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Wood for the Trees | November 2023
8 December 2023

Christmas came early for global stock markets in November. All global indices finished the month up significantly. The S&P 500 was up 8.7% for the month, representing the best monthly performance since July 2022.

The catalyst for the big move in risk assets was below-consensus inflation across the globe. Inflation has fallen precipitously since its highs in 2022, with all 3 major developed economies seeing inflation approaching target ranges.

The dramatic fall in inflation has given market participants confidence that we have reached the end of the rate hiking cycle, as such we begin to look towards when first cuts can be expected.

You should be used to this chart by now, it’s one we watch closely to get an indication of what the rates market is forecasting for interest rates over the next 12 months. As seen below, the rates market is currently pricing in 5 rate cuts in 2024 versus the previous forecast of 3 cuts as of the end of October. Additionally, the first cut has shifted forward to March from May.

Along with the beginning of a rate cutting cycle, one of the other bullish catalysts for an Equity market rally in 2024 is the fact that cash levels among Global Fund Managers remain at higher-than-average levels.  The rally in November saw strong flows into US focused Mutual and ETF equity funds, which have essentially experienced outflows for the last 12 consecutive months.

As we head into the end of the year, we see lots of reasons to expect November’s rally to continue into December. The narrative coming out of the FOMC meeting on the 13th of December will no doubt set the tone.

In the final edition of Wood For The Trees for 2023, we take a look at some of the portfolio changes we made in November and walk you through 3 new products recently launched by NVest Securities. This month’s version is slightly shorter than usual, I hope you enjoy it.

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By the Numbers

Markets delivered their strongest month in over a year on the confirmation of easing inflation, consumers remaining resilient, and expectations for sooner rate cuts next year. S&P 500 (+8.7%, +18.1% YTD), Nasdaq (+10.6%, +44.8% YTD), Stoxx Europe (+6.2%, +7.3% YTD), FTSE 100 (+1.8%, 0.0% YTD), Emerging Markets (+7.6%, +3.0% YTD), and Hang Seng (-0.6%, -12.9% YTD).

U.S. yields drifted lower as investors increasingly believe the Fed will keep rates unchanged as inflation declines closer to the Fed’s 2% target. Shares of medical device makers, Insulet (+43.5%) and Dexcom (+34.7%), rose as study results on WeGovy (weight-loss drug) were better than expected. Software companies Datadog (+44.3%) and CrowdStrike (+35.3%) rose on upbeat earnings outlook, while Fortinet (-6.9%) and Cisco (-6.5%) fell on weak guidance.

In the UK and Eurozone, inflation has dropped a lot faster than anticipated; putting the central bank in a difficult position, potentially having to cut rates sooner. Some of the European movers include Adyen (+70.0%) who surged after management revised targets. On the other hand, Burberry (-13.9%) warned that its full-year operating profit may be at the low end of forecasts as global luxury spending slows. Diageo (-10.9%) also moved lower after a trading update cautioned investors on weaker performance in Latin America and Caribbean; leading to slower sales growth.

China remained one of the only major geographic regions to enter December with indices still lower YTD. Haidilao (-22.0%) a restaurant business, dropped after its plan to acquire a Japanese hotel business, disappointed investors. Meituan (-19.8%) a food delivery company, also disappointed investors with a soft outlook citing consumer caution. On the brighter side, Tencent (+10.7%) and Baidu (+11.7%) reported solid earnings

last quarter in ZAR
Last Quarter in USD

Alibaba U-Turn

This month Alibaba, the Chinese e-commerce company, unexpectedly announced a U-turn on their plan to spin off their Cloud business. This spin-off was one of our main catalysts for a revaluation of Alibaba shares, as the potential separate listing of the various operating businesses would drive the share price based on its sum-of-the-parts valuation.

Global equity

This reversal led us to reconsider our investment thesis, selling out of our holding to pursue other stocks with more compelling growth prospects.

On Alibaba’s September quarter earnings call, Chairman Joseph Tsai noted that they would not pursue the full spin-off in light of the uncertainties created by recent U.S. export restrictions on advanced computing chips. Management stated that a spin-off of its Cloud business “may not achieve the intended effect of shareholder value enhancement.” Tsai said, “Instead, we will focus on developing a sustainable growth model based on emerging AI-driven demand for networked and highly scaled cloud computing services.”

The move was a sharp reversal from its plans, following the restructuring announced earlier this year which would split the company into 6 major businesses. At the time, Alibaba said that the business units would go public individually; raising capital and maximize value for shareholders.

The company also announced that it has put on hold its plans to list the supermarket chain Freshippo, as they evaluate market conditions and other contributing factors. Alibaba’s logistics company, Cainiao, has submitted documents for IPO on the Hong Kong Stock Exchange and will continue as anticipated.

Turning to quarterly earnings, Alibaba revenue rose 9% year-over-year. Revenues grew slower than in the quarter ended June, which saw revenue rise 14% amid a slowdown in China’s economy following the initial rise when COVID-19 restrictions were lifted. Alibaba is grappling with both a slowdown in consumer sentiment amid a softer Chinese economy, as well as fierce competition from rivals.

While the company remains world class and a dominant player in the Chinese consumer marketplace, we have concerns that low-single-digit revenue growth will not be enough to drive the share price higher in the short term – particularly given Chinese economic growth which is showing negligible signs of reinvigoration. With the separate listing of the various Alibaba divisions now off the table, this significantly impacts the near-term investment case on the stock.

