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Wood for the Trees | April 2023
10 May 2023

April felt a little bit like that meme where one guy does something crazy, and the second says to the guy next to him, “hold my beer”. 

March gave us the second and third largest bank failures in U.S. history, prompting the Fed to step in with emergency lending facilities, which succeeded in stabilizing the regional banks for a “whole” 4 weeks. As we approached the end of April and the regional banks began their reporting season, most were at pains to instill confidence among investors that deposit outflows had ceased.

First Republic Bank announced 1Q earnings that showed deposits had decreased from $174bln to $104bln (including $30bln recently deposited by 4 major banks).

Hold my beer, with a jug of beer

What made things worse, was the fact that management refused to take any questions on the call. The resulting uncertainty caused the share price to drop precipitously, and a few days later the FDIC took over the bank and sold it to JP Morgan; resulting in First Republic taking the prize as the second largest U.S. bank failure in history. 

The resulting knock sent the Regional Bank Index gapping down again, with the most susceptible banks falling more than 30%. The Index is now down 43% since the 9th of March.

Regional Bank Index showing a decline

The speed and magnitude of the Fed’s rate hiking cycle has clearly produced some unintended consequences and no doubt will cause banks to slow down lending in order to preserve liquidity; thus, tightening financial conditions. Despite the turmoil in the regional banking sector, a rate cycle pivot and better-than-expected earnings reports drove equities higher during April.

Graph showing April's performance of Fed’s rate hiking cycle and consequences on market indicators

In this month’s newsletter we take a look at the 1Q23 S&P 500 earnings and expectations for the next 12 months. Additionally, we zoom in on the earnings take-aways from some of our portfolio holdings to see what the future holds.

Locally, we revisit the state of the SA consumer given the rising cost of living.

International section

By the Numbers
1Q23 Earnings Season – Better than Expected
All Eyes on Earnings

Local section

By the Numbers


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By the Numbers

Major indices posted gains this month and added to the year-to-date momentum. S&P 500 closed 1.6% higher for the month as several companies reported earnings that were received positively and have been less rocky than investors feared. Still, worries around potential US recession and troubled regional banks weigh on sentiment, with First Republic Bank down 74.6% in April. Big tech companies (Nasdaq +1.2%) are benefitting from resiliency in their underlying businesses as well as investments in new areas like AI. Notably, Microsoft (+7.2%), Alphabet (+4.8%), and Facebook’s parent Meta (+15.1%). Looking at US economic data, inflation came in lower than anticipated and the labour market seems to be showing signs of cooling off. In the UK (FTSE 100 +3.1%), inflation remains high suggesting policymakers might continue to raise borrowing costs. Turning to Europe, both the EU 600 and DAX ended the month 1.9% higher. Chinese markets were mixed (Hang Seng -2.4%, Shanghai Composite +1.4%) as the reopening started with a bang led by strong domestic consumption but has since stalled in business activity due to softness in demand from developed markets. Chinese listed stocks such as Alibaba (-16.1%), Tencent (-11.5%), Baidu (-19.6%), and JD.com (-17.4%) were holding the wooden spoon as sentiment remains shaky with investors awaiting upbeat reports.

Offshore Investment Markets performance for April 2023
Offshore Investment Markets performance for April 2023

1Q23 Earnings Season – Better than Expected

First quarter earnings season was in full swing in April. Given the current forecasts for an economic recession, all eyes were focused on any clues confirming the dull economic environment, particularly after the soft 4Q22 earnings results which saw earnings drop 4.7% Y/Y; marking the weakest growth number since 3Q20.

Heading into 1Q23 earnings, expectations for earnings had deteriorated with many analysts suggesting forecasts for 2023 remain too high. As of the 31st of March, analysts expected 1Q23 EPS (earnings-per-share) to decline 6.7% Y/Y, an acceleration from those weak 4Q22 numbers.

With 85% of S&P 500 companies having reported, 79% of companies have reported positive earnings surprises, significantly ahead of 5- and 10-year averages of 77% and 73%, respectively. On average companies are beating earnings expectations by 7 percentage points.

As we exit 1Q23 reporting season, it looks like EPS will end up being down only 2.2% Y/Y. Not great by any means, but better than the decline of 6.7% forecast in March and an improvement from 4Q22.

Across the sectors, all but one sector beat expectations with Consumer Discretionary, Industrials and Energy showing the best growth.

