The Confidential Report - August 2023
2 August 2023 By PDSNETAmerica
On Friday last week the S&P500 index rose again to a cycle high of 4582 which puts it just less than 4,5% below its all-time record high of 4796 made on 3rd January 2022. It now seems inevitable that the S&P will break above that record high sometime later this year. This reality has forced us to re-consider our view of the progress of this important index, taking into account the long-term context of its progress over the past 26 years.
The recent downward trend, which began on 3rd January 2022 and lasted 10 months until 12th October 2022, took the market down 25% - just sufficient for it to be regarded as a bear trend rather than a major correction. It is a convention to regard any downward trend of more than 20% as a bear trend rather than a major correction.
If this was a bear trend, it was certainly the shortest and smallest bear trend in history. We believe that it is more realistic to think of it rather as an extended and exaggerated correction within the great bull market which began in March 2009. Consider the chart:
This is a chart of the S&P500 going back to March 1997 and it uses a semi-log scale to make the relative moves of the index visually comparable. As you can see, prior to the start of the great bull trend which began in March 2009, there had been two previous bear trends. The first of these, associated with the 9/11 attack on the World Trade Centre, began at the end of March 2000 and lasted until mid-October 2002. It took the index down just over 49% over 32 months. The second bear trend, associated with 2008 sub-prime crisis began in July 2007 and lasted 21 months until March 2009. It took the index down 56%.
The “bear trend” of 2022 visible on the extreme right-hand side of the chart lasted just 10 months and resulted in a fall of just 25%.
Looking at this long-term context, it now seems to us more reasonable to view the downward trend of 2022 as a correction, albeit exaggerated and extended. This view implies that the bull market continues and has now been in place for over 14 years.
To support this idea, you need to accept that the sharp downward spike in the S&P as a result of COVID-19 in 2020 was a “black swan” event which had nothing to do with the stock market and so should be viewed, from a charting perspective, as an aberration which also did not interrupt the underlying bull trend.
If you are comfortable with that, then it becomes possible to consider that the great bull trend which began in March 2009 may still be in progress. This perspective is supported by the fact that it is bounded above and below by two well-established channel lines. The upper channel line is confirmed by at least five “touch points” (the red arrows) and connects with the record top made on 3rd January 2022 at 4796. The lower channel line connects the 676 low of March 2009 with the 3577 low of 12th October 2022 – and, significantly, it is parallel to the well-supported upper channel line. You need to consider that it is no coincidence that these two channel lines are parallel.
If we are right in this understanding of the S&P500 index, then it has considerable implications for private investors, because it means that we are in a primary bull trend, and you should be close to fully invested.
The US monetary policy committee (MPC) increased interest rates by a further 25 basis points at its meeting in July 2023. Jerome Powell’s comments after the meeting left the door open for a further rate hike at one of the two remaining MPC meetings later this year. But he said that the committee regards the current level of interest rates as “restrictive” – which basically means it is impacting the inflation rate. The level of job creation remains a problem and indicates that the economy is still growing fairly rapidly.
Following Powell’s remarks, the latest core personal consumption expenditure (PCE) for June month showed that inflation, excluding food and energy, had come down further to 3% from May’s figure of 3.8%. The MPC regards the core PCE as the most important indicator of inflation – so the June figure positively impacted Wall Street. Most investors now believe that interest rates have finally peaked and there will be no further interest rate increases at future MPC meetings. The market is currently pricing in a 20% chance of a 25-basis point hike when the MPC meets again on 20th September 2023 and a 31% probability of such a hike at the meeting on 1st November.
It seems clear that Wall Street is discounting a “generative AI gold rush” as one commentator put it. There is the expectation that AI will result in substantially improved productivity and hence increased profits for the 500 companies in the S&P index. In our view AI is certainly affecting all businesses and consumers positively. But it is important to remember that, prior to the current tightening monetary policy in America, there was more than a decade of extreme quantitative easing (Q/E) and ultra-low interest rates. The carry-over of that very stimulatory monetary policy combined with the increased productivity coming from new technologies such as AI has apparently been sufficient to overcome the negative cumulative impact of rising interest rates – at least so far.
