Newsletter – Week 26 2024 – Econo-politics – global and local uncertainty

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Market Watch

Uncertainty has crept back into the market thanks to the delays and public horse-trading around cabinet seats – remember, this is not a done deal. The ANC can get over the 50% mark with MK and the EFF! Any kind of coalition is going to take time to settle down, regardless of who is in power. When it comes to your investments, our position is to continue to stay invested but diversified – by sector, by asset class and by location.



Global uncertainty

Global uncertainty and conflicts are spilling over globally. This is veritably the season of discontent.  Kenyans are rioting – initially over some proposed tax changes but ultimately this is due to the IMF-required austerity that has got up local Kenyan’s nose. President William Ruto backed down yesterday from plans to raise $2.3 billion in new taxes after the proposed bill triggered protests from people already struggling with rising food prices and high youth unemployment.

Bolivia had a failed coup. Whatever the circumstances of Bolivia’s failed insurrection, it’s clear that voters are hurting. The Andean nation is one of the most volatile in South America with a record of coups throughout its 200-year history. Yesterday’s attempt was over within hours of troops storming the presidential palace. While speculation swirls around the motivations behind the uprising, analysts agreed that President Luis Arce stands to benefit from being seen to crush it quickly.

Israel looks set to open up a second front on the Lebanon border to take on Hezbollah. 



The world’s fastest-growing major economy India, which has the largest population on the planet, but has never been fully connected to the global finance machine is finally getting some recognition.  India is now  joining JPMorgan Chase & Co’s emerging-market bond index, hallowed territory for a certain Wall Street set, which is a significant milestone — one that’s projected to attract billions in investment.

Inclusion in the index comes at a moment that China looks tired, Russia is no longer investible and other emerging markets face instability — all of which makes India that much more attractive.

In general, inclusion in JPMorgan’s index reflects a certain confidence in India’s economic trajectory. In more practical terms, the event means foreign investors will finally gain access to India’s tightly-regulated $1.3 trillion government bond market. Global investment in the country’s debt could amount to as much as $40 billion, in total, due to the index inclusion, 

JPMorgan added India to its watchlist for inclusion in the emerging market bond indexes in October 2021. But talks hit a stalemate due to New Delhi’s reluctance to provide tax breaks to foreigners to trade on international platforms. What likely revived the matter was investors wanting diversification to compensate for China’s economic woes and sanctions on Russia. India hasn’t yielded to requests by foreign investors for tax breaks.

I have to wonder why our (RSA Inc) unfriendly business environment, no foreign tax breaks (outside of double taxation agreements) and BEE requirements didn’t get us excluded. Perhaps we were one of the founders back in the days before we let the foxes in the henhouse, but bear in mind this is a bond index and the government has not defaulted on bonds since 1994 and we still have decent yields with several hundred basis points ‘sweetener’ to make up for the potential risk.

We often talk about Japan both here and on our podcasts because it serves as such a good cautionary tale.  
From the 2000s, until fairly recently, Japan was stuck in growth doldrums and had such a low interest rate that it even went negative from time to time. A major reason was to protect the value of the Yen at all costs ( and cost it did!).

You can see (above), since 2022 the Yen has been “allowed” to devalue against the dollar, but this has obviously been too far and too quickly as  Japan’s top currency “diplomat”, Masato Kanda, has been fired. Kanda will be succeeded by Atsushi Mimura, a director-general of the Finance Ministry’s international bureau, who will take over as vice finance minister for international affairs on July 31. Incumbent Kanda has been the main figure in handling the government’s catastrophic interventions in the foreign exchange market, in an attempt to arrest the yen’s slide against the dollar, yet, despite spending a record $60+ billion two months ago trying to halt the yen’s implosion, the yen is now at the lowest level since the Plaza Accord.

The historic 1985 Plaza Accord, signed at the Plaza Hotel in New York City, was a pro-growth agreement signed by what was then known as the G-5 nations: West Germany, France, the United States, Japan, and the United Kingdom. The purpose was to force the United States to devalue its currency due to a current account deficit, approaching an estimated 3% of GDP according to Paragraph Six of the accords. More importantly, the European nations and Japan were experiencing enormous current account surpluses, as well as negative GDP growth, threatening external trade and GDP growth in their home nations.

And while no amount of intervention will prevent the yen from imploding further – to do that the BOJ will have to raise rates to 4% or higher, setting off a cataclysmic collapse of the entire Japanese bond market – the outrage among the populace at the runaway inflation in Japan in large part due to the plunging currency, is finally being addressed now that Japan is facing an election in a few months, and scapegoat time has arrived.



You’ve probably caught the endless autopsies over the Biden/Trump debate last week and there is very little doubt that Biden did not come off the winner – but do these debates really matter? Unfortunately, yes. You can see this from the graph below – asked of voters over the decades. 

Home sales have plummeted in the last few months – and there are a couple of things behind that.

Firstly mortgage rates are at multi-decade highs, and understandingly home buyers are reluctant to tie themselves into a 30-year fixed mortgage at those rates.

Secondly, homes have become increasingly over-valued since the pandemic, not only making them unaffordable on salaries that have not kept up but there are also plenty of homeowners who got caught up in the property FOMO during the pandemic who not only have minimal equity in their home (the difference between the selling price and the mortgage) but are often in a negative equity position.


Where have all the millionaires gone?

