The Confidential Report - February 2025

5 February 2025 By PDSNET

America

As Wall Street moves higher in this long-standing bull market, it becomes more vulnerable to the news flow and so more volatile. This can be seen by Monday’s (27/1/25) overreaction to the news about the Chinese AI chip maker, DeepSeek and then again at end of the week to the market’s overreaction to the White House’s announcement concerning tariffs. As shares move higher overreactions tend to become more commonplace and more extreme. The reality is, however, that the persistent rise in share prices continues to reflect an economy that is still growing strongly.

This can be seen by the recently-reported jobs number for December 2024 which showed that the US economy created a further 256 000 new jobs in December 2024 – well above economists’ expectations of 155 000. At the same time the unemployment rate fell back to 4,1% from the previous month’s 4,2% and is hovering around what economists consider the to be the “full employment” level. Obviously, the strength of the jobs report mitigates against further interest rate cuts and investors are now expecting only two or possibly three 25-basis point rate cuts in 2025.

In December 2024, the Federal Reserve Bank’s monetary policy committee (MPC) cut interest rates by a further twenty-five basis points but made hawkish comments about the pace of rate cuts in 2025 which generally upset the market at the time. In a single day (18-12-24) the S&P500 fell by 2,95% as investors digested the statement that the MPC was now anticipating only two more twenty-five basis point cuts in 2025 against the four cuts which had been expected by the markets. For example, after their strong run following Trump’s win at the poles, Tesla shares fell by 8,3% in a single day – and Paycom fell 10,1%. Our view was always that this sell-off was overdone. We have remained consistently bullish and always said that the S&P would overcome each of these overreactions to climb to new record highs in due course. The ripples on the surface are difficult to anticipate or predict, but the underlying direction of the current is clear.

The Fed does not want the unemployment rate to rise from the current levels around 4,1%. At the same time, the inflation rate is close to their target level of 2%  but the MPC feels that at this level it will be “sticky” and difficult to reduce further. What is clear is that Trumps’ inauguration was never going to directly impact monetary policy as he has no control over it. That, of course, did not stop him from saying that the MPC made a mistake in its latest decision to leave rates unchanged.

US Core inflation rose less than expected in December 2024 raising hopes that an early drop in the level of interest rates might still be on the cards. Core inflation which excludes food and fuel prices rose by 0,2% in December month – less than the 0,3% of the previous 3 months and what economists were predicting. On its announcement, the number caused the S&P500 index to rise by 1,5% on 15th January 2025. A steady decline in interest rates had by that time already been over-discounted into share prices by investors, so anything which supported this prediction was bullish - and vice versa.

Fourth quarter earnings reports coming in from S&P500 companies began on a positive note earlier in January with close to 80% reported profits and revenue above estimates. Shares in the financial sector were the largest contributors. Earnings were coming in about 9,1% above estimates and 67% of the companies beat revenue expectations. Later in January month Meta, Tesla and Microsoft reported with earnings unscathed and in line with expectations. And then Apple came in with better than expected results at the end of last week.

At the same time gross domestic product (GDP) growth for the 4th quarter was reported at a solid 2,3%, below predictions of 2,5%, but sufficient to give the whole year of 2024 a growth rate of 2,8% - pretty much in line with growth in 2023 which was 2,9%. This shows that the economy is still growing steadily and that a soft landing had been achieved by the Federal Reserve Bank. In the last 4 months of 2024, the Fed cut rates by a total of 1%, but they now seem intent on stepping back and watching the effects of what they have done. We view this as a healthy approach which is having the effect of slowing down the rise of share prices – but not interrupting the bull trend.         