As we look ahead, analysts are currently forecasting negative EPS growth to continue into 2Q23, with EPS growth expected to be down 5.5%. Beyond 2Q, earnings growth is forecasted to recover over the next four quarters, as cost inflation is reigned in, and expected rate cuts later in the year stimulate economic growth.

S&P Quarterly bottoms-Up Eps Actuals and Estimates

What does this all mean from a valuation perspective?

2023 EPS is forecast to grow a measly 1.1% Y/Y to $221.35, with growth returning to double digits in 2024 ($246/shr).

Currently the S&P 500 is trading at a forward 12-month P/E of 17.7x, which is below the 5-year average of 18.6x and within the 10-year average range. So, if earnings expectations over the next 12 months are correct the market is not overextended by any means.

S&P 500 12-Month P/E Ratio: 10 year


Trying to get a handle on possible downside risk, annualizing the average quarterly EPS numbers over the 2Q22 to 4Q24 period ($55/shr) gets you a $220/shr annual number. The S&P 500 is currently trading at 18.8x on this number, which is not stretched by any means. $220 /shr is 10% below current 2024 estimates suggesting the current market is pricing in a 12-month forward EPS number somewhere between the range of $220 & $246.


EPS Growth vs recent average EPS annualised

Clearly companies are doing a great job managing their businesses through a tough environment. Going forward all eyes will be on the depth of the impending recession and the ability of company management teams to manage costs; these factors will impact earnings going forward. Whether or not, and by how much the Fed cuts rates will determine what P/E valuation investors will be happy to pay for these future earnings. 


All Eyes on Earnings

It’s been a busy couple of weeks as companies report earnings for the first quarter of 2023. Several of our holdings have reported earnings that have been received positively, and are less dire than analysts feared leading up to earnings season. Let’s have a look!


Banks have recently been bannered across headlines, with U.S. regional banks bearing the brunt as investors sell off the sector as a whole.  (Read about the Fed’s various programs to stabilize the financial system

vector image, man holding binoculars

However, doom-and-gloom is not the message we are hearing from large-cap executives, who are delivering reassuring earnings and settling investor jitters. We are seeing how established large banks are benefitting, as deposits migrate from small- and medium-sized banks to large-sized banks as depositors flock to safety.

Starting off with HSBC, revenues were up 64%, driven by strong net interest income (up 47%) as interest rates increase and the reopening of Asia leads to higher loan demand and banking activity. HSBC also boasted an impressive RoTE (Return on tangible equity) of 27.4%, up from last year’s 7.2% and well above their target of +12%.

Another highlight was the resumption of the quarterly dividend, and the announcement of a better-than-expected $2bn share buyback program. Management remains committed to future capital distribution with the special dividend on completion of the Canada business sale.

HSBC acquired Silicon Valley Bank U.K. after the collapse in March, and are feeling very optimistic about the growth potential, noting on the analyst call that SVB has a “good quality book. We’ve seen no nasty surprises.” They plan to expand the business with incremental investment and build the business outside of the U.K.

Goldman Sachs fell short of revenue estimates but beat earnings-per-share expectations. Investment banks tend to underperform on the back of a decline in capital market activity, and as expected, the Investment Banking segment was weaker while Asset & Wealth Management performed well.

Goldman Sachs remain focused on executing their strategy to further grow their leading global brand and expressed that they see further private wealth opportunities in Asia and Europe, after the consolidation of UBS and Credit Suisse.

The positive tone on the analyst call set investors at ease with CEO David Solomon commenting, “As we sit here today, it appears that the worst of the volatility is behind us. Prompt action by regulators was vital in bolstering confidence and stabilizing market sentiment … demonstrating the resilience of the country’s largest financial institutions.”


Tech stocks have outperformed the broader market so far this year, with the tech-focused Nasdaq 100 moving into a bull market and up over 22% year-to-date. Leading up to earnings season, investors had elevated expectations and despite these already high hopes, big tech continued to impress and showed resiliency in their underlying businesses. This was evidence in both Microsoft and Alphabet (parent of Google) reporting strong results.

Microsoft rallied as earnings beat expectations on strong growth in its Azure cloud-computing business. Companies continue to invest in cloud-computing as a top priority, and despite growing concerns about cutting costs, cloud is not one of them. This is great news for Microsoft whose user-base keeps growing, and as more AI features are implemented into their wide product offerings, they have the ability to capture incremental spend from both existing and new customers.

