The Bears are back in town & some SA snippets

Having spent a rather restful week at South Africa’s beautiful Southcoast (KZN), here a few thoughts that I gathered – I guess it sometimes helps to take a step back to see the woods for the trees. Food for thought bullet points in no particular order:

  • SA is not a DM. What I mean with this? Bottom-line: Interestingly, when an EM gets it “right”, you can see what valuations investors are willing to pay – pointing especially to Indian markets. For that SA can learn from e.g. INDIA. – SA Inc valuations are considered low, we “just” need the right program…
  • Foreigners are sellers of SA Inc – this trend has established itself into elections and the risks that come with potential leftists’ coalitions (NHI, prescribed assets, etc etc -  more of the same what we have experienced in the last 10 years in SA). Lower growth for longer? Transnet and Eskom still need to be fixed. – I have just been to the Southcoast and trains are not running as bridges that collapsed ca. 2 years ago have not been repaired, sewage treatment plants have not been maintained and raw sewage has become a problem at many places at the coast. Tourism is down 20-30% in the region. Who cares???
  • SA’s biggest investor, the PIC, seeks to invest a larger percentage outside of SA – a major flow headwind for SA stocks. 
  • SA retailers/ apparel sector: under significant pressure from Temu, Shein and at some point potentially from Amazon. I tried the Temu app to see what it’s all about and I can see why it is the most downloaded app in SA now. 
  • SA banks – valuations are undemanding, none of the banks has made a buy signal though on technicals. Relative value trades for now. Is M&A the only real growth option?!
  • SA PGM sector has started to cut jobs – this is one of the largest employers directly and indirectly within SA. This trend will likely accelerate after the elections.
  • While there is a bit of short-term relief for PGM, the medium-term is full with headwinds. Electric cars (and also hybrids) are coming and this trend is not going away (China China China!). Solid-state batteries will change the car industry for good (and hence the PGM sector AND the demand for oil). Sector has become a trader’s & HF hotel. – I prefer copper over PGM any day.
  • China has established itself as dominating exporter/manufacturer of clean & renewable industries/ products. China stands for ca. 15% of global exports vs 8% in 2008 (Source: IMF). China’s weak currency (result of rate differential) a major advantage for Chinese exporters.
  • Renewables need more copper!
  • Inflation in especially the U.S. is sticky and above target. Rates higher for longer. – See the Apollo view – interestingly, we are tracking far above the 2% target.
  • China is buying Gold instead of U.S. Treasuries – again, a headwind for treasuries – and lower yields.
  • Growth in the U.S. is largely deficit driven (plus some argue immigration plays a major role) – this fiscal deficit needs to come down and this again will impact growth – in an environment where rates are still elevated. – Once this slows inflation trends, we can talk rate cuts again. The R-word might need to come back for this. Bottom-line: We need a recession in the U.S. to see rates coming down!
  • Commodities have started to rally – China’s push for growth is helping – this is a headwind for inflation and corporate margins.
  • U.S. inflation is sticky while Europe and the UK see it easing. Rate differential is supportive for the USD – a headwind for EM, no impact on commodities yet due to demand and the “inflation hedge edge”.
  • There is an economic war between especially the U.S. and China – Chinese consumers have also started to opt for non-American goods (see Nike as an example). Trump could make this worse – another headwind for lower inflation.
  • Chips are the oil of the 2020s. AI and related start to remind me of the “.com days” though. What multiple makes sense despite this disrupting new technology? (Cisco example – ask me).
  • The geopolitical situation is not improving so far- risk of further escalation is not zero. Oil price shock possible.
  • Defense spending globally is accelerating – a new era of a cold war is here. Huge spending trend! (globally $2.44 trillion in 2023 according to Die Welt - and growing).
  • Margin pressure (higher inflation - especially wages, input costs, less pricing power, financing costs), higher rates/yields, valuations (AI?!) are starting to be a headwind – markets are starting to price this. 
  • Technicals for major indices are all on SELL. Value lifted its head, flows into those sector are picking up.
  • The everything rally has come to an end! Commodities, tech in particular and equities in general, USD all rallied simultaneously – this has come to an end. – BoAML’s Michael Harnett with some thoughts on this recently!
  • Chinese Tech is trading generally with PEG ratios <1. All are looking to expand overseas, too. CONTRARIAN LONG. Decent price action vs Nasdaq last days.
  • Luxury companies are reporting slowdowns, Chinese consumers return goods at record pace, these companies need aspirational consumers to feel good and spend. Still a consensus long?!
  • The U.S. 2yr yield is at ca. 5%. Not a bad place to hide – especially after this year’s rally – lock in your gains in Tech and hide.

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