ARTICLES

Overview of the Market

The Rand

South Africans will have been watching the steady decline in the rand to below R17 to the US dollar with resignation and some despair. It seems as if our currency is always losing ground, making it more and more expensive to travel overseas while increasing local inflation and especially the price of petrol.

The latest fall has been caused by the shift to “risk-off” among international investors as the US Federal Reserve Bank hikes interest rates in its desperate effort to contain US inflation. Investors are rushing out of emerging market investments and back to US treasury bills to protect their wealth as the bear trend on Wall Street continues.

What you may not have noticed, however, is the fact that other first world currencies like the euro have also been taking a pounding. In fact, the euro has fallen from 81,03 euro cents to the US dollar at the beginning of last year almost to parity at 98,7c euro cents. And the rand has actually been appreciating against the euro. For example, on 18^th August 2020 the rand was at R20,74 to the euro and today it is just R17,16.

This means that, far from slipping into new negative territory, the rand has been performing at least in line with first world currencies and even slightly better. Much of this is due to the fact that our Reserve Bank has stayed well ahead of many first world countries in this rate hiking cycle. After the latest 75-basis point hike, our repo rate is at 5,5% - which means that the prime overdraft rate here is around 9% - against our inflation rate of 7.4%. This means it is still possible to earn a real rate of interest on money invested in this country. If you contrast that to America where, even after their expected rate hike, the repo rate will be around 2,25% against inflation of over 9%, we still look very attractive.

Technically, the rand does appear to have found some strong support at about R17.11 to the US dollar and looks ready to begin strengthening again. Consider the chart:

The Oil Price

One of the most significant effects of the war in Ukraine has been the sharp rise in the price of oil. Before the war the price had already been rising steadily, but the war pushed it up to levels around $125 per barrel which had a severe knock-on impact on inflation around the world. The situation was really brought home to Americans on the Independence Day weekend when they had to pay more than $5 per gallon for petrol.

It is true to say that the policy of quantitative easing was made possible in large part by the relatively low price of oil during the pandemic. That shield has now abruptly been stripped away and the true inflation impact of printing money to prevent a recession is now becoming clear.

The rising oil price has obviously also been benefiting Russia at a time when the war in Ukraine has made it an international pariah. To address this problem President Biden visited Saudi Arabia and we believe some kind of deal was struck to bring the oil price back to around $100 a barrel. The fall in the oil price has been greeted enthusiastically by the bulls on Wall Street who perceive that with petrol back at around $4 per gallon the pressure on the Federal Reserve Bank to raise rates will be reduced.

Our view is that the respite is likely to be short-lived. The underlying reality is that the cycle of rising interest rates world-wide has only just begun. It still has a long way to go before it has a significant impact on runaway inflation. Consider the chart:

Despite the recent rally on Wall Street, which has taken the S&P500 back above resistance at 3900, it is important to understand that we remain in a bear trend. The bear trend is not over. The underlying sentiment is negative, and the S&P will fall further.   

POSTSCRIPT: We wrote last week’s article about one share which we think will “buck the trend” on Wall Street – Tesla. At the time of writing last week, it was trading for around $700 per share. It closed on Friday at $816.73 – a gain of 16,7% in one week!

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately