| 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. Market Watch Although the JSE has softened over the last couple of weeks, it is still sitting at 24.4% up for the year, the UK hasn’t been as lucky, with the FTSE sitting at 13.3%. The one important thing to notice from the JSE graph is that most of the growth in the last year came in 3 or 4 short spurts – if you’d tried to ‘time the market’ rather than sitting on your hands and letting the market do what it’s best at long term, your returns would have been around half.   Eli Lilly Riding on the wave of the success of the GLP-1 weight loss drugs (like Ozempic which is manufactured by Novo Nordisk), Eli Lily’s market cap is sitting at $898 and is looking to become the first trillion-dollar pharma company.  Eli Lilly share price Lilly’s success in the weight loss realm isn’t without hiccups, though. The company has experienced turbulence in meeting rising demand for its GLP-1 medications. As a result, some patients are opting for lower-cost alternatives, that potentially could stifle Lilly’s near-term growth. Lilly has been solidly investing in research and development (R&D) throughout 2024. In April, the company announced the acquisition of a new manufacturing facility from Nexus Pharmaceuticals. The rationale behind the deal is to increase production to help meet surging demand for its GLP-1 medications. This month, the company announced that it’s building a $4.5 billion research facility called the Lilly Medicine Foundry. The idea behind this investment is to bridge Lilly’s clinical trial pipeline with enhanced manufacturing capabilities. The stock of Eli Lilly and Company LLY has declined 1.7% already this week, losing almost $14 billion of its market value. Earlier this month, the FDA removed Lilly’s popular GLP-1 drug tirzepatide from its shortage list after confirming with Lilly that it can meet the present and future demand with its manufacturing expansion. Lilly markets tirzepatide as Mounjaro for type II diabetes and Zepbound for obesity. Due to increased demand, tirzepatide was added to the FDA’s shortage list in 2022. Tirzepatide is a dual GIP and GLP-1 receptor agonist (GIP/GLP-1 RA). The GLP-1 segment is a very important class of drugs for multiple cardiometabolic diseases and is gaining significant popularity. Mounjaro was approved in May 2022 for type II diabetes. Zepbound was launched in November 2023 to treat obesity. Despite a short time on the market, Mounjaro and Zepbound have become key top-line drivers for Lilly in 2024, with demand rising rapidly. Since 2020, Lilly has committed more than $18 billion to build, upgrade or acquire facilities in the United States and Europe, and the benefit of these investments is showing now as the supply of the drugs is increasing. Mounjaro and Zepbound generated sales of almost $6.7 billion in the first half of 2024, accounting for around 44% of the company’s total revenues.. Analysts are now pencilling in annual peak sales exceeding $65 billion.  EU and rates This week, the chairman of the European central bank, Christine Lagarde, announced that the EU has ‘broken the back’ of inflation and that rate cuts are on their way. Lagarde was careful to talk down the significance of the headline rate, including food and fuel, dropping below 2%, but it plainly gives the ECB far more freedom to cut rates, while signs that European growth is stalling suggests that she and her colleagues might well want to do so. Currency markets certainly have that message, and the result is a new surge for the dollar, while the euro recedes below its 200-day moving average and sterling snaps back after a strong rally. New interest rates have been set at 3.65% for main refinancing operations, 3.90% for the marginal lending facility, and 3.50% for the deposit facility. (The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the rate on the deposit facility is what banks can use to make overnight deposits with the Eurosystem. The rate on the marginal lending facility offers overnight credit to banks from the Eurosystem.) The latest ECB decision comes as inflation has eased. EU consumer price growth slowed to 2.2%y-o-y in August and 1.8% in September, marking the slowest increase since July 2021. However, core inflation, as in the US, remains persistent at 2.8%. The sharp decline in annual inflation can also be attributed in part to a higher base last year. Eurostat highlighted that “the slowdown was due to a sharp fall in energy costs as base effects came into play in August”. While inflation is cooling, growth indicators have remained concerning. The eurozone’s gross domestic product grew by just 0.2% in the second quarter of 2024, a downward revision from the earlier estimate of 0.3%. Across the bloc, performance varied significantly, with Germany, the region’s largest economy, contracting by 0.1%.  US debt and bond vigilantes We always keep a close eye on the US debt level, because it is that huge time bomb sitting on the US horizon that nobody wants to talk about, let alone deal with, and this is the one area that there might be a significant change depending on the outcome of the US elections. Over the last week, a couple of interviewers have tried to bring this up with Trump, to no avail. The problem may justify a Clinton-style bipartisan approach. But it might require the intervention of bond vigilantes ( a bond market investor who protests against monetary or fiscal policies considered inflationary by selling bonds, thus increasing yields) to make this happen. Historically, the vigilantes have had some successes. They sent the 10-year Treasury yield above 8% in 1994, prompting the Clinton administration and Republican leaders in Congress to strike a deal to balance the budget.  