Food for thought for 2024 from the SA equity trading desk

"Food for (provoking) thought” from the SA trading desk for 2024. This has become a bit of a tradition and is meant to help with thinking about the big themes in 2024. No particular order, always a pinch of salt. ALL TRADER’S VIEWS. Happy to send the list for the last year. – The excerpt about South Africa is a bit longer than usual this year and therefore is at the end of this piece. – FEEDBACK as always much appreciated.

GEOPOLITICS – 1.) Peace in the Middle East is going to happen. 2.) There will be peace talks with Russia. Stalemate situation and the new global order will be in place. Sanctions will not be lifted though. 3.) Ukraine will start the process to join the EU and NATO.

JAPANESE RISK – BoJ to change monetary policy and Japanese yields to rise significantly. Repatriation risk for Japanese assets invested outside of Japan is huge. The Yen will be one of the strongest currencies vs the USD when this happens. However, the problems that have been created with the easy money and the blown-out balance sheet of the BoJ will be a problem later in 2024 again (and hence for the Yen).

GLOBAL ECONOMY & MARKET VIEW – We will see a further slowdown. The Fed will cut aggressively in H2 due to risk of a hard landing. Bonds to outperform equities is the general view. The equation lower yields = lower stocks will at some point become true, recession and hard landing fears are back (and valid). Value vs growth should work, long defensive bond proxies are places to hide. Once peace talks happen with Russia, Europe and especially Eastern Europe will become the place to be for asset allocators.

NIGERIA – While reforms continue, 2024 will be a year of transition, i.e. show me time. Wait and see approach after 2023.

POTENTIAL BLACK SWANS – 1.) Trump gets elected as President of the U.S.A. 2.) Ukraine & Russia peace which will translate into a massive stimulus program to rebuild Ukraine. Eastern European stocks the biggest beneficiary. 3.) Unlisted asset bubble bursts somewhere. 4.) Social unrest in China. The CP pivots (it has historically been the only big CP globally being able to change and that is still the reason for it to be in power). The end of Xi starts.

UNLISTED SPACE – The BIGGEST risk for markets. Over more than a decade money poured into the unlisted space. Rising interest rates have been a huge problem for especially unprofitable investments. HUGE portfolios will have to adjust valuations. A lot also sits with retail investors. – We have seen the tip of the iceberg so far (Signa and commercial property in general, some PE portfolios, some VC portfolios that have been adjusted).

U.S. ELECTIONS – Nikki Haley is going to be the first female President of the U.S.

SA ELECTIONS – The ANC loses its majority and will have to enter coalition talks. The result can be an ANC & EFF coalition.

INDIA – Modi will get re-elected. This translates into further growth and inflows into Indian markets. India the new China theme continues. Valuations are becoming so stretched and the market so hot though that you will generate Alpha being underweight Indian indices.

USD WEAKNESS – The U.S. keeps overspending in the election year. Budget deficits are becoming a major concern. Europe is cutting deficits proactively and more conservative governments will be in place. The Euro is gaining vs the USD and will be a major flow beneficiary. Only end of the year, once Nikki Haley has been elected, will this view change.

M&A & CORPORATE FINANCE SPECULATIVE THOUGHTS – POTENTIALS: – 1.) Glencore lists its coal assets. The remaining company will be either a target for a competitor or management will delist it. 2.) Barloworld remains a target. Zahid Tractor has the chance to build one of the largest CAT networks on this planet. 3.) AngloAmerican is still a target. M&A is returning to the mining industry. 4.) SA retailers will do acquisitions outside of South Africa. Balance sheets will weaken. 5.) PGM miners will do major M&A to diversify. 6.) Exxaro should do a major acquisition. 7.) M&A in the SA leisure space continues. CLH is a potential target. 8.) Thungela will do further M&A in the coal industry outside of South Africa. 9.) There is overhang in Dis-Chem. Shoprite could try to buy it. 10.) Vodacom with major overhang. 11.) Pepkor overhang could go to creditors. 12.) Sasol will come up with a strategic plan – a new business unit that will be built. A major capex program. There is a chance that Sasol will raise capital for that, dividend will be cut to zero in that case. 13.) British American Tobacco should start to sell down its stake in ITC. Proceeds will be used to reduce debt and start buying back stock. 14.) 2024 will be a year of capital raisings in SA. Sasol, KAP, Spar, PIK are all at risk to come to the market. There is risk also from PGM miners when doing M&A and retailers (apparel) for the same reason. 15.) Firstrand could do an acquisition that offers them offshore exposure. The target is right in front of their nose. I know who I would buy if I was them. 16.) Hulamin – Another potential attempt to takeover HLM SJ. 17.) In general, more de-listings in SA again.

