August was the month where the U.S. Fed’s trade-off of slowing aggregate demand in order to bring down inflation, or slowing aggregate demand too much causing a recession, shifted to the latter. There was risk the Fed was behind the curve which increased the potential of the U.S. economy going into a recession. Markets responded accordingly.
The first week of August saw the S&P 500 fall 7% in three days, as weak job data spooked investors into thinking high interest rates were choking the economy. Non-Farm Payrolls data for July suggested only 114k jobs were added versus expectations for 175k, and unemployment increased to 4.3%. It was not only the equity markets that sank but U.S. government bond yields dropped precipitously as investors moved to the safety of government bonds. 2-year yields dropped from 4.35% to 3.87% and 10-year yields from 4.17% to 3.78%; driving the 10-2 year spread into positive territory.
With the ensuing market panic, rate markets quickly priced-in the likelihood that the Fed would have to cut rates by 50bps in September to try get ahead of the curve and steady the ship.
Displaying how volatile markets can be, stronger-than-expected ISM Non-Manufacturing data for July – which came out on the 5th of August – was enough to support markets. However, by the time July CPI numbers confirmed inflation was in fact moving towards the Fed’s target rate of 2%, the S&P 500 had recovered the entire pull-back seen at the start of the month. By the end of August, equity markets were again testing new highs with expectations for a 25bps cut back on the table, when the Fed meet on the 18th of September.
U.S. Q2 earnings reports concluded in August with Walmart and Target both commenting on the resilience of the U.S. consumer. Walmart, the bellwether for the U.S. consumer, beat Q2 earnings expectations delivering 4.7% sales growth with improving margins. Additionally raising guidance for FY25, which suggests they see no signs of a recession. These comments buoyed the stock and the equity market in general.
By the end of the month, investors were awaiting the release of Nvidia’s earnings. As the AI poster child, Nvidia has single-handedly driven the tech sector higher for the last 12 months; having individually appreciated over 200%. Expectations were high going into the print, and in hindsight, anything less than an exceptional outlook was going to disappoint investors. Despite Nvidia beating expectations and delivering 122% year-over-year revenue growth, guidance for the September quarter disappointed; leading to a selloff in Nvidia shares as well as the tech space in general. Despite the weakness in the tech names after Nvidia’s earnings, capital expenditure on AI remains strong.
One of the main reasons why we at NVest believe that the U.S. will avoid a recession, is due to the strength we saw in Q2 results. Of the 93% of companies that have already reported, 79% beat expectations by an average of 3.9%; reporting Q2 earnings growth of 10.9%. Q2 earnings growth is significantly higher than previous growth rates and signals a potential step change in growth looking forward.
On the local front, we are beginning to see signs of the South African risk premium waning across the board and for SA Inc focused stocks in particular. We have seen most SA assets outperform in August, with the Rand representing a good barometer for investor sentiment. Since late April, just before we went to the polls, the ZAR had appreciated 7.73% from R19.20/USD to R17.68/USD. In August alone, the ZAR appreciated 4%.
Given the fact that SA equities have been a pariah in the global investment landscape for so long, it is pleasing to see sentiment finally begin to turn. We continue to believe SA equities offer very exciting return potential with numerous catalysts in the near term providing solid tailwinds.
1. We are on the cusp of an interest rate cutting cycle. We expect the first cut at the end of September, with the market pricing 100bps of cuts by June 2025. Historically, rate cuts have been supportive of equity markets.
2. The two-pot pension system will likely put R50bln in the hands of the SA consumer. This has the potential to add 0.5% to 2025 GDP growth and drive discretionary spending; which bodes well for SA-listed retailers.
3. While still early days, we are hearing positive developments regarding our new Government of National Unity (GNU). This is leading to economists upgrading their forecasts for GDP growth. Most economists are now forecasting GDP of >2% for 2025 and beyond; a growth rate we haven’t experienced for many years.
With these catalysts right in front of us and SA equity valuations that remain very attractive, we are very excited about the potential for SA equities to deliver significant upside returns.
With this in mind, Khonie and Anda walk though some of the highlights coming out of the latest SA company trading updates. Additionally, we motivate why we remain buyers of Sasol at current levels.
Looking ahead, we are about to enter election season in the U.S., with the first debate between Trump and Harris scheduled for the 10th of September. Liza breaks down the main policies for both candidates and how they could impact various industries and the market.
