| Cobie and I like to keep this newsletter and our podcast evolving. We’d love to hear from you about what you like or dislike, what you’d like more or less of – both in the newsletter and podcasts. Do you have topics you’d like to hear a blog on? Do other people’s wealth journeys interest you? The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. Many of our clients come from referrals from our existing clients, often through the forwarding of this newsletter – so if there is anyone you know who might like to be on our database please share this newsletter. If you’d like us to contact them directly – our details are below. Market Watch The S&P has been on yet another tear, and appears to be looking for yet another all-time high  This rally that’s already added more than $1.5 trillion to the S&P 500 since last Monday. This seems to be thanks in part to the seeming inevitability of a Federal Reserve rate cut later this month (which is likely to push liquidity out of the short-term bond market, back into stocks. Every major group in the US equity benchmark rose, with both mega and small caps outpacing the broader market. Swap contracts are even pricing in slightly higher odds of a half-point Fed reduction next week. The producer price index (PPI) picked up slightly in August after the previous month’s numbers were revised lower and categories that feed into the central bank’s preferred inflation gauge were muted. The JSE didn’t really follow suit.   US Inflation Unlike the presidential debate which probably didn’t resolve anything for voters – the US inflation numbers 10 hours later seem to have resolved something. Basically, this continued decline in inflation is going to take the punch out of that topic for Trump. If the Federal Reserve cuts rates by 50 basis points this week, it will cause a major surprise. Twenty-five basis points still looks more likely – the speed of disinflation is perhaps slowing down, and that makes it hard to justify such drastic action… for now. In other words there are still pockets of sticky inflation. The great spike in goods, food and energy prices is over. The problem is that services inflation remains uncomfortably high. Headline CPI edged down, and is just below its 20-year average for the first time since 2020. Core inflation, excluding food and energy, was less obliging. Core CPI currently says that while inflation is trending in the right direction, it has a way to go; the headline says the Fed can start slashing rates now. If you want the central bank to be vigilant about limiting living costs, you want them to look at the core.  Then there is shelter inflation itself, which rose slightly. This brings us to difficult statistical issues concerning measurement. The Bureau of Labor Statistics’ methodology looks at the average rents in force, and therefore moves much more slowly than private sector indeces based on newly signed leases each month. Shelter also accounts for another serious issue — the high level of “sticky” inflation for services and commodities whose prices take a long time to change. Including shelter, this measure, calculated by the Atlanta Fed, remains above 4%. If shelter is ignored, it’s below 3%, making it far easier for the Fed to start easing: Taking all of this into account, the Fed can be happy that inflation is trending the right way, but may cut more slowly at first to leave more fire power later on.  Time for small-caps to shine? U.S. small-cap stocks are beating the S&P 500 in the third quarter, even after being more badly battered than large-cap equities in September.  Essentially, small caps got a lift when the Fed definitively signalled a move to easier policy at the Jackson Hole Economic Symposium in late August. Small caps often do well in a cutting cycle, but that’s generally more “pronounced” when the Federal Reserve is cutting to combat a recession . It is much easier to sell a large cap than it is to sell illiquid small caps. This time round, the FED won’t be cutting because a recession is imminent. On a cautionary note – the universe of small-cap stocks is huge, but eclipsed by the shares with massive market cap. To get the Russell 2000 to move, there has to be a broad-based recovery across all those companies (not an AI-generated bonanza, for example). Looking inside the Russell 2000 index,there is still a very, very wide range in terms of performance and it generally is aligned with low quality versus high quality. The economy is slowing, not about to accelerate so if you want to take advantage of these small caps you’re going to have to ferret out quality. (An index is likely to be a muted balance between those high and low-quality stocks).  |