Powell has indicated that there was the possibility of a “soft landing” for the US economy. In other words, that inflation will come under control without the economy falling into a recession (defined as two successive quarters of negative GDP growth).
It is notable that, in response to the rise on Wall Street and a general shift towards “risk-on”, the JSE Overall index has last week finally broken above its downward trendline. Consider the chart:
Ukraine
It is now apparent that Prigozhin is working with and training the Belarussian army with his Wagner fighters inside Belarus. New footage shows him welcoming his fighters to Belarus and working directly with the Belarussian army there. We remain convinced that Putin and Prigozhin have come to an agreement that he will ultimately replace Lukashenko as the leader of Belarus in due course – and that he will prepare the Belarussian army so that they can open a Northern front against Ukraine. This idea does not seem to have occurred to Western analysts, but in our view, it is a typical Putin strategic move cleverly covered by Prigozhin’s short-lived “mutiny” and subsequent move to Belarus. It is notable that the West has interpreted the “mutiny” as evidence of Putin’s growing weakness, but we think the reality may be rather different.
The summit for African leaders being held in Russia is a stark indication of how Russia’s influence has faded in Africa. This year only 17 heads of state turned up, (regrettably including our own) compared with 2019 when there were 43. Russia has been trying to leverage its influence in Africa, but its recent withdrawal from the Black Sea grain initiative and its bombing of Odessa and other key Ukrainian ports has soured relations. Prices of wheat and other grains have risen sharply. Africa will suffer the most from the higher grain prices and Putin’s offer of a small amount of “free” grain is insignificant in the context of Africa’s needs. For the first time, Putin addressed the meeting himself – which is also perhaps an indication of how desperate he is for their support and recognition. Significantly, Prigozhin was also there – a clear indication that his relationship with Putin remains intact. Prigozhin’s Wagner mercenary group is also responsible for ensuring that some of the African leaders remain in power – in return for a share of their country’s mineral wealth.
So, the situation in Russia and the war on Ukraine is being directly and indirectly prosecuted and dominated by 3 individuals – Putin, Lukashenko and Prigozhin. All three are known for their ruthlessness and their pre-occupation with the pursuit of money and power:
- Lukashenko’s behaviour has always appeared to be dominated by fear – fear of Putin and more recently concern over his deteriorating health.
- Putin is also dominated by fear – the fear that he will lose power as a direct result of his blunder in prosecuting the Ukraine war.
- Prigozhin, on the other hand, appears completely unconcerned about his physical safety or the attitudes of the other two. He has demonstrated time and again his ability and willingness to speak out against Putin. Of the three he is the only one with direct and proven battle experience. Unlike Putin and Lukashenko he is not afraid to die – and that makes him extremely dangerous. We believe that Putin knows this and is keeping him close.
Last week it became apparent that Ukraine’s counter-offensive was being pursued with greater force. NATO trained and equipped elements are being committed in a serious effort to break through the Russian defensive lines. Clearly, it is necessary for Ukraine to demonstrate that NATO countries’ massive investment is generating a return. Winter is once again approaching, and they need to show some significant gains before further action becomes impractical. Their problem is that Russia has laid down extensive mine fields and still dominates the air, slowing and impeding their progress. Once Ukraine can break through the Russian lines progress should improve. The objective of the counter-offensive is to take the city of Melitopol on the sea of Azov so as to cut off support for Crimea. If that is achieved, it is unlikely that Russia will be able to hold Crimea for long. The loss of Crimea would almost certainly spell the end of Putin’s career and that perhaps explains why he may be planning for Prigozhin to open a new northern front in the war from Belarus.