Enjoy this month’s investor letter.
International section
Local section
By the Numbers
August started with US recession fears sending shockwaves through global markets, causing losses in equities and big tech underperformance. Major US indices then moved higher after Fed Chair Jerome Powell signaled that rate cuts are coming, as trends appear supportive for the first rate cut in September – S&P 500 (+2.0%, +19.0% YTD), Nasdaq (+1.0%, +17.4% YTD).
Some of the big movers include Kellanova (Kellogg’s spin off) (+39.5%) after an acquisition announcement by Mars. Starbucks (+18.9%) announced a CEO replacement which led to numerous upgrades. On the other hand, Moderna (-35.8%) cut FY2024 sales outlook citing lower COVID vaccine sales, after quarterly product sales plunged 73%. Intel (-27.8%) dropped after disappointing Q2 results as well as announcing that it would suspend its dividend and cut 15% of its workforce in an effort to cut spending and streamline the company.
Across the pond, the UK central bank delivered its first interest rate cut, joining the European central bank in cutting rates ahead of the US. Major equity markets closed higher – EU 600 (+1.4%, +9.5% YTD), FTSE 100 (+0.1%, +8.3% YTD). Online food services, Delivery Hero (+38.9%) and HelloFresh (+29.6%), reported stronger-than-expected results on the back of higher volumes. Luxury brand Burberry (-13.5%) closed lower as it is set to drop out of the FTSE 100 at the September rebalancing, as well as experiencing weakness in the luxury market.
In China, equities continue to drag down EM performance as economic stimulus fails to boost consumer demand and concerns of an economic slowdown pressure commodity prices – Shanghai (-3.3%, -4.4% YTD), Emerging Markets (+1.4%, +8.9% YTD). Streaming media platform, iQIYI (-35.4%) dropped after reporting lower revenue and profit, as well as anticipating slower growth due to fierce competition and concerns over a weaker economy; affecting stocks that rely heavily on domestic consumption. Chinese internet giant, NetEase (-12.0%), moved lower after missing estimates, despite reporting stronger gaming revenue.
Policies under Trump & Harris
As the U.S. elections approach and November draws closer, we take a look at 10 potential policies set out by the Democratic- and Republican Party.
If Harris (Democrat) wins, policies would likely focus on taxation, regulation, industrial policy, and energy transition. On the other hand, a Trump (Republican) victory will focus on immigration, trade relations, deregulation, and a reduction in federal oversight.
Below is a breakdown of the 10 policies each candidate could prioritize:
10 Policies if Harris Wins:
1. Restore top individual income tax rate to 39.6%:
High income earners will face higher taxes, potentially dampening consumer spending on luxury items. However, according to research this only affects around 3% of U.S. households who earn more than $400,000 per year.
2. Set new rules and penalties to prohibit food/grocery companies from expanding profit margins more than warranted:
Regulation preventing price gouging may limit profitability in the food processing and retail sector. Accordingly, food companies sell smaller pack sizes at lower prices to help consumers stay within budget.
3. Continue antitrust enforcement:
Reduce monopolistic practices and hidden fees, targeting large corporations like Big Tech and financial services. This could also dampen capital markets activity and affect the approval process for M&A.
4. Lower drug costs by increasing transparency from Pharmacy Benefit Managers (PBMs):
Force PBMs to disclose pricing information, which could lower medication prices and impact pharmaceutical profits.
5. Develop AI guidelines via the AI Safety Institute:
Regulatory oversight on AI could slow innovation but will ensure responsible use. Forward-looking guidelines include banning voice impersonations and enforcing content authentication. Cybersecurity companies will be the biggest benefactors.
6. Use American-made materials for federal-funded infrastructure:
Policy to stimulate domestic industries like steel, lumber and concrete; benefitting U.S. manufacturing and infrastructure investment.
7. Reshore critical supply chains:
Aimed at reducing dependency on China. This could benefit domestic manufacturers of critical materials and technologies, but might raise costs for industries reliant on global supply chains.
8. Restrict exports of advanced technologies to China:
This would impact semiconductor and defence companies that rely on international sales. A series of more export controls – in addition to those already put in place – are expected to limit the use of advanced tech by Chinese companies. This excludes, for example, Taiwanese companies based in China.