Microsoft is investing to be a leader in AI and won’t slow down anytime soon. CFO Amy Hood said, “We will continue to invest in our cloud infrastructure, particularly AI-related spend as we scale with the growing demand… Therefore, we are committed to leading the AI platform wave and making the investments to support it.”

Alphabet bounced on better-than-expected advertising revenue. Meta (parent of Facebook) echoed this sentiment, reporting upbeat advertising revenue that topped estimates and helped investors breathe a sigh of relief. We believe we’ve seen the bottom in ad-revenue growth, as advertisers continue to prefer large established platforms such as Google.

The continued push with AI is one of the key reasons why Alphabet is one of our top picks. CEO Sundar Pichai confirmed the huge opportunities ahead in AI, “I’ve compared it to the successful transition we made from desktop to mobile computing over a decade ago. Our investments and breakthroughs in AI over the last decade have positioned us well.”


Shifting our attention to the consumer. Unilever provided an upbeat view on the consumer segment and showcased the company’s ability to push pricing with only a marginal drop in volume. In this most recent quarter, Unilever raised pricing by 10.7% while volumes declined only 0.2%; showing strong brand strength and customer resiliency. This is truly impressive, with competitors all singing the same tune and passing on cost inflation to consumers.

We also expect an improvement in operating margins as input costs have peaked and are beginning to roll over. This means that profitability will increase as costs come down and pricing remains unchanged. This margin expansion theme is a significant reason why we are so positive on Unilever’s trajectory.

Another company with strong pricing power and marginal volume pullback is Philip Morris. Organic revenues rose 3.2%, with pricing up 4.3% and volumes down 1.1%.

Unilever’s price volume trajectory

However more importantly, is the volume growth in their smoke-free/noncombustible business, that experienced volume growth of over 10%. PM has set a target for the smoke-free business to contribute at least 50% of revenue in 2025 and are well on their way. This is a higher-margin business that will lead to margin expansion as the company approaches their 2025 target revenue ratio.

In February, CEO Emmanuel Babeau noted, “we are coming with a business that has potential to be significantly better in terms of growth and profitability than the combustible business.” Given the current environment and the opportunity in front of it, we are bullish on PM. It continues to show encouraging trends and gain market share despite heightened competition.


Energy stocks continue to trade at new highs. Shell’s stronger-than-expected profits followed a string of record-breaking levels as the sector continues to benefit from strong demand and price volatility.

Shell kept its dividend unchanged and announced a further $4bn share buyback program for the next 3 months. With both buybacks and dividends reaching $6 billion, or roughly 40% of cash flow, Shell exceeded its commitment to spend 20% to 30% of its cash flow on shareholder returns. This was very well received.

Looking at the bigger picture, the current dynamic influencing the price of oil is the perceived weakness in demand coming from developed markets. However, we recently had a call with an energy specialist who confirmed her bullish view on oil as China has enough domestic demand to offset any weakness in the developed markets.

On Shell’s earnings call, CEO Wael Sawan concurred how the physical fundamentals in the oil market continues to be strong. “Clearly, there are market jitters. And I can understand the reactions to the Fed interventions and more central bank interventions with the tightening of credit is having an impact on the market. But physical fundamentals continue to be strong … People still want to be able to get their hands on cargos ASAP. And so those fundamentals are good.”

We remain bullish on the price of oil on a fundamental basis and see the price of oil increasing in the near future.

To wrap it up, as we approach the end of earnings season, we continue to shift through the noise and look ahead. Blackstone’s, CEO Stephen Schwarzman fittingly quoted Wayne Gretzky, “You have to skate where the puck is going, not to where it is.” We couldn’t agree more!

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By the Numbers

The second quarter started on a high as the JSE ALSI returned 2.8% in April, driven by gains across the board. The property sector outperformed with a return of 3.8% for the month. Fortress (+17.3%), MAS Real Estate (+10.3%), Stenprop (+10.1%) and Sirius (+7.9%) were amongst the best performers in the sector, while SA Corporate was down 7%. The resources sector was up 3.7% for the month, as momentum continued for the gold miners (Goldfields +21.3%; Harmony +20.5%). The platinum miners were also amongst the biggest winners on the JSE, led by Northam Platinum (+22.6%). Amplats (+13.5%), Sibanye (+10.2%) and Impala (+8.5%) also recorded strong gains.