Political
The speech given by Nkosazana Dlamini Zuma, our Minister of the Presidency for Women, Youth and Disabled at the BRICS Youth Summit in Durban, shows her to be the radical protagonist of populism in South Africa. She regards the “big five” banks as entrenching a system which works against the interests of the people and calls for the formation of a state-owned bank. Clearly, she is against the capitalist system which operates in this country and in favour of the state ownership of primary assets like banks. She also spoke of the BRICS countries representing a new world order which should replace the current international financial system and replace the US dollar as the dominant international currency. Obviously, her extreme sentiments are directly dangerous both for the stock market and the economic progress of this country. To the extent that they can take hold, they will impede development and result in a flight of capital away from South Africa.
President Ramaphosa was on the horns of a dilemma when it came to the BRICS summit to be held in South Africa later this year. In terms of the International Criminal Court’s (ICC) arrest warrant for Putin, South Africa was obliged to arrest him as soon as he arrived in the country. The DA opened a court case to force the government to comply with the ICC’s arrest warrant. Ramaphosa argued that such an arrest would be tantamount to a declaration of war between South Africa and Russia and therefore not in keeping with his obligation to protect the rights of South Africans in terms of the constitution. Putin’s decision not to attend the conference in person resolves this thorny problem and is an indication of his concern that South Africa might just have executed the warrant. Had he come in person, a refusal to arrest him would have jeopardised relations with our major trading partners like America and Europe who would take it as proof that we are not neutral on the Ukraine war and that we side with Russia. The economic consequences of that for South Africa would have been dire.
Retaining its participation in America’s African Growth and Opportunity Act (AGOA) is critical to the South African economy. AGOA allows South Africa to export about 7000 products to America duty-free. The Act works in ten-year cycles and South Africa, together with 5 other African countries has been benefiting during the current cycle which ends in 2025. We have two problems with remaining involved. The first is the fact that our economy is relatively well-developed compared to most African countries so the primary justification for us to remain is that we are a “gateway to Africa” , and that other African countries benefit directly from our prosperity. Various American companies have argued that we do not need the support which AGOA offers any longer. The second problem is our relationship with Russia, mainly because we have not condemned Russia’s invasion of Ukraine and we are a BRICS member. It can therefore be argued that we do not support American interests. If we lose our membership of AGOA we will lose substantial export markets to the detriment of the economy – especially the motor manufacturing sector.
The National Health Insurance (NHI) bill has passed through the National Assembly and now must pass through the final house of Parliament. The bill aims to ban medical schemes and to pool the funds spent on healthcare in South Africa so that everyone in the country can have the same level of medical attention, irrespective of their ability to pay for it. Right now, medical schemes only cover about 9 million people and the rest either have to pay for private health care or go to one of the notoriously badly-run government hospitals. Clearly, it is desirable that everyone in South Africa should get first-world health care. The problem is that the government simply cannot afford to pay for it. The ANC has, in the almost thirty years since it came to power in 1994, shown that it is completely incapable of managing large complex organisations and projects. So, critics of the NHI say that it will become yet another corrupt and highly inefficient government-run organisation – like Eskom or Transnet. The result will be that many highly-qualified and experienced doctors will leave South Africa and we will end up with a much lower standard of health-care. The NHI is a typical populist idea which ostensibly intends to improve the lot of poor people in this country, but which will ultimately not benefit anyone – except for a very small corrupt inner circle.
Another impending ANC white elephant is the Administrative Adjudication of Road Traffic Offences Act (AARTO) which is to replace the current system of traffic fines. Of course, the existing system has almost completely failed now with only a small percentage of traffic tickets actually being paid in Gauteng – which means that traffic in this province, at least, is operating virtually without any policing at all. AARTO will introduce a system of points where drivers will incur “demerits” for traffic offences which could eventually result in their licences being suspended or revoked. It is a system which is operated in many first world countries like Australia. The problem is that, as a country, we have demonstrated that we are incapable of implementing and managing the type of large database system that AARTO would require. We can barely manage the E-Natis system for the registration of motor vehicles, and it is well-known that about half of the drivers on South African roads do not have a valid driver’s licence. The chronic mismanagement of all state-owned enterprises (SOE) is well known. So AARTO will almost certainly turn into, yet another expensive “white elephant” characterized by massive inefficiency and corruption. The average mini-bus taxi driver in this country commits dozens of traffic offences on every trip that he drives – so it seems unlikely that they will be brought to book by such a system, even if it worked efficiently.