9. Electrify federal and heavy-duty vehicles:
Increased demand for EVs could significantly boost the U.S. clean energy and electric vehicle sectors. This would benefit lithium, copper, and aluminium demand, as well as analog companies who provide semiconductors for the EV transition.
10. Require low-carbon materials and clean power for all federal buildings by 2030:
This would stimulate growth in green energy and sustainable construction materials; influencing sectors like renewable energy and construction.
10 Policies if Trump Wins:
1. End benefits for undocumented immigrants:
Removing access to public housing, food stamps, and healthcare for undocumented immigrants. This would reduce federal spending, but may strain sectors that rely on low-skilled workers such as agriculture and construction. Subsequently, this may result in additional spend on equipment to help relieve reduced labour force.
2. Align U.S. tariff rates with trading partners:
Impose 10% tariff on imports (up to 60% for China), as well as a Matching Tax to raise tariff rates to an equivalent level to what each trading partner charges on U.S. goods. This could disrupt global trade, raise consumer prices, and hurt companies reliant on foreign manufacturing.
3. Restore executive order to remove two existing regulations for every one new regulation:
Trump’s deregulation rule would reduce compliance costs for businesses; benefitting sectors like energy, healthcare, and finance but raising concerns about oversight. Less regulation could mean easier and quicker approvals for traditional energy projects, medication, and capital markets activity.
4. Revoke EV standards:
Removing the requirement for EV sales to reach 56% by 2032 could slow down the EV industry and diminish demand for green energy initiatives. Slowing EV penetration could drive increased Internal Combustion Engine (ICE) vehicles sales – the largest PGM end market – leading to higher-than-expected PGM demand growth.
5. Lower medication prices through domestic manufacturing:
Expanding U.S. manufacturing of essential medication could strengthen domestic pharmaceutical supply chains while cutting reliance on foreign sources.
6. End the war in Ukraine:
While a specific plan has not been detailed, resolving the conflict could stabilize global energy markets, start a rebuild cycle, and lead to companies reinvesting in the market after the war caused them to pause operations in the area.
7. Federal budget cuts:
Directing agencies to identify savings that decrease government spending. This could impact industries that depend on federal contracts, such as defence, healthcare and infrastructure.
8. Transfer education authority to state governments:
Shifting control from federal to state could decentralize education policy. Many of Trump’s policies are rooted in decentralizing the government and bolstering states’ rights. The potential shift of authority could impact technology and publishing sectors, as they need to adjust their products to changing demands from each states’ diverse priorities.
9. Restore Schedule F:
By reinstating Schedule F (order to reclassify federal employees), civil employees are easier to hire or fire. This might impact the stability and effectiveness of federal agencies.
10. Ban censorship on speech:
Executive actions to promote freedom of speech and religions, as well as restrict promotion, marketing or financial support for platforms that do censor speech.
By the Numbers
August was another solid month, with July’s momentum carrying through as the JSE ALSI gained 1.19%. It was a stellar month for the property sector, which rose 8.26%, followed by financials (+5.51%), industrials (+4.00%), and retailers (+2.48%). On the flipside, resources sold off, declining by 10.63% this month.
Hyprop gained 19.2% following an announcement that the company would be selling its stakes in malls across Nigeria and Ghana to focus on its investments in South Africa. RES rose 14.4% as the company reported higher revenue and EPS in its 1H24 results, along with a 6.2% year-on-year increase in average rentals, benefitting from Eskom’s improving power supply. Fortress (+13.3%) posted better-than-expected FY24 results, with diluted EPS rising 30.8% year-on-year. Growthpoint (+15.0%) and Redefine (+13.6%) also recorded solid gains. Additionally, Redefine issued a pre-close update and held a capital markets day that highlighted continued improvement in fundamentals. On the flipside, MAS PLC declined 4.8% after reporting weaker FY24 DIPS, missing both expectations and management’s own guidance.
Financial services and retailers rallied in line with the improved sentiment for domestic equities. Standout performances came from Discovery (+15.0%), Mr. Price (+13.2%), Woolworths (+13.2%), JSE (+13.1%), and Absa (+11.0%). Absa’s 1H24 results were largely in line with expectations, although slightly weaker compared to peers, but the market responded positively to the announcement of leadership changes. Truworths (+8.2%), Foschini (+8.2%), and Pepkor (+7.0%) also posted solid gains this month.