| The deficit time-bomb In August there was a sudden surge in the deficit – Republicans, of course, are blaming the sudden surge in the deficit numbers on Biden wanting to stimulate the economy ahead of the November presidential elections. Trump is well-known to boast about his time at Wharton Business School, this tweet, straight after his debate probably got under his skin:  This happened: an August budget deficit of a staggering $380 billion, up more than 50% from the $243 billion in July, and up more than 55% from July, and up 66% from last August, and almost $100 billion more than the median estimate of $292.5 billion,  This means that the cumulative total for Fiscal 2024 – where there is one more month to go until the end of the fiscal year (which ends Sept 30) – just hit an all-time high of $1.049 trillion, the first time in history when interest on US debt has surpassed $1 trillion.  This massive interest rate bill is alarming – caused by 400% rise in interest rates post pandemic to get inflation under control. That job is done, but there are still billions in bonds issued over the last couple of years that are paying at a much higher rate. As of now, gross interest on US debt has surpassed not just Defence spending, but also Income Security, Health, Veterans Benefits and Medicare, and is now the second biggest outlay of the US government, second only to Social Security, which is roughly $1.5 trillion annualized. (Sounds like RSA Inc). The US is truly ina debt refinancing era.  RSA Commodities South African stocks are beating their emerging-market peers, but glum news from China threatens to weigh on the key mining sector and stymie that outperformance. Johannesburg’s main equity index has climbed about 7% in 2024 in dollar terms, outshining the 4.6% advance for MSCI’s gauge of emerging-market stocks. Miners aren’t helping, with the sector dragged lower by worries over weaker demand from China, the biggest customer for South Africa’s industrial metals. China after all, is transforming from an economic miracle to a consumer-led economy. s a matter of fact, Resources have now underperformed other JSE sectors for 3 years. Below is the 3-year total returns for various JSE indices to end August 2024:  Iron ore touched the lowest level in almost two years last week, battered by the continued crisis in China’s property market. Seven of the 10 worst-performing Johannesburg stocks this year are mining companies. Optimism flowing from South Africa’s elections in May and prospects of lower interest rates have propelled the FTSE/JSE Africa All Share Index to record highs. Yet an index of Johannesburg-listed industrial miners has dropped 14% this year, with Anglo American Plc’s Kumba Iron Ore leading the retreat with a 46% slump. It mirrors the picture in Europe, where basic resources stocks are the biggest laggards in the regional Stoxx 600 benchmark. Slow progress in China’s efforts to tackle an oversupply of homes has deepened investor pessimism about the outlook.  2 Pot bonanza update In case you missed it, we put out a comprehensive blog on the two-pot pension system last week. (Also available on Moneyweb) The South African Revenue Service (SARS) has received altogether 161 607 tax directive applications since the two-pot retirement system came into effect on 1 September. The gross amount of the lump sums for the applications received totals R4.1 billion. A total of 159 853 of the directives relates to savings withdrawal benefits from the savings pot, which is 98.9% of the total number of applications received from Sunday 1 to 10 September 2024, which means SARS received an average of 17 964 tax directive applications a day. Make no mistake, the biggest winner in this 2-pot savings bonanza is SARS. The revenue was initially estimated at R5bn. Most withdrawers cite ‘reducing debt’ as the primary reason, but it is human nature to ‘reward’ yourself with at least some of their windfall, and debt has a nasty way of creeping back.  AI – Strawberry OpenAI is getting closer to releasing a new artificial intelligence model that is said to perform some human-like reasoning tasks. The new artificial intelligence model known internally as “Strawberry” can perform some human-like reasoning tasks, according to a person familiar with the matter. (What is the IT industry’s obsession with fruit anyway?) The timing is still unclear, but a release to a limited number of users could come as soon as this week, said the person, who asked not to be identified discussing private information. AI with the ability to reason is considered a major step in the development of the technology — in this case it means that OpenAI’s tools should be able to solve multi-step problems, including complicated math and coding questions. The model’s release, which has been rumoured for months, comes as OpenAI is looking to raise billions in funding and faces heightened competition in the race to develop ever more sophisticated artificial intelligence systems. OpenAI isn’t the only company working on such capabilities; competitors Anthropic and Google have also touted “reasoning” skills with their advanced AI models. The timing is still unclear, but a release to a limited number of users could come as soon as this week. AI with the ability to reason is considered a major step in the development of the technology, both by proponents and those who consider it a grave threat. In this case, what it means is that OpenAI’s tools should be able to solve multi-step problems, including complicated math and coding questions. Adobe fell in extended trading after giving a revenue forecast that missed Wall Street estimates, fuelling investor impatience for the company’s AI tools to begin generating sales. Known for its software for creative professionals, Adobe has been adding AI features to its applications, such as embedding its proprietary AI model, Firefly, into products including Photoshop and Illustrator. But there’s been increasing anxiety on Wall Street in recent months that AI could ultimately do damage to the business of traditional software companies.  