The impact of Friday’s White House announcement that tariffs would begin on Tuesday the 4th of February 2025  took Wall Street down after being up 0,7%. It then tracked down 0,5%, in what immediately looked to us like a strong overreaction. We expect that markets will recover as more good news about the economy emerges. At this stage all we know is that the intention is to apply 25% tariffs to Mexican and Canadian imports as well as 10% tariffs on Chinese imports. But there are no details about whether the tariffs are temporary or permanent or which specific imports will be directly affected. As more details become available, we expect markets to retrace most of their losses and to resume their, by now, well-established upward trend. Consider the chart:

S&P500 Index: 25th of October 2024 - 4th of February 2025. Chart by ShareFriend Pro.

The chart shows the progress of the S&P500 following Trump’s election victory in November. The period included three public holidays – Thanksgiving, then Jimmy Carter's Commemoration on the 9th of January 2025 and Martin Luther King Jr. Day on the 20th of January. On the 2nd of January 2025 we tweeted that international markets were returning to risk-on which implied that a new upward trend would emerge in the S&P500 and that the rand would strengthen. Both predictions have come true despite some unexpected market shocks. The trend on the S&P500 is upwards and it has made a new record closing high at 6118 on 23rd January 2025. We expect further upside in the coming months – albeit interrupted by corrections.

President Donald Trump has threatened to apply 100% tariffs to all the countries in the BRICS group, including South Africa, if they decide to proceed with their efforts at creating a new currency to replace the US dollar. Trump also threatened to cut BRICS countries out of the American market completely. Obviously, South Africa will have to engage in talks with their American counterparts to try and resolve this problem. The United States is our third largest export market. Trump’s threats could also impact on South Africa’s membership of the US’s African Growth and Opportunity Act (AGOA) in terms of which SA exported R55bn worth of product to America in 2022.

The return of Trump to the White House is difficult to assess in terms of its economic impact on the South African economy. The Governor of the Reserve Bank, Lesetja Kganyago, has warned that his policy on tariffs could have a negative impact on economic growth and the strength of the rand. At this stage, growth is expected to be between 1,6% and 2% in 2025, and our view is that it may well be higher than this. The economy is riding a wave of reform brought about by the new government of national unity (GNU). Kganyago warns that Trump has complicated the inflation outlook, and it is possible that interest rates may only come down more slowly than anticipated.

Climate change came into sharp focus with the massive and devastating fires in the Los Angeles area. The area has not had rain for 9 months and as a result has large quantities of flammable material. The fires were fanned by strong winds and resulted in a number of deaths and tens of thousands of evacuations. Entire suburbs of Los Angeles have been completely destroyed. 2024 was the world’s hottest year on record and 2025 could be even hotter. There is evidence that the ice in both the Arctic and Antarctic is melting far more quickly than previously expected. At the same time the melting of the permafrost is resulting in the release of massive quantities of methane into the atmosphere which is making the situation worse. There seems to be little doubt that climate change is becoming a significant factor in investment decision making, both internationally and locally. Ironically, one of Trumps first actions on taking office was to remove America from the Paris Accord on climate change.

 

Ukraine

Both Russia and Ukraine have been attempting to make territorial gains ahead of Trump’s much-vaunted effort to stop the war after his inauguration on the 20th of January. The Ukrainians have made some headway in the Kursk region while the Russians have advanced in the Donetsk region taking the small towns of Kurakhove and Pokrovsk. It is apparent that both the Russians and Ukrainians are stretched to the limit and that both sides would probably welcome some sort of at least temporary cease-fire.

The attacks over the past month on Russian oil infrastructure by Ukraine have been doing significant damage to their economy and reducing their ability to make bombing raids. So far, Trump has not yet even talked to Putin and now his staff are talking about allowing the war to continue indefinitely. It appears that, despite his claims of stopping the war on day one of his presidency, Trump has become aware that Putin is in a desperate situation and probably needs to have a cease fire as soon as possible. The troops brought in from North Korea have failed because of inadequate back up and support and they are apparently now completely out of the fight. North Korea is, however, still supplying Russia with a considerable amount of ammunition which is enabling them to continue.

Trump is a wild card and his pronouncements since being inaugurated have caused the markets some volatility. However, he has not stopped shipments of arms to Ukraine and appears to be content at the moment to allow the war to persist at least for the time being. It is possible that his advisors are making him aware of Putin’s precarious position and the fact that he is now at a disadvantage in whatever negotiations follow. It seems to us that time is not on Putin’s side, despite his bravado and that perhaps the Americans are taking advantage of that.

Either way, we feel that some sort of cease fire is coming soon and that it will provide an opportunity for a more rational reassessment of the situation by both sides. The stark reality is that NATO has the resources to continue while Putin almost certainly does not.

 

Political

The recent by-elections in Thabazimbi (Limpopo) and Matubatuba (KwaZulu-Natal) show that the new government of national unity (GNU) is gaining ground with voters while Jacob Zuma’s MK party is struggling to make headway. Since the elections in May 2024, MK has apparently lost some ground to the ANC/DA alliance in Natal and has made a poor showing in Limpopo. For investors on the JSE this is good news since it makes a possible return to a Zuma-controlled government less likely. In our view, the GNU appears to be making steady progress on economic reform and is encouraging overseas investment into South Africa.

The ruling handed down by President Ramaphosa that all spaza shops must be registered following the death of twenty children from food poisoning is now being implemented. 13600 forms have been handed out to spaza shops in Gauteng but less than two thousand have been completed and returned. In our view this attempt to formalize the informal sector is probably going to fail. The essence of the informal sector is that it operates almost completely outside the rule of law. It pays no taxes and obeys no by-laws or statutes. Trying to change that is not going to stop spaza shops from selling unhealthy or even poisonous food any more than it is going to stop minibus taxis from breaking the rules of the road or informal settlements from ignoring all the building by-laws. The informal sector continues to employ millions of people who would otherwise be dependent on the state in one way or another. The fact that it oblivious to the laws of the land means that there will continue to be deaths and injuries – whether by poisoning, road accidents or fires and flooding in the overcrowded squatter camps. The solution in the end comes down to better law enforcement.

The government of national unity (GNU) is primarily composed of an alliance between the DA and the ANC. Those two political parties have several critical areas of difference which have the potential to break the GNU up. These are:

  1. The National Health Insurance (NHI) which the DA says is unaffordable and will result in further corrupt bureaucracy and possibly lead to an exodus of medical professionals from South Africa.

  2. The Expropriation Bill which was recently signed into law by President Ramaphosa (replacing the old Expropriation bill of 1975) which allows the state to expropriate land without compensation under certain conditions where it is deemed to be in the public interest. This piece of legislation frightens prospective investors away from the country because it threatens their ownership rights.

  3. The Basic Education Laws Amendment Act (BELA), which threatens the existence of our school governing bodies, and thus takes away the power of parents to determine the manner in which school that their children attend is run.

So far none of these problem areas has threatened to disrupt the functioning of the GNU, but each one of them represents a potential problem area and will require some delicate manoeuvring.

 

Economy

South Africa’s Monetary Policy Committee (MPC) cut rates by a further twenty-five basis points last week as inflationary pressures receded. This brought the prime overdraft rate offered by commercial banks down to 11% and eased the burden on mortgage bond holders. The decision to cut came immediately after the US Federal Reserve Bank had decided to leave rates unchanged at their meeting on the 29th of January 2025. While the downward trend in interest rates worldwide remains in place, it has slowed down somewhat and fewer rates cuts are expected in 2025. Locally, the MPC has taken a more hawkish stance as international conditions became less certain, and growth prospects deteriorated. Germany has slid into a technical recession while the UK and France are performing poorly. The Chinese economy which is the largest market for our raw materials has been underperforming recently. Trump’s threatened tariff war on BRICS countries is also a major potential disruption and source of uncertainty. Inflation in South Africa dropped to 3% in the year to December 2024 – the lower end of the Reserve Bank’s target range - mostly because of lower food and fuel prices. The Reserve Bank now expects the economy to grow by 2% only by 2027. We are expecting it to reach and even pass that level this year.