Leading the gains in Industrials was Telkom (+20.3%), as its investment case became more attractive following a positive 1Q25 trading update. The company reported revenue growth of 3.9% and an EBITDA margin of 25.5%, both ahead of market estimates, driven by strong performance in its mobile business. This was followed by Motus, a recent addition to our holdings, which rose 17.1% in line with general market movements. MTN (+16.2%) also ranked among the top performers this month after delivering a resilient 1H24 operational performance and successfully negotiating renewed tower lease terms for its Nigerian business. On the flipside, Grindrod (-9.7%) and Super Group (-8.1%) lost ground this month.
Resources fell out of favour this month due to a decline in commodity prices, with gold and PGM counters leading the losses. Northam (-22.2%) was the worst-performing share following its FY24 results, where the company reported a 22.2% decline in revenue and an 81.6% year-on-year drop in EPS, mainly due to lower prices despite higher sales volumes. African Rainbow (-20.2%) also anticipated a decline in headline EPS, as indicated in its FY24 trading update. Despite a strong gold price year to date, Gold Fields (-19.7%) reported a 15.7% decline in its 1H24 diluted EPS due to a 25% year-on-year drop in output at their South Deep mine. Meanwhile, Pan African (+6.0%) and AECI (+5.5%) were some of the stocks that avoided the sell-off.
Earnings Overview
A number of companies across the JSE universe came to market with results and updates, giving us a perspective of the current operating environment post the GNU formation. In this note, we will review these updates and highlight some of the emerging trends in the different sectors.
Retailers
1. Discretionary – Weak demand weighs, but strong tailwinds on the horizon
A key challenge for clothing retailers over the past few months has been weak demand, as consumers have held back on purchases amidst a challenging macroeconomic environment. The late onset of winter added to the challenge, leading to softer sales growth.
Despite this, tactical decisions resulted in an increase in full-priced sales which differs from the heavy discount trade we have seen in prior years. Looking ahead, we anticipate a renewed focus on inventory management, where maintaining optimal levels and mix will be crucial for preserving margins and market share to drive earnings growth.
2. Staples – Lower inflation and resilient trading environment
A major highlight in this sector is Shoprite’s dominance, as it continues to innovate and capture market share from its peers. Woolworths Food is performing well, maintaining steady growth, while Pick n Pay’s turnaround is still in its early stages. Meanwhile, the turnaround at Spar is making strides with the decision to shed the loss-making and debt-laden Polish business.
The main sectoral trend is declining internal inflation, driven by the normalisation of food inflation from last year’s high base. This, along with cost savings from the absence of loadshedding, has supported earnings growth. Looking ahead, we expect the sector to remain competitive, with earnings bolstered by an improving macro environment.
Banks – Strong Operational Performance on Back of Normalising Credit Cycle
Turning to the banks, three of the big four (with FirstRand still to report) delivered reassuring results to the market. The sector experienced positive trade and price action due to the improving macro sentiment, which is starting to reflect in the operational and financial metrics of the banks.
A key concern going into the results was the quality of loan books and the trend in credit-loss ratios. With the exception of Absa, which faced challenges with credit quality, we saw improvements across the board, although levels of distress remain high on a through-the-cycle basis. The banks have guided a decrease in credit losses in the second half due to a combination of prudent risk budgeting and falling interest rates.
Additionally, capitalisation levels, for the most part, remain above target, providing the banks with excess funds and optionality for deployment.
Property – Improving Fundamentals Continue to Drive Earnings Growth
Amongst the property names, NEPI Rockcastle and Redefine Properties continue to impress. Nepi continues its excellent execution in the fast-growing eastern European region, premised on a strong balance sheet and value accretive capital allocation. The outlook on fundamentals on the ground remains constructive. Redefine also reported improving operational performance. The result was driven by improving, though still negative rental reversions, which drove an uptick in net property income. Loan-to-value remains high by industry standards, though they retain optionality to reduce the burden on their balance sheet with tactical sales across their offshore portfolio.
In general, we have a bullish view on prospects for the sector, on a favourable macro-economic climate, balance sheet repair and a firmer rental market, which together should lead to growth in distributable income and a sentiment-led expansion in multiples.