The re-imprisonment of Jacob Zuma is now in the hands of the national commissioner for correctional services who has asked him to make submissions regarding his incarceration before 4th August 2023. For some reason, Zuma is apparently receiving medical treatment in Russia at the moment. The danger in this, of course, is that South Africa could experience a re-run of the riots and looting that accompanied his arrest in July 2021. No doubt the police will be better prepared this time. In July 2021 more than 300 people were killed and the damage was estimated to have cost about R50bn.
Economy
The International Monetary Fund (IMF) has increased its forecast for growth in South Africa’s gross domestic product (GDP) to 0,3% in 2023 and reduced it slightly to 1,7% in 2024. This compares to the Reserve Bank’s forecast for this year at 0,4% given last week after the MPC meeting at which rates were left unchanged. This also compares with the IMF’s forecast for sub-Saharan Africa at 3,5% and world growth at 3%. Growth forecasts have improved slightly with renewed optimism about the American economy. Obviously, the South African growth rate remains far too low to absorb our school-leavers, most of whom will be unable to find a job next year.
The Reserve Bank’s monetary policy committee (MPC) followed the example of their counter-parts in America and held interest rates unchanged with the repo rate at 8,25%. This follows the surprising drop in the inflation rate to 5,4% in June 2023. The MPC was careful to emphasise that it remains in a hawkish stance and that further interest rate hikes are likely. The objective of high interest rates is to bring the consumer price index (CPI) back to the mid-point of the target range at around 4,5%. The MPC’s estimate of inflation for 2023 was 6% and it adjusted its estimate of GDP growth this year upwards to 0,4% as a result of the reduced loadshedding. In our view, the Reserve Bank has managed interest rates very well throughout COVID-19 and loadshedding. Obviously, the high level of rates is impacting on the economy and has resulted in a decline in consumer spending.
The governor of the Reserve Bank, Lesetja Kganyago, has said that inflation in South Africa is gradually coming under control. For the past two years the Bank has been implementing measures to keep the inflation rate within its 3% to 6% target range by raising interest rates. The rate-hiking cycle is probably not over given that the US Federal Reserve Bank anticipates at least two more 25-basis point hikes in America before its hiking cycle is over. The sharp drop in South Africa’s inflation in June to 5,4% from May’s 6,3% and April’s 6,8% is encouraging and indicates that the CPI is now back inside the target range. The figures indicate that the monetary policy committee’s (MPC) 50-basis point hike in May was overly aggressive.
The Reserve Bank has warned that loadshedding may have reduced gross domestic product (GDP) growth in 2023 by as much as 2%. Recently, loadshedding has been substantially reduced with a concomitant impact on productivity. At this stage, it is not clear whether the improvement will be sustained. The June 2023 ABSA purchasing managers index (PMI) fell to its lowest level in 2 years showing the impact of loadshedding. June saw less loadshedding than May so the effect was probably residual. All 5 elements of the PMI were below the 50 level which shows that they were shrinking. New sales orders were down significantly indicating that the economy is contracting. Business activity was slightly better as loadshedding declined. Global demand for our manufactured exports was weaker as the world economy slowed. Almost half of the respondents to the survey said that they expected business conditions to improve later in the year. Lower inflation is a positive as is the prospect of less loadshedding.