DIVIDENDS AT RISK – 1.) Sasol could cut its dividend to zero – all about future capex plans. 2.) PGM sector at risk to cut dividends to preserve cash. Companies at risk to burn cash and to do M&A.

CHINA PROPERTIES – The crisis continues. Property values are falling further, not a lot of new projects. Banks are forced to help, which reduces risk appetite elsewhere. Wealth effect still negative. China’s growth once again slowing. Consumer confidence is low and social unrest starts to appear as a problem for the government.

CHINA GENERAL – Deficit growing, Yuan weakening on back, yields lower. Japanese scenario becoming more probable. Due to slowing demand offshore, China’s factories are also exporting deflation. Anything renewable will grow! Unemployment is still rising though. The risk of social unrest grows. The beginning of the end of Xi is a potential due to this.

INFLATION & YIELDS – Due to wage inflation being stubbornly high, inflation does not pull back to central banks’ targets. Yields are coming off further due to recession getting priced. Inflation in the U.S. stays in 2.5-3% range. Fed to cut by 75bps, main reason the slowing economy. SA’s inflation stays >4.5% also due to a weak ZAR. We are getting close to the new normal for rates and yields. The world of QE, close to zero interest rates and yields is a thing of the past.

LUXURY – U.S. slowdown weighing. India the only bright spot in terms of growth! China dragging the sector further. A return to pre-covid is still happening, aspirational consumers are under further pressure.

COMMODITIES – 1.) Iron ore demand to slow. China property sector dragging. Supply not getting reduced. 2.) PGM under further pressure. Demand waning and recycling supply growing. 3.) Oil under further pressure. U.S. recession the main reason. Supply also growing. 4.) Thermal coal prices stabilizing and not moving much. 5.) Gold with further upside on lower yields, U.S. recession and a weaker USD. 6.) Soft commodities to gain due to El Nino phenomenon.6.) Copper – due to more demand from anything renewable, copper is making a come-back.

SA BANKS – Growth is the problem. Valuations are undemanding, dividends rather high. Best performing bank for 2024 ABSA and worst of big 4 will be Standard Bank. This trade to work on falling rates.

SA RETAIL – Apparel will be under significant pressure, but Pepkor will be the bright light in the sector, Brazil to come through as a growth story as well for them. Shoprite the only one to own. Clicks will start to show it is running into a structural growth headwind and valuation of >25x is unsustainable. Spar is at risk to raise equity, PIK also at risk to do the same. Woolworths showing further signs of a slowdown.

SA PROPERTIES – SA yields to fall and sector one of main beneficiaries. Proper asset allocation opportunity!

BEST & WORST PERFORMING MAJOR EQUITY MARKETS 2024 – FTSE 100 best - S&P500 worst.

BEST & WORST PERFORMING ASSET CLASS 2024 – Bonds best, private equity worst.

BEST & WORST AFRICAN MARKETS 2024 – Nigeria best – Egypt worst.

FRONTIER TO OWN – Pakistan & Vietnam.

BEST SA LISTED LONGS VS BEST SA SHORTS – Long BTI SJ, ANG SJ, ABG SJ & GLN SJ - Short SPP SJ, IMP SJ & ARL SJ.

SPORTS – 1.) Arsenal to win the PL 3.) Real Madrid to win the Champions League. 4.) England to win the Euros (did I really write this??). 5.) Formula1.. Max Verstappen winning again. 6.) Nadal to make a come back by winning a Grand Slam. Alcaraz to be the man in Tennis though.

