF coalition at the national level.

While the DA may seem a better coalition partner, the downside of this scenario is policy risk. It is more likely than not that a coalition with a larger opposition party will complicate decision making and policy action. With each pushing their own agendas, decision-making may become strained, which has the potential to slow down economic transformation in the country.

Opposition Seeing a Shift

The base case for most is for the ANC to receive around 40%-50% of the vote, with the IFP and Action SA being the primary beneficiaries of the ANC’s decreasing share. The DA is largely anticipated to receive between 20%-25% of the vote, with downside risk. The Patriotic Alliance and Action SA are anticipated to be the largest beneficiaries of this potential downside. In addition, there are concerns the DA may lose amongst its Muslim voter base given its stance on the ongoing conflict in Gaza.

The EFF is anticipated to increase its share of the vote from the 10% it had achieved in 2019, while the FF+ is largely expected to show a similar result to 2019. While the MK party gains headlines, it is unlikely to gain significant numbers of votes. Early election polls have shown the MK party gaining followers but contrary to popular opinion, these have not been at the expense of the ANC, rather at the expense of the EFF and the IFP.

Graph: SA Election Poll


Waiting on the Sidelines

Given the noise an election presents, it may appear safer to wait on the sidelines. However, as guided in our outlook for 2024, the local equity market will take its lead from the US Feds rate cutting cycle. SA equity remains undervalued at current levels and as such we advise against waiting for elections to pass before driving in. Chat around the general election will gather momentum closer to May 29th, but election noise is transitory and once passed, attention will once again shift to the rate cutting cycle.


Depreciating Naira Weighs on MTN

Over the past few months, Telecommunication giant MTN has experienced significant price weakness. The primary driver behind this weakness stems from its Nigerian operations where the Nigerian Naira has experienced steep depreciation against the US dollar.

Yellow block with black MTN logo
Graph: Blue and Green lines comparing MTN stock with depreciating Naira, weighing down MTN

Over time, the official Naira to USD FX rate has significantly deviated from that of the black-market (parallel) rate. With the aim of narrowing this gap, in June 2023, the Central Bank of Nigeria opted to allow the official exchange rate to float freely. Consequently, the official exchange rate weakened from NGN400 to more in line with the black-market rate which was ~NGN900 at that time. Subsequently, as inflation became more rampant, and people were looking to get funds out of the country at any costs the black-market rate jumped to NGN1500 to the US dollar and the official rate quickly followed.


Removing the Risk

Keeping it simple, our initial investment thesis for MTN was premised on:

  • An attractive sum-of-the-parts valuation, driven by the strong operational performance across all regions.
  • The Group’s ability to repatriate cash from the Nigerian business, in turn increasing cashflow for dividend payouts.

Going into result season, we had no real concerns surrounding operating performance as we anticipated this to remain resilient. Our concerns remained focused on the Naira. A significant portion of MTN Nigeria’s cost base, particularly the IHS tower leases, is denominated in USD. The continued devaluation of the Naira would result in a significant increase in the cost of servicing debt in addition to a large increase in the Naira value of the existing debt on the balance sheet. Furthermore, the FX market remains tight and extracting cash from the Nigerian business remained questionable in our opinion.

Our concerns centered on the fact that analysts were not incorporating the impact of a depreciating Naira and the potential earnings impact, and in our opinion the earnings and cash flow risk attached to MTN given its Nigerian woes was too high. We made the decision to exit our positions prior to their earnings release to avoid the potential of significant downside.

Results Confirm Our Concerns

While Group results are yet to be released, results from the Nigerian operations highlighted how currency volatility resulted in higher net finance costs and forex losses on the back of the restatement of lease liabilities. On the back of Africa region results, MTN Group released a trading statement anticipating earnings per share to be between 70%-90% lower than the prior year.

While management are in the process of renegotiating the tower leases and operationally resilience remains, the currency risk attached to Nigeria remains, and in our opinion, it is safer for investors to sit on the sidelines.  We will continue to monitor the situation for future opportunities.


Closing Comments

We always thought that there may be some volatility as we get closer to the point of the expected first cut. For now, the markets are content that the US economy remains resilient. We are still firm that rate cuts will be positive for equity markets and are buyers on any pull back. 

Locally, all eyes are on the elections in May. While investors acknowledge the value currently inherent in SA markets they are choosing to sit on the sidelines until after the elections.