This month’s Wood For The Trees will be short and punchy, given that we have recently sent out our Local and Global mid-year updates in July.

July proved to be a pivotal month for global equities, as it delivered economic data that finally began to show the impact of 18 months of rate hikes. On the 11th we got inflation data for June which showed the first signs of disinflation, as CPI declined 0.1% month-over-month and slowed to 3% year-over-year, down from 3.3% a month earlier.

We saw an immediate reaction from the rates market which quickly shifted to pricing in a 90% probability of the first rate cut coming in September, followed by two further cuts in November and December. A meaningful change from the previous 50% chance of the first cut in September and potential for a second in December.

Additionally, we saw funds rotate out of Technology stocks – which have been driving the S&P 500 performance YTD – into smaller cap, cyclically-oriented names; causing the Russell 2000 to outperform.

As seen in the graph above, the market felt some pressure after the attempted assassination of former US president Trump on the weekend of the 13th, but quickly recovered by the following weekend when news broke that President Biden would not be running for re-election.

As we approached the last week of July, focus shifted to 2Q earnings. Earnings season has proven to be very good with more than 75% of companies beating earnings estimates, by an average of 4.5%. Overall, we have seen earnings growth of 11.5%. However, technology company results were put under the microscope, with any slight sign of weakness resulting in their shares selling off. This was particularly evident with Tesla and Alphabet, which saw their share prices dropping 10% and 5%, respectively, as earnings disappointed.

As we exited July, JOLTS, or the Job Openings and Labour Turnover Survey, saw job openings decrease down to pre-pandemic levels; showing further softening in the labour market.

It is becoming noticeably clear that the Fed’s high interest rate policy is having the desired effect on the economy, slowing growth and suppressing inflation. The pendulum has temporarily swung from expectations of a soft landing to fears that the Fed has left it too late to lower rates and the probability of a recession is increasing. Suddenly, bad economic data is bad and global equity markets are leaning on the cautious side.

We maintain that the US economy remains resilient, and the US consumer has the ability to withstand a slowdown in economic growth. Interest rate cuts have historically been good for global equities, and we remain optimistic that positive equity market returns can continue to deliver once this brief period of volatility subsides.

From now until September, we will oscillate from one economic data point to another.

At a portfolio level, we have added a position in Motus in order to take advantage of several catalysts that will drive cyclical stocks, starting with interest rates cuts and the kickoff of the 2-pot retirement system in September. We walk you through why we are excited about the name.

We also discuss Nike and why we continue to favour the stock despite the most recent pullback.

International section

• By the Numbers
• Motus Holdings – Several Catalysts set to Drive Shares Higher

Major indices continued to move higher in July but saw a rotation out of tech stocks. With inflation moving in the right direction and the resilient labour market finally showing signs of softening, investors gained confidence on anticipated rate cuts and moved out of tech names and into small-cap stocks – Russell 2000 (+9.9%, +12.0% YTD) Nasdaq (-1.8%, +16.2% YTD), S&P 500(+0.9%, +16.4% YTD).

The Magnificent 7 took a step back in July – Apple (+4.7%, +18.7% YTD), Amazon (-3.4%, +23.4% YTD), Microsoft (-6.8%, +11.9% YTD), Nvidia (-5.2%, +137.6% YTD), Tesla (+15.4%, -7.2% YTD), Alphabet (-6.1%, +24.0% YTD), Meta (-6.0%, +35.2% YTD). Some big movers include Dexcom (-40.7%) after the medical device maker slashed full-year revenue outlook. CrowdStrike (-40.4%) also dropped after the widespread technical outage affected millions globally.

Across the pond, UK and European central banks have started the rate cutting cycle ahead of the US, as inflationary pressures subdue. Major equity markets closed higher – FTSE 100 (+2.5%, +8.2% YTD), EU 600 (+0.8%, +8.0% YTD). Ocado Group (+41.3%), the online grocery business, moved higher after lifting annual profit guidance as their cutting-edge warehouse technology is expanding to international retailers and improving profitability. On the other hand, luxury brand, Burberry (-13.8%) dropped after reporting a slowdown in sales and highlighting weakness in the luxury market.

Commodity prices were under pressure on concerns of an economic slowdown as well as the challenging outlook in China. Recent Chinese economic data continues to weigh on sentiment, with indices moving lower – Shanghai (-0.9%, -1.1% YTD), Hang Seng (-1.4%, 1.2% YTD).