Producer price inflation (PPI) fell to 4,8% in June 2023 from May’s 7,3% - showing how the weak economy has impacted prices at the factory gate. The PPI was reflecting a drop from the high base levels of last year which were impacted by the Ukraine war. Nonetheless, this sharp decline shows that prices in most sectors are coming down rapidly which is also a reflection of reduced demand. Loadshedding is pushing up producers’ costs and will ultimately have to be reflected in prices. That, in turn, will impact on the consumer price index (CPI) in due course.
Retail sales in South Africa fell by 1,4% in May 2023 for the sixth month in a row indicating the poor state of the economy, mainly as a result of loadshedding. With the exception of clothing and footwear, most elements of retail sales were down. The fall in sales is also due to rising interest rates in this country which have constrained spending and the 18,65% increase in the cost of electricity has taken a toll. The South African economy is contracting steadily due to these factors. The sharp drop in the consumer price index CPI to 5,4% in June from May’s figure of 6,3% is also a clear indication of the problems faced by consumers. Inflation is now within the Reserve Bank’s target range of 3% to 6% - but at an enormous cost to consumers.
New motor car sales in June came in at 46800, up 14% on the previous year. The figures are unexpected given the distress that most parts of the economy are in and the fact that interest rates are rising. Clearly, a surprising number of consumers are still optimistic enough to invest in a new car. Year-to-date car sales are almost 5% up on 2022. Expectations are that sales will improve in the second half of the year. June 2023 exports were 12,6% lower than last year, but year-to-date were up 4,7%.
The attacks on trucking on our major highways are becoming a major problem. There have been 16 such attacks and they have now spread from the N3 to the N4 and N1. They are clearly being conducted by organised crime syndicates and the police appear to be as incapable of controlling the situation as they have been in preventing the theft of rail infrastructure. The problem is that because of the rail situation most goods are now transported by road. Transport companies are responding to the attacks by increasing security, which will obviously have the effect of increasing their costs. We see this as a major threat to the South African economy.
One of the major impacts of Eskom’s high prices and unreliability has been that more and more people have turned to using gas for water heating and cooking. The fact that Sasol is now being investigated for “price gouging” in the gas market is therefore significant. Apparently, the company has raised prices on gas by as much as 70% over the past ten years. Sasol has an effective monopoly on the supply of gas in South Africa and so is in a position to push prices up without fear of competition.
Manufacturing activity increased by 2,5% in the year to the end of May 2023 on top of April’s 3,6% increase. This indicates that most manufacturing concerns have moved away from Eskom and implemented their own power solutions. The largest gainer was motor vehicles, parts and accessories, followed by iron and steel products. The figures are encouraging because they show that South Africa is rapidly adapting to loadshedding and will soon, perhaps within the next few years, be substantially independent of Eskom power. Not only will that be good for the environment, but it will also result in an economy running on cheaper more reliable power.
Mining production fell by 0,8% in the year to end of May 2023. It was brought down by a combination of loadshedding and lower commodity prices. Sales of platinum group metals (PGM) were down on lower prices and demand. The effect of lower mining production will be to reduce tax revenues by about R60bn in the 2023 tax year which will have a significant impact on the fiscus. Rhodium prices were down about 65% and palladium was down about 28%. Coal prices also fell by about half this year and iron ore production was down about 6%.
The impact of Transnet’s bad performance in getting our minerals to port for export was well illustrated by Kumba’s operational update on the six months to 30th June 2023. The company has taken the decision to suspend capital expenditure projects worth R2bn as a direct result of its problems with Transnet. Taken across the entire mining industry, Transnet’s inefficiency is resulting in far lower profits and hence lower tax revenue. It also impacts on employment levels and poverty in this country. As such, the Transnet debacle is more evidence of the ruling party’s complete inability to manage large organisations or large projects.
The pressure which South African consumers are under was evident in a recent report from ABSA bank. The report shows that credit impairments have risen sharply in the six months to 30th June 2023 by between 1,25% and 1,3%. Rising interest rates, combined with the huge impact of loadshedding and high unemployment have forced consumers to change their spending habits. This will undoubtedly impact on gross domestic product (GDP) in 2023 and 2024.