The Institute of International Finance is expecting the growth of the South African economy to be 1,9% in the 2025/26 year. This compares with the International Monetary Fund (IMF) prediction that SA growth will be 1,5% in 2025 and rise to 1,6% in 2026. The improved growth figures are a result of the end of loadshedding (which may now be in doubt), the advent of the government of national unity (GNU) and declining interest rates. The world economy is expected to grow at 3,3% on average so SA is still well behind that. We believe that local growth will surprise to the upside in 2025 provided there is no sustained return of loadshedding and provided there are no significant external shocks.

Gross Domestic Product (GDP) shrank by 0,3% in the third quarter of 2024, mainly because of a sharp decline in agricultural productivity. Excluding agriculture, the growth was 0,9% up from the third quarter of 2023. The effects of the drought on this year’s maize crop dragged the agricultural figure down. There is some doubt about the accuracy of the agricultural production figures, however, and there may be revisions. The negative GDP growth figure has cast some doubt on whether South Africa will be able to achieve the hoped-for growth in 2025. Agriculture has felt the effects of El Nino and the impact of animal diseases.

Inflation came in at 3% in the year to 31st December 2024 – slightly higher than November’s figure of 2,9% and still well under control. As a result a further twenty-five basis point reduction in interest rates, at the monetary policy committee (MPC) in January 2025 was implemented. Lower fuel costs have helped keep inflationary pressures down. Economists were expecting 3,1% or 3,2% so the final number was better-than-expected and right at the bottom of the Reserve Bank’s target range of between 3% and 6%. Lower food inflation has also helped to keep the overall number down. Inflation is now expected to be around 4% for the whole of 2025.

The South African Chamber of Commerce and Industry (SACCI) business confidence index for November 2024 reached a 9-year high at an index level of 118.1 – up from October’s 114,2. December was also very strong with 65% of respondents saying they expected business conditions to improve in 2025. Confidence in the business community has been riding high on the absence of loadshedding, the appointment of the GNU and the prospect of lower interest rates. In addition, the price of fuel has been dropping steadily, which reduces one of business’s key expenses. High confidence levels normally translate into more investment in both listed and unlisted companies. Road and rail transport is a major component of business optimism with deliveries expected to improve as the year progresses. Logistic problems have been a major factor for both importers and exporters in recent years.

Consumers in South Africa are still taking strain and the reduction in interest rates has not yet really been sufficient to significantly reduce pressure which they are under. This can be seen from the fact that in the third quarter of 2024 applications for loan finance rose by 3% over the same period in 2023, while arrears on bond repayments reached almost 7% of outstanding loans. Consumers are still struggling to pay their obligations and especially their bonds after the festive season. January is normally very tight for consumer spending, and we should expect more property foreclosures. The situation should slowly improve as interest rates come down.

Retail sales experienced a significant increase, rising by 7% in the year to the end of November 2024, following a 6.2% increase in October. General dealers performed exceptionally well, with sales increasing by almost 12%, and household furniture and equipment sales up by 9.4%. This indicates that consumers have boosted spending due to lower fuel costs, reduced inflation, and falling interest rates. Some of the additional spending resulted from cash payouts from the new two-pot retirement system, which peaked in October and were available to consumers in November. While the two-pot system provided a one-off boost, optimism surrounding the new government of national unity (GNU) has led to high levels of investment.

In October 2024, retail sales surged by 6.2%, with general dealers' sales up 11.5% and household furniture and appliances up by 16.6%. The increase in spending was driven by falling fuel costs and the prospect of lower interest rates. Ten months without loadshedding stimulated all sectors of the economy, resulting in a surge in employment levels with more people able to earn a living. However, the recent return to level 3 loadshedding casts doubt on this positive trend. Despite this, the economy is expected to grow more rapidly in 2025, supported by lower inflation, with food inflation at its lowest in 14 years. The consumer price index (CPI) was at 2.9% in November, slightly higher than October's 2.8% but still low enough for a further twenty-five basis point rate cut at the December monetary policy committee (MPC) meeting. Prices for bread and cereals decreased, while egg prices dropped by 3.7%. The maize crop is expected to be around 12.7 million tons, approximately 23% less than the previous year due to the mid-summer drought South Africa experienced.