Nike shares have fallen 23% since reporting Q4 and full-year results, after management cut its outlook for 2025 due to macro uncertainty.

Nike currently trades at an historic low multiple of 22.8x forward earnings. The question investors need to ask is can Nike successfully address its issues and return to its former glory, or is this a broken story?

Despite the challenges, Nike remains a dominant force in the sports industry due to its unparalleled brand strength, extensive global market presence, and expectational athlete endorsements. This setback presents an attractive buying opportunity for investors seeking a high-quality name at a discounted price.

We need to see 3 things happen at Nike to become confidence its share price can move above $100:

1. New CEO to rejuvenate the strategy. The current CEO, John Donahoe, has been in the position since January 2020 with his contract expiring in April 2025. Under his tenure, the company has lost their way with innovation. There is a growing feeling amongst the investment community that fresh blood is needed.

2.Innovation. Nike is also at a point of transition where innovation has slowed, with management acknowledging the need to reaccelerate newness and pull forward their innovation pipeline. Ultimately, Nike needs to become relevant to the younger generation again.

3. Channel focus. Nike’s direct-to-consumer strategy has backfired. The wholesale channel needs to be reinvigorated.

Nike is hosting its Investor Day later in the year (November) with expectations hoping to see management changes as well as answers on innovation and confirmation that new styles are taking hold. It has the potential to be a market moving event.

Nike is currently trading at 22.8x earnings, well below its historic range of 30-34x. With FY26 EPS expected around $4.00, this offers over 50% to current levels.

For now, we remain holders of Nike and will look for appropriate opportunities to add to our positions as the Nike story unfolds.

The JSE ALSI reached record levels in July, posting a 3.84% gain ahead of its global peers. This performance was led by Resource counters (+5.53%), followed by Financials (+5.15%), SA Property (+4.30%), and Industrials (+1.56%). Conversely, the Retailers sector underperformed the market, declining 0.35% for the month.

Amplats (+20.0%) had a solid month, leading gains in resources. While the company reported an 18.3% year-on-year decline in EPS in its 1H24 results due to lower PGM prices, the stock rallied on the announcement that it was on track to demerge from Anglo American by 2025, with a planned secondary listing in London and an optimistic outlook for PGM demand by the CEO. Gold stocks DRDGold (+16.0%) and Gold Fields (+14.2%) also rallied as the gold price averaged new highs in July.

On the flip side, S32 (-17.9%) came under pressure after the company announced it had received approval to complete the sale of its met coal mine. Meanwhile, Kumba (-9.6%) declined after the company reported lower 1H24 earnings due to lower iron ore prices and decreased sales volumes.

The rally in financials was driven by insurers Momentum (+17.6%) and OUTsurance (+13.4%). At its investor conference, Momentum management reported robust growth in demand for affordable health insurance products. The banks also had a strong rally, with Nedbank and Capitec gaining 12.6% and 10.8%, respectively, in line with general market movements.

Within Industrials, Altron (+22.5%) and Karooooo (+18.6%) released trading updates and 1Q24 results, respectively, reflecting better operational performance. PPC’s price surged 16.9% after the company announced it had received final approval to dispose of its 51% stake in a Rwandan cement manufacturer for approximately R780 million. On the other hand, MTN (-4.4%) continued to face pressure due to the depreciating Naira, while Richemont (-4.7%) reported 1Q25 results that were largely in line with expectations but traded lower due to general weakness in the luxury market.

Property and retail stocks traded higher on the back of improved market sentiment. The most notable movers were Motus (+13.1%), Mas PLC (+12.7%), Cashbuild (+11.3%), Pepkor (+10.3%), Foschini (+8.9%), Vukile (+4.9%), and Redefine (+4.9%). Additionally, Cashbuild reported stronger revenue growth in their 4Q24 operational update, following slower growth in previous quarters.

Motus Holdings is a leading South African, vertically integrated automotive group with a diversified business model that spans vehicle import and distribution, retail, rental, financial services, and aftermarket parts.

Tough Operating Environment

As an interest rate sensitive name, Motus has felt the pressure associated with a high-interest rate environment. Weakened vehicle demand coupled with lost market share to entry level brands resulted from the constricted economic climate, ultimately impacting topline numbers in 2024.

The environment further exacerbated the excess inventory position, carried over from the post-COVID restocking cycle, pushing finance costs higher.

All in all, 2024 was a tough year for Motus, with management guiding a 25-35% decrease in earnings for FY24. The market has adjusted its valuation for the stock accordingly.