The healthcare stocks (Netcare +11.5%, Mediclinic +7.6%) were one of the best performers in the industrial sector, which was up 3% in April. British American Tobacco was up 7.2%, following the weak performance reported in March and Richemont once again reported a solid 6.1% return for the month.

Within the financial services sector (up 1.3%), FirstRand returned a solid 6.6% for the month. Capitec, on the other hand, was down 4.9% as investor concerns regarding asset quality weighed on the stock. African Rainbow Capital was the biggest loser within the sector, down 15.6% while Transaction Capital was down another 6.5% in April. Retailers had a decent run as the sector was up 1.3%. The Foschini Group was up 6.5% while Mr Price was up 3.7%. Following the release of the Pepco Group interim results, Steinhoff was up 22.7%.

Local South African Investment markets, major market indices
Local South African Investment markets, major market indices

SA Consumer is likely to Weather the Storm


The financial health of the South African consumer continues to come under a microscope as the cost of living rises; food inflation remains stubbornly high and interest rates continue to increase. As such, the already strained consumer is expected to come under further financial strain which will consequently impact spending. This, together with the severe loadshedding expectations for the winter season, suggests that company earnings will come under pressure over the near term.

The recent Capitec results also drew attention to these concerns, as the company noted that the increased cost of living has had a significant impact on its clients, especially the middle-to-lower income class.

The company reported that the weighted average costs for all categories grew 5% from the previous year, with costs in some categories growing by double digits.


The economy of 20 million clients showing a significant increase in the cost of living affects the middle- to lower-income clients the most

Additionally, the company disclosed data for insufficient funds transactions as a percentage of total transactions – an indication of financial strain. This has increased to 10.7% in February 2023 compared to 9.8% in the previous year and was driven by declining inflows, lower bonuses, and less overtime.


The economy of 20 million clients showing insufficient funds transactions* increase driven by declining inflows, lower bonuses and less overtime

Taking a step back and looking at the bigger picture, the current consumer and business confidence data reflect that sentiment is low. The drop in the consumer confidence index indicates concern among consumers about South Africa’s economic prospects and household finances. In addition, the business outlook remains gloomy as confidence is being impacted by severe loadshedding.


graph showing consumer and business confidence post COVID

Despite the depressed confidence levels, other data points suggests that the financial health of the SA consumer remains stable.

Firstly, the growth in private sector credit extension shows no signs of a significant slowdown as all categories continue to grow at healthy levels.


Graph showing growth in private sector credit extension shows no signs of a significant slowdown as all categories continue to grow at healthy levels

Given the growth in private credit, it is encouraging to see that household debt to disposable income remains at relatively low levels; the lowest level post-Covid. Although there has been a sharp rise in interest rates, debt-service costs as percentage of disposable income remain at manageable lows compared to historical levels.


Graph: Given the growth in private credit, it is encouraging to see that household debt to disposable income remains at relatively low levels; the lowest level post-Covid

Retail spending is up 7% year-to-date which, in our view, reflects a healthy level of spending in a tough environment.


Graph showing that Retail spending is up 7% year-to-date which, reflecting a healthy level of spending in a tough environment.

Lastly, excess cash (deposits above the December 2019 normal levels) remain at healthy levels. This excess cash currently sits at R248.7 billion. To put this into context, this represents 19.7% of the 2022 retail sales. The consumer is sitting on a lot of dry powder, and we expect that they will draw down on this cash, should need arise.


Graph showing excess cash (deposits above the December 2019 normal levels) remain at healthy levels. This excess cash currently sits at R248.7 billion.

While we acknowledge that the SA consumer is under significant strain from the rising cost of living, we do believe that they will be able to navigate the tough economic environment. The valuations for the retail and banking sector remain low, reflecting this depressed sentiment. As we have noted, we believe that the consumer will be able to weather the storm and as such, the low valuations present opportunities for the patient investor.

Closing Comments

Turning points in economic cycles always creates the most noise, as rate hikes begin to achieve their intended goals, squeezing economic growth. The social impact is emotional and exactly what the media focus on. It is important to remember that the stock market looks out 12 months and not to get caught up in the noise. Year-to-date, global equity market returns are approaching double digits, which feels surprising given all the negative press. As an investor it is important not to get distracted by the noise and remain focused on buying quality companies at reasonable prices.