In the graph below you can see which countries have seen a net inflow and outflow of Millionaires – and unsurprisingly it shows RSA Inc. as haemorrhaging high net worth individuals (HNWIs). The mass exodus of HNWI out of China is unsurprising as its politics oscillates between  Capitalism and Communism – and the punishment for white-collar transgressions, be they real or perceived, can be the death penalty.

The United Arab Emirates is set to attract the most millionaires in 2024 (including some of our mamparas), while China and the UK are expected to lose the largest number of  HNWIs)

HNWIs have a liquid investable wealth of $1 million or more. (All figures come from the Henley Private Wealth Migration Report 2024.)


Is cash dead?

The prominence of cash for use in transactions is dropping in every country measured. This includes countries where cash was the preferential method of payment in POS transactions. This is highlighted in the graph below from the Visual Capitalist (with a 2027 projection). 

One clear example is Nigeria (RSA is sitting at 33%). In 2019, over 90% of transaction value was still in cash payments. That number has now fallen to 55% today. Cash is still the leading payment method in Nigeria and a handful of other nations, but current trends indicate this may not be the case for much longer.

For now, cash also remains the leading method of payment in various South American and East Asian countries. In some places, cash payments are already a rarity. This includes Canada, New Zealand, Australia, and most Nordic countries. The report predicts that France, Singapore, South Korea, the UK and the U.S. will fall below the 10% transaction value threshold for cash by 2027.


Size Divergence

Below are the returns for the S&P 500, the small-cap S&P 500 and the tech-only QQQ ETF. The returns over the last 3 years have been startling. Small Caps (Blue) have actually produced a negative result over the period relative to the S&P500 (green) which has produced a 28% return over the period.

But look at the QQQ ETF showcasing the best in the tech sector. Here returns have been more than 37% showing that if you betted 3 years ago that tech will continue to deliver relative to smaller companies which are often linked to the real economy, you would have made a really decent return.  Since the 15th of April, tech stocks have taken off further leaving smaller companies flatlining.
Last week, a company which I admire sold down by more than 7% and year to date by -22%. Welcome to Pool Corp which at a small size knows how to produce a 20% Return on Invested Capital and does so by producing its own free cash flow. It’s an uncomplicated business. They install pools and maintain them across North America. With the recent rise in interest rates, consumers are understandably more reluctant to install pools. And yes, the economy seems to have entered a shallow growth period which could be likened to the recession, of sorts,  that was expected this year. FactSet forecasted EPS of $5.83 but the company is now guiding to earnings between $4.85 and $4.95. The maintenance part of the business which makes up 60% of revenue was stable but new builds for the year could be down 15-20%. Pool Corp is indicative of Mainstreet USA, and it is no surprise that the Small cap index which also relies on the average American suffers alongside Pool Corp.

The crowded trade is therefore in tech, and it is easy for investors to forego other investment opportunities and only to own tech. Make no mistake, the tech bubble of the 2000’s was earmarked by listed ideas rather than real life companies. If we look at the free cash flow tech companies are producing it is startling. Below is a chart highlighting the growth in free cash in these companies. In previous newsletters I have spoken about the cash available to Google for instance. Which companies in the world can throw Billions at an idea and walk away if it doesn’t work? Only tech companies can do so:


Free Cash Flow as a % of sales for Tech Companies
So the price phenomena in tech isn’t just an idea bubble. These are real-life companies producing products which are sold to drive revenue. But non-tech companies seem to be producing their own share of free cash flow. Yes, it’s not quite as impressive as the tech giants but still, the increase in free cash has been on an upward trajectory which should stand them in good stead over time. In some cases, these companies’ prices relative to free cash flow are more attractive than their tech counterparts:
This is why diversification continues to be important. Not all the stocks in a portfolio are going to have the same payoff profile but over time the broad growth in GDP should lift them all. Over a decade one forgets the ups and downs as this is replaced by an overall return which favours good quality companies.
Author:- Cobie Legrange



The Rand/Dollar was exceptionally voaltile during the week  closed up  at R18.20  (R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09, R18.68, R18.99, R18.76, R18.72, R19.15, R19.30, R18.97, R19.03, R18.80,  R18.78, R19.03).


The Rand/Pound closed at  R23.00( R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62, R23.61, R23.93, R23.90, R24.06, R24.18, R24.47, R23.61, R24.03, R23.87, R23.86, R24.15.)  

The Rand/Euro closed the week well up at  R19.49 (R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35, R20.25, R20.56, R20.43, R20.47, R20.71, R20.93 R20.38, R20.51, R20.38, R20.40, R20.72.)


Brent Crude: Brent closed the week up at $84.86 ($85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39, $90.87, $86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33.) This price rise is due to the building back of inventories and increased tensions in the Red Sea which will interrupt deliveries.   

Bitcoin was down again at $61,436 ( $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135, $68,804, $64,681, $69,078, $68,340, $62,315, $54,649, $52,510, $47,195, $ 42,897, $41,608, $41,680).  

Articles and Blogs: 

Taking a holistic view of your wealth NEW
Why do I need a financial advisor ? 
Costs Fees and Commissions 
The NHI and what to do about it 
New-Normal for Retirement? 
Locking-In Interest rates – The inflation story 
Situs – The Myths and Reality
Tax Residency – New Rules new headaches  Are retirement annuities dead 
A new look at retirement
Offshore investing – an unpopular opinion  

Cobie Legrange and Dawn Ridler, 
Rexsolom Invest, Licensed FSP 45521.