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By the Numbers

Following three consecutive months of decline, the JSE ALSI gained 8.4% in November, bringing the year-to-date performance to 3.4%. All sectors rallied during the month, as Industrials led with a gain of 10.4%, followed by Financials (+8.6%), Property (+7.7%), Resources (+6.4%) and lastly Retailers (+2.3%).

PPC led the industrials sector with a 40.4% gain, driven by a positive trading statement indicating profit for the first half. Additionally, PPC announced the disposal of its 51% stake in CIMERWA. Telkom rose by 23.1% on better-than-expected first-half results. Also, Naspers and Prosus gained nearly 20% each following strong interim results. Conversely, Bidvest lost 10.9% in November after reporting muted performance in its four-month trading update.

Transaction capital recovered further in November, rising by 48.2%; however, it remains the worst performer year-to-date (-78.9%). Other notable financial sector performers include Quilter (+24.6%), Investec Ltd (+19.8%), Capitec (+17.4%), and Investec PLC (+16.2%). Conversely, Brait was the poorest performer on the JSE in November, declining by 22.5% after releasing first-half results. African Rainbow and Alexander Forbes were also down by 12.0% and 8.7%, respectively.

Several companies in the property sector released updates and results in November, revealing ongoing improvements in fundamentals across all segments. Some notable performers include Sirius (+18.5%), Nepi (+16.0%), and Fairvest (+15.0%), which reported strong results. Lighthouse (+16.9%) and MAS (+16.1%) also experienced significant gains. However, Hyprop was an exception, with the stock declining by 10.8% for the month.

Within resources, Harmony gold was a standout performer, up 34.9% this month. This was followed by a very strong performance from Amplats (25.6%) despite PGM prices remaining under pressure. Other strong gains came from Kumba (+21.9%) and African Rainbow (+17.3%). Meanwhile, energy counters lagged with Thungela down 17.7% on weaker coal prices and the weaker oil price also weighed on Sasol (-12.5%).

The rally in the retail sector was also supported by better-than-expected results that came out during the month. Mr Price (+16.3%), TFG (+11.5%) and Pepkor (+9.5%) were amongst the big gainers. On average, sales growth was ahead of market expectations and the companies reported cleaner inventory levels, which was a focus area going into the results.

Last Quarter in ZAR
Last Quarter in ZAR

Time for Some Change

In our September WFTT we covered the PGM market in detail. Sustained pressure on PGM prices continued to stress the platinum sector throughout October and November. Pricing remains below the cost curves of numerous mines and the inability of market experts to make heads or tails of the outlook leaves us concerned. The opaque nature of the supply/demand dynamics continue to cloud the prospects of the underlying companies with share prices reflecting this uncertainty. Valuation at spot pricing presents a scary reality that PGM shares remain overvalued with the likes of Implats having an implied value of between R30-R40 per share.

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The lack of a dividend, uncertain outlook and potential for significant capital downside, led us to fully exit our platinum positions across our managed book. Subsequently, we have seen debt funding raised by Sibanye Stillwater and talks of job cuts at Anglo Platinum thus reaffirming our expectations of an environment that will remain challenging for longer.

Amongst the big 4 banks, FirstRand has always been the high-quality option with superior returns and growth, hence it has traded at a premium valuation to its banking peers. As we look forward, FirstRand faces slowing top line growth with cost growth coming in higher than originally forecast; resulting in lacklustre earnings growth expectations which could ask questions about its premium valuation. The balance of the banking sector is offering more attractive earnings growth expectations on less demanding multiples. We currently view FirstRand as facing capital downside risk and/or the potential to lag the sector. The position has performed well across our portfolios and as such we have decided to capture this gain and shift the funds into areas presenting more attractive prospects.

Proceeds from these disposals will be primarily split twofold. We are still buyers of the banking sector with preference for Absa and Standard Bank. A portion may be used to ensure our banking weight is appropriate across a portfolio. Secondly, we have added an Actively Managed Certificate known as the NVest Global AMC into growth focused accounts. The AMC gives the portfolio exposure to the NVest Global Model Portfolio, discussed in more detail below.

New NVest Securities Products

In an ever-evolving financial landscape, innovation frequently finds its way to the forefront, this has been the case with the advent of Actively Managed Certificates or AMCs.  AMCs are listed entities on the Johannesburg Stock Exchange which trade like typical listed stocks, however within the AMCs are underlying reference portfolios that allow the investor to gain exposure to specific portfolios through one investment vehicle, not to dissimilar to Unit Trusts. 

NVest Securities has recently launched 3 new AMCs based products which offer clients the ability to invest in a broader range of asset classes and stocks directly in your local NVest stockbroking account.

The NVest Balanced and Stable Portfolios provide a more conservative investment option where funds are invested across multiple asset classes; SA Equities, Offshore Equities, SA Bonds and Cash. The weightings in each asset class differs between the Balance and Stable Portfolios, with the Balanced Portfolio having up to 75% exposure to Equity (split between Local and Offshore), 20% in SA bonds and the remaining 5% in Cash. While the Stable Portfolio is slightly more conservative with 55% in Equities, 35% in SA Bonds and 10% in cash.

Global equity

The NVest Global Portfolio provides investors with an opportunity to gain exposure to a focused portfolio of leading international companies, such as Microsoft, Apple, Visa, Nike, etc.

If you would like more information please don’t hesitate to get in touch with one of our Portfolio Managers.

Closing Comments

We are currently working on our 2024 Outlooks which we hope to get out to you in the new year. We are confident the Equity markets, both locally and internationally, are set up to provide a strong year for investors.  

From the whole team at NVest Securities we wish you happy holidays and a fantastic New Year. See you in 2024.