The selection of a private sector operator to partner at the Durban container terminal is a major step towards privatisation for Transnet and signals the government’s reluctant acceptance that the private sector is better at managing facilities of this sort than they have been. Hopefully this will be the first of many such privatisations at Transnet and at other state-owned enterprises (SOE). The container terminal is the largest in South Africa and the agreement will see it being expanded substantially. The agreement is with International Container Terminal Services, a terminal operator with extensive international experience. In time this should result in far more efficient management of container traffic for both imports and exports.
The sharp rise in children under the age of 5 years suffering from severe acute malnutrition (SAM) in South Africa shows that the economic mismanagement of the country has the greatest impact on the most vulnerable in our society. Deaths of children under the age of 5 from SAM have risen from 1,9 per 1000 in 2019 to 2,4 per 1000 in 2023 – and these figures leave out the many children under 5 who have SAM and are recorded as dying from other causes. SAM greatly increases the chances of death in a young child from other diseases such as dysentery and pneumonia. The rise in SAM deaths of young children must count as the most damning indictment of the ruling ANC because it has happened under their watch and is a direct result of the corruption and state capture which they are responsible for. The department of health recently issued a report which indicated that as many as one in three of the children under 5 years of age who die do so from malnutrition. Obviously, some of the SAM deaths can be attributed to the COVID-19 pandemic, but much of it is simply due to abject poverty.
The report recently published by Stats SA on the manufacturing sector in this country shows that it has been shrinking for the past 16 years both in terms of contribution to gross domestic product (GDP) and in terms of employment. The sector’s contribution to GDP has shrunk from a high of 23% in the 1980’s to just 11% in the first quarter of 2023. And it has lost over 300 000 jobs since 2005. Profits in the sector have dropped from 7% of turnover in 2005 to the current level of around 2%. It is notable that small and medium enterprises (SME) account for 58% of total employment and about 24% of income in the manufacturing sector.
According to Nedbank’s most recent capital projects report, the value of new projects in South Africa dropped sharply in the first six months of 2023 to R173bn compared with R248bn in 2022 and R393bn in 2021. This sharp drop off is a function of decreased confidence in the economy and probably mainly a result of increased loadshedding. Higher interest rates would have played a part as would declining consumer spending. The drop means that growth in future years will be subdued. 60% of the projects announced in first six months of 2023 were government projects – showing that the private sector is doing even less. Major projects require investors to have a positive view of the coming years – something which has been lacking in South Africa for some time.
BankServ’s take-home pay report shows that the average South African household took home R14596 in June month just slightly more than the previous month and June last year. Pay levels have stagnated while costs have been rising resulting in increased pressure on consumer disposable income. Higher interest rates and the need to spend money on alternative power has impacted directly on consumer spending and gross domestic product (GDP). Inflation is now falling (5,4%) and the Reserve Bank held rates unchanged at its latest meeting – but South Africans are really struggling to make ends meet.
The Rand
As the bull trend has taken hold on Wall Street so sentiment has shifted rapidly towards risk-on - and this has caused the rand to strengthen to well below R18 to the US dollar. It is important to understand this strength is not due to any significant improvement in the South African economy. Consider the chart:
As you can see here the increased loadshedding late last year and early this year caused the rand to weaken. That weakness came to an abrupt halt on 31st May 2023 with the rand at R19.75 to the US dollar. Suddenly our currency received a new lease of life as overseas investors forgot their fears and sought to invest in high-yielding emerging markets. This shows the close relationship between the rand and the S&P500 index. When the S&P is rising, then it makes sense that investors are becoming more optimistic and want to move away from their low-yielding secure assets. That makes South Africa and other emerging markets look more attractive.
It is also true that international markets like London, Tokyo, Shanghai and the JSE tend to follow Wall Street’s lead. If the S&P is rising then you would expect other markets to also be rising. What is interesting is that, until the last few days, the JSE-Overall index has been relatively slow to move up in response to the bullishness on Wall Street. Perhaps local investors did not quite believe the basis for enthusiasm in world equities - until now.