More recently, bond vigilantes in the United Kingdom helped lead to the resignation of Liz Truss as Prime Minister in 2022. Investors baulked at her plan to lower taxes while inflation was running rampant. Incessant borrowing to fill the revenue shortfall should theoretically push up the interest rates that lenders demand. That means higher interest payments for the government (and hence for taxpayers), and also for corporations and individuals. But even if bond yields have been jolted out of their long-term declining trend in recent years, they remain lower than in 2001, when the US had a surplus. When you’re the world’s reserve currency, it’s difficult for investors to walk away. That’s the interesting push-pull in this whole debate that’s going on about where yields should be on the back of a fiscal deficit that’s deteriorating.  US Retail sales US retail sales strengthened in September by more than forecast in a broad advance, illustrating resilient consumer spending powering the economy. The value of retail purchases (unadjusted for inflation) increased 0.4% after a 0.1% gain in August. Excluding autos and gasoline stations, sales climbed 0.7%. The sales figures cap another likely quarter of economic growth fuelled by a labour market at or near a 50-year record for employment. While the retail report does little to reverse expectations the Federal Reserve will cut interest rates by 25 basis points next month, it does mean the central bank is likely to remain circumspect about more and bigger rate cuts.   Medical aid reminder At this time of the year, you can make changes to your medical aid plan without penalties, waiting periods or underwriting. Most medical aids have gone up at least 10% this year, and you might find that a combination of a lower plan with gap cover will actually give you better coverage (and reduce your costs). These changes can usually be made online. Contact your med aid broker if you have any questions (if you can’t get hold of them I may be able to help).  Earnings and Valuations Earnings season is upon markets again and the theme that I see busy playing out is that nothing is cheap in the US market. Markets are like cascades. First, the large quality counters are filled and then follows the lower quality large companies. Once these have attained their valuation levels, money will flow to smaller companies.  Above is the price performance of the S&P 500(yellow), S&P 500 equally weighted (blue) and the S&P Small Cap Index (purple). Over the last 3 years, the performance has really belonged to the S&P 500 as large tech names have driven these returns. The rest of the S&P 500 index (as measured by the equal weighted version) has also experienced inflows and has played catch up since October 2023. But the small cap index in the US has experienced no returns over the last 3 years (-1.03%) showing that the rally has not been broad based. So what will lift smaller companies higher? For starters, earnings. Much of the returns for larger companies have been themed based rather than on an expanding economy. The hope is that as interest rates fall, this will spur more growth allowing for smaller companies to start benefiting from the rally as well. It’s not like they haven’t been trying. Some early investors started buying small caps in October last year and yes those investors have made money. But for long haulers, the last 3 years have seen no returns. The P/E expansion that the S&P 500 has experienced is in anticipation that earnings will start coming through meaningfully next year. The below graph courtesy Jurrien Trimmer from Fidelity, shows how the P/E multiple has expanded (purple) in the hope that earnings (orange) will follow suit.  This is why markets are in anticipation mode. If interest rates drop as expected, this will be a sign that more earnings could be around the corner but equally important would be a bond market which shows decreasing yields and not the refinancing trouble which lurks below. It is in this world that equities today are priced at a premium especially if you believe earnings growth is going to stall. A couple of pointers to the bears: The elections in the US is around the corner and improving the plight of the average American is going to be a top priority despite who wins. This will spur growth. The FED has to reduce interest rates (4.83%) and inflation (2.4% y-o-y) has allowed the leeway to do so. Even if one believes that the FED target rate of 2% has become a pipe dream, current rates at 4.83% still has a long way to go before it gets to 3%. This is good for growth and by default equities. Liquidity or the lack thereof, could become an issue in 2025 and this would need to be monitored. Not being invested in equities this year so far would have been a mistake (as it is for most years when viewing history). The economic levers that can be pulled for growth are available. The Chinese are certainly trying their best to pull on their available levers. I have learnt that betting against policy makers is often to your detriment. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R17.59 (R 17.41, R17.48, R17.12, R17.42, 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).  The Rand/Pound closed at R22.95 (R22.75, R22.93, R22.90, R23.20, 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)  The Rand/Euro closed the week at R19.12 (R19.05, R19.19, R19.12, R19.47, 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)  Brent Crude: Closed the week up at $72.92 ($ 78.67, $77.95, $71.96, $74.68, $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). This is likely due to increased tension in the Middle East.  Bitcoin closed at $68,385 ($62,876, $62,267, $65,596, $62,603, $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: Some unconventional thoughts on risk and wealth management NEW Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified 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 |