India – the rising tiger! An initial public offering by the home loan unit of India’s largest shadow lender was oversubscribed by more than 60 times, highlighting continued investor exuberance over listings in the nation. Bajaj Housing Finance, which sought to raise 65.6 billion rupees ($781 million) in the nation’s biggest public offering of 2024, attracted bids for about $39 billion on the last day of the sale on Wednesday. That’s more than 1% of the country’s gross domestic product. India has been bustling with debuts, with $7.75 billion raised in listings so far this year. Investors have been chasing first-day gains, which have averaged about 30% this year. While we’re talking about housing – China is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month, people familiar said, as it accelerates a move to reduce borrowing costs to spur consumption. Some families may enjoy up to 50 bps of immediate rate reduction.  Rotation Last week, I glanced again at the performance of investment maestro, Terry Smith, from Fundsmith. Their motto is to buy long term quality stocks and this they have done this successfully for a long time. They avoid the fads and hot ideas which are prone to overexuberance. Here is their long-term track:  To the right is the long-term returns for their accumulation shares net of all fees. They have beaten the index handsomely over time. But look at the returns over shorter periods. Here you can see how the fund lags against the MSCI World Index. This has been the case since 2022. The reason that can be attributed to this is the rise of large tech. As I wrote last week, semiconductor companies are cyclical in nature and Nvidia boasts a 6.24% weight whilst Apple (which has a growth problem) has a 6.86% weighting. Add those together and you already have 13.10% of the S&P500 accounted for. The likes of the Fundsmith fund doesn’t own these companies at size and it shows in the performance numbers. They are paying the short-term price for not owning these counters but long term they may be doing exactly the right thing, if your aim is long term capital compounding. This is what makes a career in fund management hard. Doing the right thing is simple, but it is hard to do. Especially when the world is making profits at your expense. There seems to be some reprieve in the upward trajectory of large tech. The Magnificent 7 has now underperformed the S&P500 equal weighted index by 9% over the last 3 months. I think there are two reasons for this. Firstly, CPI is cooling and even though the last Core reading (3.2% y-o-y) remained the same as the previous reading, the trajectory for inflation remains unchanged. This is good news for real economy companies who rely on consumers and businesses spending discretionary cash. They are represented by the rest of the shares listed outside of the Magnificent 7. Secondly, the Magnificent 7 in many cases are growth stories which has benefited from all the hype around AI. As this story ages and the realization that super profits may not be realised at the same magnitude as what was anticipated, this enforces investor caution. There is a real chance that index investors could suffer whilst individual stocks, outside of the magnificent 7, could enjoy price stability.  Jurrien Timmer, an analyst at Fidelity, makes the point that the equally weighted S&P 500 now has a trailing P/E of 18.3x earnings and the gap with the S&P500 P/E of 23.1x is now at a historic level given its recent past (see chart above). If the P/E for the equally weighted index rises further, it would place it at odds with its long-term average placing the emphasis again on the growth in earnings as the main catalyst for growth in stock prices going into 2025. The same rules would apply to the broader S&P500 given their current P/E of 23.1x. Any earnings misstep here is going to lead to prices reducing in value. Author:- Cobie Legrange EXCHANGE RATES: The dollar continues to soften against a basket of global currencies as shown in the DXY chart below. It is now at the ‘neutral’ level of 100.  The Rand/Dollar closed at R17.75 (R17.85, R17.82, R17.71, R17.85, R18.32, R18.26, R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09). This gradual improvement in the rand is due in part to the improved business sentiment post-GNU, but is also linked to the softening of the dollar as shown by the DXY graph above  The Rand/Pound closed at R23.29 (R23.44, R23.41, R23.13, R23.39, R23.28, R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62). If you compare this exchange rate with the Rand/Dollar you can see that much of the R/D improvement has been due to the softening dollar.  The Rand/Euro closed the week at R19.68 (R19.79, R19.72, R19.80, R19.70, R20.01, R19.94, R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35). In this graph again, you can see that the dollar softening has been what is most at play in the improvement of the Rand.  Brent Crude: closed the week down at $72.09 ($71.47, $76.99, $79.05, $79.09, $79.43, $77.56, $85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39). The softening of Brent crude price will have been due in part to the softening of the dollar but is much more in the ‘Goldilocks’ range – where nobody is happy.  Bitcoin closed at $60,096 ($54,548, $57,947, $63,936, $59,152, $60,847, $61,903, $59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135). Articles and Blogs: Entrepreneurial wealth traps NEW Two Pot pension system demystified NEW Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth 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. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |