Jerome Powell, and the US Fed finally gave us what we have been waiting for. The market felt some pressure as we exited August on concerns the Fed was behind the curve and fears grew the US economy was heading into a recession. This headwind turned into a tailwind in the first couple
of weeks in September as it became evident that the Fed could potentially cut rates by 50bps at their September FOMC meeting. All asset markets began to adjust to this new reality, with yields on government bonds strengthening, the US dollar weakening and equity markets galloping higher.
On 17th September, the FOMC finally kicked off the rate cutting cycle, cutting rates 50bps, in line with market expectations.
Powell’s comments at the press conference conveyed his confidence in the Fed being able to successfully guide the economy to a soft landing.
Also of interest, the Fed’s updated Economic Projections, which echoed Powell’s comments, showed that Fed members expect GDP growth to remain at 2% + for the next 3 years while seeing inflation returning to 2.1% by the end of 2025. They also adjusted their expectations for interest rates to be 4.4% by year end, suggesting 50bps of cuts over the last 2 meetings of 2024.
Rate markets initially called the Fed’s bluff and priced in 75bps of cuts going into year end. However, some stronger than expected data points released toward the end of the month brought the market inline with the Fed’s view.
With less than a month until US elections (5 Nov), we expect election noise to begin to impact volatility in equity markets as participants sit on the hands until the outcome is certain. While Harris is up slightly in current polls it is going to come down to the swing states.
On the geopolitical front, we have had the anniversary of the 7th October 2023 Hamas’ attack on Israel. Israel is fighting on multiple fronts and have successfully eliminated the leaders of Hamas and Hezbollah along with many other top lieutenants.
While the fighting in the Middle East has had a dramatic impact on many people’s lives, capital markets have essentially brushed them off. That is, until Iran launched a barrage of ballistic missiles at Israeli in retaliation to the Israeli’s attack against Hezbollah and the assignation of Hassan Nasrallah. The introduction of the Iranians into the Middle East crisis caused the oil price to jump and US bonds and the Dollar to rally as investors moved into “safe haven” assets. The price of oil jumped again as September closed out on fears the Israeli’s were planning an attack on Iranian oil infrastructure. Iran supplies the world with 1.8mln barrels of crude per day. To say the situation in the Middle East is fluid would be an understatement, it bears watching.
Finally, the potential for a Chinese stimulus package to reverse their ever-weakening property market and tepid consumer sentiment has been on investors “watch lists” as an upside catalyst for the last 24 months. In the last week of September, the Chinese government announced a set of measures, that for the first time, looks like they may have some potential to support the Chinese economy. We go into more detail on the actual measures later in the newsletter, but needless to say, anything with China exposure gapped higher, led by commodity and luxury names which were up in excess of 20% in a week as short sellers scurried for cover. We await further details on timing and the exact quantity of the programs announced, any disappointment and the markets could easily give back the gains seen from the initial announcements.
On the local front, sentiment in the long-term outlook for economic growth is improving with economists starting to envision a SA economy delivering 2%+ growth. The JSE ALL share delivered 8.6% in the September quarter, outperforming all developed markets except China. SA Property remains the sector outperformer, a position the sector has held for the last 24 months. Given the recent run up in property stocks, we re-evaluate valuations and fundamentals to determine how much further this sector could potentially run.
Additionally, we take a closer look at the first 100 days of the GNU and why we believe there are reasons to be optimistic for the next hundred days.
We hope you enjoy this month’s Wood For The Trees.
International section
By the Numbers
Global equities moved higher in September, with the S&P 500 hitting record highs as the U.S. Fed started the rate cutting cycle with a 50-bps rate cut – S&P 500 (+2.7%, +21.4% YTD), Nasdaq (+2.8%, +20.4% YTD). Recession fears remain at bay as the economy & labour market remain resilient.
Some of the big movers include Constellation Energy (+33.2%) after Microsoft signed an exclusive 20-year deal where the utility company will provide energy to the tech giant’s data centers. This deal paves the way for future deals where big tech work directly with utility companies to meet massive AI energy needs. Casino & gaming companies Las Vegas (+29%) and Wynn Resorts (+26.3%) rallied as Chinese exposed companies moved higher, aided by stimulus measures to propel economic growth. In addition, JD.Com (+46.3%) and PDD Holdings (+39.5%).
In Europe and the UK, cooling inflation and modest economic activity continues to support rate cuts. Major equity indices lagged this month but remain in positive territory YTD – EU 600 (-0.4%, +9.0% YTD), FTSE 100 (-1.7%, +6.5% YTD). Energy stocks, Shell (-11.0%) and BP (-10.1%), followed lower oil prices on news that Libya is preparing to resume production and OPEC+ will increase output.
Chinese equities rallied as investor sentiment improved amid much-needed government stimulus measures – Shanghai (+17.8%, +12.2% YTD), Emerging Markets (+5.4%, +15.1% YTD). Real Estate shares surged on easier home purchase rules and a cut in mortgage rates; namely China Vanke (+99.2%) and Longfor Group (+77.4%). Investment banking & brokerage businesses also rallied after the central bank announced that it will provide liquidity and lending facilities for capital markets activity and share buybacks – Hithink RoyalFlush (+101.1%), East Money (+95.4%), China Galaxy (+85.7%).
Unpacking China’s Stimulus Playbook
Chinese stimulus announcements dominated the market in the last week of September, with each day revealing additional measures.
This move shows a U-turn regarding the attitude towards stimulus packages and is very positive for sentiment. That said, the current announced policies, while more than anything seen in the past, may not be enough to really drive fundamental change. According to industry experts, approximately a 2 trillion-yuan stimulus package is needed. However, the overarching message is good for sentiment and for job security.
The PBoC announced policy changes focused on 3 fronts:
- Monetary Policy – The PBoC will cut the policy rate by 20bps and Reserve Requirement Ratios (RRR) by 50bps, essentially releasing 1trln renminbi of liquidity to banks.
- Property Policy – Mortgage rates were cut by 50bps including for existing mortgage holders (typically on fixed rate mortgages). Additionally, down payment ratios for second homes were reduced to 15% from 25%. Subsequent to these initial announcements, several of the large cities removed their restrictions on local foreigners owning properties.
- Stock Market – The PBoC will set up a RMB500bn swap facility for brokers and funds to buy stocks. It will also set up a RMB300bn refinancing facility for stock buybacks.
On the consumer side, a once-off handout for the poor is to be given out before 1st October. In addition, Shanghai has rolled out a consumption coupon program for catering, hospitality, movies and sport. This does, however, work on a first-come-first-serve basis and is not a lot of money (amounts to REM20 per person). There are rumours that additional coupons will be available for meals to increase protein in-take as well as an expected subsidy for families with more than 2 children.
Chinese stocks reacted positively to the announcements, led by commodity and luxury names. The Shanghai Index moved 25% in a week.
We are still waiting to see the actual implementation and uptake of the stated initiatives which will be critical to their success. Many analysts have already warned that while stimulus policies look positive on the surface, they do little to change the fundamentals across many sectors on the ground and as such may be deemed to fail resulting stock prices swiftly moving back to levels prior to the stimulus announcement.
We are watching this space closely as the implications for the global economy is huge.
By the Numbers
The third quarter closed on a high note, with the ALSI reaching record levels in September, rising 3.3% (3Q +8.6%) on the back of improved global investor sentiment. Industrial stocks outperformed, gaining 4.8% (3Q +10.7%), followed by SA property (+4.7%, 3Q +18.3%). Resources recovered some of the losses from August, gaining 3.7% (3Q -2.5%), while financials rose 1.4% (3Q +12.5%) and general retailers were flat in 3Q.
Driving the performance in Industrials was Southern Sun (+16.5%), which released a positive 1H24 trading update, pushing the share to an all-time high of R8.00. Prosus and Naspers both gained 15.7% in September, buoyed by positive sentiment surrounding China’s latest stimulus measures. WHBO’s share price rose 14.5% after the company reported strong results, showing an 18.7% year-on-year increase in HEPS from continuing operations. On the downside, Aspen’s share price dropped 17.0% after its FY24 results, released on September 3, fell short of expectations.
Hyprop’s momentum carried through to September, with the share rising an additional 21.4%, leading the property sector. The company reported an 8.6% decline in FY24 distributable income per share, better than the previous guidance of a 15% to 20% decline. Burstone (+14.6%) highlighted in its 1H25 pre-close that it expects to deliver 1H25 results in line with full-year guidance, with management also noting significant progress in executing its strategy. Attacq (+13.7%) and SA Corp (+10.4%) also rallied after releasing results that underscored strong operational performance.
South32 (+17.7%) led the recovery in resources after being awarded a grant of approximately R2.9 billion from the US Department of Energy to develop a commercial-scale manganese production facility at its Hermosa project in Arizona. Implats (+17.6%) benefited from early signs that PGMs might be bottoming, with platinum prices ending the month 5.6% higher. Kumba (+9.7%) and BHP (+9.3%) saw share prices rise following China’s stimulus announcement. On the downside, Sasol (-19%) was one of the month’s worst performers, missing out on the China-led rally, as the stock was impacted by a stronger rand and weaker oil prices.
OUTsurance (+23.6%) was one of the top performers this month after reporting a 10.2% increase in EPS and raising its ordinary dividend by 29% to R1.74, along with an additional special dividend of R0.40 per share. Discovery (+11.7%) also posted strong earnings, with normalized HEPS up 14%, driven by solid performances in both its South African and global business units.
Improved investor sentiment, fueled by interest rate cuts, continued to drive a rally in the retail sector.
Lewis (+24.2%), Mr Price (+12.3%), Pepkor (+10.7%), Truworths (+8.6%), and TFG (+8.2%) all posted gains for the month.
Performance Update – SA Listed Property
It has been a year since our last SA listed property update and the picture could not be more different to a year ago. In what has been one of the most beaten down sectors, the South African listed property sector is back on its feet, fundamentally strong and still offering an attractive entry point for those looking to take a position.
The Market Moves
In the last quarter of 2023, the South African listed property sector (SAPY) staged its recovery. The uptick fuelled by growing expectations of global interest rate cuts. In 2024, SA Listed property has seen a significant resurgence, becoming the top-performing sector on the local bourse. This strong performance being driven by improving fundamentals in a supportive economic environment ultimately boosting investor sentiment and demand for the sector. Year-to-date, it has achieved an impressive return of around 23%.
Strong Bond Correlation Persists
The strong correlation between the SA10Yr yield and the distributable income per share (DIPS) yield of SA REITs persisted, with the REIT yield outperforming the 10yr bond yield at times. The outcome of the SA general elections coupled with the initiation of the rate cutting cycle in the US and South Africa, have been the drivers behind this move in bonds and listed property.