SOUTH AFRICA - South Africa is the country of the future – and it always will be! Charles de Gaulle once said this about Brazil. Think about it – what did he actually mean? I do think the same about South Africa sometimes. Talk a big game, lots of potential, but little delivery. I won’t go into details again; I do suspect most of us understand what needs to happen to let beautiful SA show its true potential. What is the view going forward? My structural view has not changed – for details see my post on "Beyond the Headlines" from the 16th of May 2023. Reasoning below:

  • Corruption and incompetence are still omnipresent. These are roots of various problems. When these two issues get sorted, everything else will get sorted.
  • ESKOM – Load-shedding is back and there is no short-term fix. Despite all the talk about renewables. We need massive investments into a smarter grid for that to play out. The recent talk about nuclear shows that Koeberg is also running out of time. Burning diesel is a problem.
  • Transnet – There are signs some of the issues are getting fixed. Some of the recent decisions made me wonder though if the general issues will ever be fixed. There is not much confidence until seeing it. Period. Ports are another issue and when you look at how modern ports outside of SA are operating, this is holding us back properly and a lot of work still needs to be done. The private companies that are getting involved will help though and this is crucial. Potential for growth - need to see it getting done though.
  • De-industrialization. This is happening! What is the plan to help create jobs?! No company will invest into new production without knowing that there will be enough electricity supplied as a simple example.
  • PGMs with structural demand issues. A whole new world with EVs out there and recycling will replace mining if there is no new demand for the PGMs.
  • No plans have been made to make big companies future proof. This is catching up with e.g. Sasol that is ca. 5% of SA’s GDP.
  • SA’s budget is under proper pressure for various reasons. This cannot be a good read for our bonds and the Rand going forward. The carry trade might bale the Rand out though. Rising taxes will be a consequence and will not help to create growth.
  • Elections next year and there is the risk for an ANC & EFF coalition.
  • Water issues are coming up more frequent. In addition, seawater in Durban and the Western Cape makes headlines regarding e-coli. The latter a headwind for tourism.
  • Social grants have become permanent.
  • Any offshore interest into a local company on a corporate level usually gets shut down by comp com.
  • BRICS is discussed, but there are not even direct flights from Johannesburg to Mumbai nor initiatives to benefit from India’s growth – similar to what China was for Australia, India could be the same for SA! Just look at Australia in the 1990s. The only real reason for its economic rise was the geographical proximity to China plus the geological blessings that Australia has. Hear what I say?!
  • NHI is now firmly on the agenda. A question of when not if it seems. Huge risk for SA.
  • Talk about SA using its FX reserves. Not for new infrastructure or growth projects, but for paying social grants. Wow.
  • Civil unrest risk is rising.

Again, why do you invest into an emerging market? You do not have to, obviously. Usually, people invest into an EM when they see structurally higher growth while taking larger risks. For SA it seems structurally lower “growth” while taking larger risks. SA has massive potential and still has a large mining industry that can still offer further growth. This helps SA to be a macro play on global growth. SA has become a trading market, not a place to invest. Regarding our markets in SA in general, two themes have become dominant in 2023. One is the Reg 28 which allows local fund managers to invest a larger proportion outside of SA. The other is liquidity. I have firm views on both. Firstly, regarding Reg 28, do you think this would be an issue if SA was growing inline with its economic potential? Secondly, due to less interest into our markets, spreads have widened, and liquidity is patchy. There is a price for liquidity though and the liquidity that is “in range” is often accessible, but away from current spreads.

I am sure we will have some wonderful trading opportunities again in 2024 – once again I also have to remind myself to “trade what you see” and that “to be right and making money are two different things.” We keep an eye on technicals, combine them with positioning, fundamentals and “stories/triggers/events” to take educated views on stocks and markets with decent risk-reward. Adjust your process, respect the market, be disciplined and best of luck!

***We wish you a healthy, happy and prosperous 2024. Enjoy some happy and festive time with your family and friends. Many thanks for all your support in 2023.***

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