In the month of December 2024 the economy slowed down slightly with the S&P purchasing managers index (PMI) coming in at 49,9 – down from November’s figure of 50,9. This breaks the pattern of steady improvements over the previous four months. The slowdown was most noticeable in the construction industry with lower output and sales, while the services sector grew slightly. Job numbers were more-or-less unchanged while input costs increased. Overall, the final quarter of the year was positive with the absence of loadshedding and optimism over the new government of national unity (GNU). The ABSA PMI also came in lower for December dropping to 46,2. 

New car sales last year were 3% lower than in 2023, with vehicle importers gaining market share at the expense of the better known brands. Despite this, sales in December 2024 were up 2,5% over December 2023. Car sales rose 1,1% in 2024, but commercial vehicle sales were down 12%. The drop in sales of commercial vehicles was mainly due to a sharp decline in the sales of taxis due to more stringent financing requirements. Toyota has had the most vehicles sales in South Africa now for the past four decades. Notably, Suzuki sales are just 10 000 less than VW which is in second place.

Manufacturing production was up 0,8% year-on-year in October 2024. This is a sharp improvement over August’s -0,8% decline. The sector, which includes petrol, chemicals, rubber, and plastic rose by 4,5% and accounted for most of the gain. Food and beverages was up 2,9% while iron, steel and non-ferrous metals gained 2,7%. The figures do not shoot the lights out, but they indicate that manufacturing is beginning to benefit from the end of loadshedding, cheaper fuel prices and the prospect of declining interest rates.

Overall mineral production in South Africa fell by 0,9% in November, dragged down by falling gold, iron, coal and diamond production. Platinum group metals (PGM) were up 4% and chrome production rose by 15,6%. Despite many past efforts to encourage local beneficiation, South Africa remains primarily a raw materials exporter dependent on the international prices of the various commodities which it produces. This means that internationally, we are a price taker rather than a price maker.

Black Friday appears to have seen record sales with Capitec reporting that it processed R25,4bn in transactions over the Black Friday weekend. About R2bn was spent at supermarket chains and Takealot processed 52 000 orders. Clearly, consumers are benefiting from the lower cost of fuel, falling interest rates and lower inflation. The Bureau of Economic Research (BER) reported business confidence at a 3-year high in the fourth quarter of 2024, reaching 54%. Consumers are feeling more optimistic as unemployment falls and the government of national unity (GNU) begins to have an impact. In our view 2025 will see gross domestic product (GDP) rise by at least 2%.

The international ratings agencies (Fitch, Standard & Poors and Moodys) could push South Africa up two levels over the next three years according to the Bank of America. Increased gross domestic product (GDP) growth as a result of reforms and the government of national unity (GNU) are anticipated by most economists. If the government debt can be brought under control, the ratings agencies will probably adjust their stance on the country. Better ratings should result in more capital flowing into the country and potentially lower interest rates on government debt. Eventually, the country could be returned to investment grade status.    

The water supply is becoming an increasingly problematic area for the South African economy and threatens local businesses. In 2023 only about 54% of drinking water was up to standard compared with 95% in 2014. The deterioration of water quality can lead to the outbreak of disease. Seventy-five percent of surface water is fully utilized and there are limited options for bringing more water into the system. At the same time, about 40% of water is lost to leaks and theft. Gauteng, especially, has a water problem with a rising number of water outages and water-shedding in some areas. This is impacting the investment decisions as companies are considering whether to put more money into the province. Much of the water infrastructure is dysfunctional and old due to a lack of planned maintenance. Sibanye, some of whose mines are located in the dry western limb of the Bushveld Complex, has had some mining stoppages due to insufficient water and is spending more than R100m a year on water infrastructure. Municipal water in the area is both unreliable and expensive.