Industrials and Resources – A Mixed Bag
The mining sector continues to rationalize the quantum of supply across the metals and minerals complex in reaction to a slowdown in Chinese demand. BHP Group delivered a solid 2024 result, on the back of stronger-than-guided production and cost control in copper, where they are increasingly directing resources for organic and acquisitive growth. They continue to be the cheapest producer of iron ore, though they are pivoting toward other sources of growth and profitability into the future.
Turning our attention to industrials, we heard from a wide swathe of the sector with the weakness in the Chinese economy evident in the results.
SA Inc bellwether, Bidvest, produced an encouraging set of results, demonstrating broad-based strength in top-line and positive operating leverage. They experienced weakness in their local automotive and renewables-focused businesses, a reflection of weak consumer balance sheets and a reduction in load-shedding, respectively.
Motus, a recent addition to our local coverage universe, produced numbers ahead of consensus expectations, as their growing non-vehicle and non-SA divisions performed well to offset the weak SA-focused vehicle import, sales and rental businesses. Notably, management cleared excess inventory implying lower finance costs in the coming year. While the automotive industry continues to face weak demand, management expects an improved operating environment which should be supportive of earnings.
Local pharmaceutical giant Aspen sold off on slight earnings miss and uncertainty around timing and monetisation of future in-licensing deal activity. The Chinese business saw topline disappoint while the rest of the portfolio and manufacturing platform showed strong operational performance, particularly in the second half. The balance of the print came largely in line with expectations, with guidance on profit contributions of recent acquisitions also reaffirmed.
Conclusion
While we have seen different trends emerging, there is one common thread: a positive outlook. Most companies reported they were ‘cautiously optimistic’ about the macro environment and expect improved operational performance from the second half of this calendar year. The expect tailwinds from interest rate cuts, two-pot withdrawals and a general improvement in the macro-environment should be supportive of earnings going forward. As such, we continue to believe there is further scope for the recent rally to continue
Sasol 2024 Results: Market Downplays Second Half Turnaround
Subsequent to the release of Sasol’s 2024 results, we reiterate our bullish view on the name. We are constructive on both the financial and operational self-help measures being implemented by management across the group, which we expect to lead to earnings uplift and balance sheet strengthening. Additionally, current valuation is undemanding, at a forward PE of 2.8x. Consensus expectations put the target price at R224 on a forward PE of 5x, which represents a 74% uplift from current levels. We are buyers.
Performance
The headline announcement was a material write-down of their offshore chemicals business. Net debt came in higher than expected, on elevated finance costs and working capital levels. On the positive side, the firm registered solid prints on core earnings, and operating profits, even though revenue came in softer than expected. The key highlight, in our view was the reversal of fortunes in the second half of the year. Cash generation showed significant improvement driven by a stabilization in the US chemicals operations and strict cost control across the business.
Operation & Trading Environment
Management expects continued pricing pressure in global chemicals sector. Additionally, a slowdown in the Chinese economy, a key market for Sasol, continues to weigh on demand. Locally, the company faces elevated regulatory risk to key operating units. Despite this, we maintain a sanguine view of Sasol’s prospects on what we view as constructive internal measures to rationalize the business and extract incremental efficiency from assets.
Valuation & Market Expectations
We view the list of self-help measures as value accretive. That, along with guidance on a transformative change to dividend policy and falling capex should see a marked improvement in earnings and a gradual strengthening of the balance sheet, moving forward. Add to that an improving production outlook and our expectation of a supportive macro environment, and we expect a rerating in the name. Consensus earnings expectations look to have stabilized, while the current forward PE, at 2.8x, is undemanding relative to the 10yr average of 8.7x and the post Lake Charles beneficial operation average of 5x. Consensus pegs the target price at R224, representing a 74% uplift from current levels. Additionally, analysts expect 2025 earnings to come in 13% higher than the last print at R45 a share; this implies a forward PE of 5x. After selling off to the tune of 6.5% on results day, the stock regained all the ground lost in the subsequent two days of trade, registering a circa 13% uplift.
We will look to add to the position opportunistically across our portfolios.
Conclusion
We have been waiting for the start of the interest rate cutting cycle since late last year, and we are finally here, with the Fed ready to make their first cut in September. As we have mentioned on several occasions, rate cuts are generally positive for global equities. While interest rate cuts don’t happen in a vacuum and there are lots of other factors to keep an eye on, we remain fully invested and optimistic for the next 12 months both locally and offshore.