General
The suggestion that the BRICS countries could establish a common currency to be used to oppose the dominance of the US dollar in international trade and as a widely accepted reserve asset is at best far-fetched. The US currency is currently used as a medium of exchange for about 62% of international trade and makes up about 60% of the reserves held by central banks worldwide. The entire “de-dollarisation” idea is a propaganda effort by Russia to oppose the massive dominance that America and Europe have over the world economy. If any currency could replace the US dollar as the most used international currency, it would be the euro which is used in about 20% of world trade. Many years ago, when the euro was first floated there was some suggestion that it would replace the dollar in the oil market. There was talk about a “petro-euro” replacing the petro-dollar – but it never came to anything. The idea that some yet-to-be-invented currency with almost no international acceptance could replace the US dollar is a fantasy enjoyed by populist academics. In our view it will have little or no impact on the international trade or the strength of the US dollar.
The record ocean surface temperatures being recorded this year combined with the impact of stronger-than-usual El Nino phenomenon are causing extreme weather patterns around the world. 2023 will possibly go down in history as the first year in which climate change became evident and indisputable in world weather patterns. Flooding, droughts, wildfires, hurricanes, and other extreme weather events are likely to begin impacting the world economy, especially in the northern hemisphere and the tropics. South Africa in a temperate zone, but we can probably look forward to a prolonged drought and water restrictions over the next few years. The annual maize crop might be substantially reduced resulting in a need to import maize and our agriculture generally could be negatively affected. Food inflation will probably rise world-wide. The first listed companies to be impacted will be those which are involved in agriculture, but the impact could become more pervasive over time.
The crackdown on crime taking place at Eskom is significant. President Ramaphosa, in answer to a DA question in parliament, gave a detailed written answer in which he spoke about R11bn worth of contracts which had been cancelled and a further R3,7bn which are under litigation. His report spoke of 5635 referrals for disciplinary action against Eskom employees referred by the special investigative unit (SIU), 125 pending criminal cases, 65 referrals to the asset forfeiture unit and 25 former senior executives who had been dismissed for corruption or state capture. Apparently, there are 2147 criminal cases relating to Eskom which are under investigation since April 2022. Clearly, this vindicates former Eskom CEO, Andre de Ruyter’s claim that Eskom was losing about R1bn a month to organised crime. Hopefully, at last, the government is taking steps to end the bleeding.
Commodities
OIL
Since last month’s Confidential Report, the price of North Sea Brent oil has risen sharply, breaking up through its long-term downward trendline. Consider the chart:
This rise almost is almost certainly caused by the renewed confidence in the US economy and hence the world economy. Investors, having been bearish for more than a year, are now expecting the demand for commodities to rise.
A rising oil price is no longer a problem for the Biden administration because Americans are experiencing one of the strongest economies they have for a long time. If the economy continues to perform as it is now, then the Democrats can expect to enjoy a substantial advantage in next year’s presidential elections. Obviously, rising oil prices are bad for inflation, but the Federal Reserve Bank appears to have inflation under control now.
Luckily for South Africa, the same factors that are driving the oil price higher are also resulting in a stronger rand, which means that the local price of petrol should be contained.
GOLD
The gold price has encountered a long-term, well-established resistance at $2050 but in rands gold has been climbing steadily. Of course, our gold mining companies receive the rand price of gold and so the decline of the rand is a great benefit to them. South Africa is no longer a major gold-producer mainly because our gold is too deep to extract profitably and because the ANC government has done much over the past thirty years to making mining in this country difficult.
Consider the chart of the rand price of gold over the past 20 years:
Here you can see the upward channel with both upper and lower channel lines supported by many touchpoints (red and green arrows). What is remarkable about this chart is that the channel lines run almost exactly parallel. In our view, gold will continue to protect South African investors against the inevitable long-term weakness of the rand.
Companies
One of the most challenging aspects of being a private investor is finding the best opportunities from the approximately 300 shares listed on the JSE. Effective share selection can be very time-consuming and difficult. To assist with this, a month ago, we re-started the Winning Shares List (WSL) and it is now available for clients on the PDSnet web site and the PDSnet Data Center.
This list was specifically designed to assist clients to identify those shares on the JSE which offer a good opportunity for capital gain. The shares selected are not necessarily blue-chip shares, although many of them are. All of them have at least sufficient volume traded for an investment of R10 000.
Historically, we have established that about 70% of the shares on the list will go up. As of Friday, last week (28/7/23), we had put 21 shares on the list. Of those shares, 17 had risen from the price they were at when we added them to the list and 4 had gone down. The best-performing share was up 19,3% and worst share was down 4,98%.
Obviously, no one can be 100% successful when selecting shares. Inevitably, some of the shares chosen will disappoint, but we are assuming that, as an educated investor, you will sell your losers when they break down through their stop-loss levels. The fundamental principal of success in the share market is to cut your losses, while allowing your winners to run. We have an absolute rule that we never lose more than 15% on any share market investment – EVER. Since some of our winners go up by several hundred percent, the result is that, overall, our portfolio is always profitable.
The following shares were drawn from the WSL:
ASTORIA (ARA) – Added to WSL on 18th July 2023 at 1000c per share.
This company is an investment holding company, owning shares in a diverse portfolio of shares such as Outdoor Investment Holdings and Trans Hex. What made this share interesting was the fact that it was trading well below its net asset value (NAV). On 31st March 2023 its NAV was 1340.75c per share, while the share was trading at 880c. This made it a potential take-over target so when the company issued a cautionary announcement on 14th July 2023 concerning a “potential acquisition”, we were immediately interested. By the 18th of July 2023 we had done what we research we could and found out nothing more – so we added it to our WSL portfolio at 1000c with a strict stop-loss. Clearly, there is substance to the cautionary, because the share had jumped up to 1193c by the 28th of July 2023. Consider the chart:
Annualised percentage gain so far = 587,04%
TRUWORTHS (TRU) Added on 27th July 2023 at 6893c per share.
This is an iconic blue-chip South African company and an institutional favourite, which has stores in Ireland, Germany and the UK. Obviously, it is a company which is dependent on consumer spending, but it is exceptionally well-managed and grew turnover by 13,7% in the 26 weeks to 1st January 2023. Obviously, it has a rand-hedge component which adds to tis attraction. We decided to add this share last week on Thursday, mainly for technical reasons because the share price was climbing rapidly. Consider the chart:
Annualised percentage gain so far = 313,9%
SANLAM (SLM) Added on 12th July 2023 at 6119c per share.
Sanlam is a diagonal share which has been performing exceptionally well for the past 35 years and which should be part of any private investor’s portfolio. The share was performing well and in a strong upward trend so we decided to add it to the list on 12th July 2023. It has not disappointed us. Consider the chart:
Annualised percentage gain so far = 167,7%
PSG KONSULT (KST) Added on 14th July 2023 at 1362c per share.
PSG Konsult is a financial services company involved in insurance, healthcare, estate planning and a variety of other services. It was spun out of PSG when that company unbundled its shares into the hands of its shareholders to unlock value in March 2022. The company is a highly-quality blue-chip company and its shares have been rising rapidly since June this year. We decided that it was a solid inclusion in our WSL portfolio and added it on 14th July 2023. Consider the chart:
Annualised percentage gain so far = 138,93%
The above shares are a sample from the WSL. We will hold the shares in the WSL unless they fall below our stop-loss levels. As you can see the methods used to select the shares vary from special situations like that of Astoria to selecting high-quality blue-chip shares like Sanlam. The only thing they have in common is that they are all well-traded and they all have the potential to go up and give the investor a capital gain.
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