Eskom is teetering on the edge of bankruptcy because of massive municipal debt and on-going electricity theft. According to the Chair, Mteto Nyati, the situation is unsustainable and threatens to prevent the separation of the distribution company. The municipalities collectively owe Eskom R110bn – up from R5bn owed in 2015. The municipal debt relief program is not working because municipalities are not complying with the terms. This will result in legal action against non-compliant municipalities. At the same time, Eskom has been given the right to increase the price of electricity by 12,74% this year by the National Energy Regulator – at a time, absurdly, when coal prices have declined by a further 25%. Since 2010 electricity prices have risen by an average of 15% per annum. It has been our view for some years now that Eskom is slowly dying as more and more of its customers, both corporate and consumer, switch to renewable energy in response to sharply rising electricity prices.

The city of Tshwane owes Eskom R6,7bn in overdue debt. Now Tshwane has reached an agreement with Eskom to repay the outstanding balance – and that agreement has been made a court order – which means that if Tshwane fails to act on it then Eskom can immediately apply for an order to attach assets. Repayments will last for 4 years and the first payment of R400m was due in December 2024. The agreement states that current accounts must be settled in 30 days. This is a landmark agreement which can be used to sort out the debts of other cities and municipalities.

Impala Platinum (IMP) has just signed a deal which will take its renewable energy from 37% of what it requires to 90%. Its carbon dioxide emissions will be reduced by more than 852 000 tons over the next five years. This deal is one of many in the mining industry and elsewhere in business. It shows the steady decline in the use of Eskom by big business, and especially the mining industry. In our view, Eskom is dying slowly, propped up by government subsidies. It is being rapidly replaced by new climate-friendly technologies that are cheaper in the medium to long term.

The graphic picture in the Business Day of a 7km queue of trucks on the N2 waiting to deliver coal to the Richards Bay coal terminal is a stark reminder that the problems at Transnet’s ports are far from over. This export/import bottleneck is costing the South African economy every day that it persists. The mining sector has been battling to export its production for a long time now and this is reducing the sector’s ability to generate profits, especially in the coal industry. In the first 9 months to 2024, mining GDP increased by just 0,7% - which is better than 2023’s 0,5% contraction – but still leaves a great deal to be desired. The 0,3% decline in national GDP in the third quarter remains a concern.

Transnet made a loss of R2,2bn in the six months to 30th September 2024. The six export corridors which it is responsible for are constantly impeded by vandalism and theft, while the systems are out of date and have not been properly maintained. The company says that it needs R14bn per annum to update and repair the 21300km of railways under its care. Some of this can come from the private sector, but some will have to be funded by the Treasury. Until the money is spent, exports critical to South Africa’s economy and tax collections are being held up. The line from Ermelo to Richards Bay has been hardest hit and is constantly being attacked by organized criminal syndicates.

The ballooning Transnet debt which has now reached $140bn is rapidly becoming a problem for the Treasury. In a recent assessment the ratings agency, Standard & Poors (S&P), has decided to put Transnet on a Credit Watch, potentially meaning that its debt will be downgraded. Standard & Poors says that it expects that sooner or later Transnet will have to get a bailout from the Treasury – which means that it is unlikely that South Africa will be able to reduce the government debt any time soon. Finance minister, Enoch Godongwana has said that the Treasury will not be making any further payments to state owned enterprises – like Transnet – and there is no allowance in the budget for it. At the same time, it is vital for the economy that Transnet’s infrastructure be restored and upgraded to enable rail transport of both imports and exports. Basically, Standard and Poor's is right – something must give. In December 2023, Transnet got a R47bn guarantee from the Treasury to help it repay its debt and meet expenses. It seems highly likely that a similar arrangement will have to be made again.

The new CEO at Transnet, Michelle Phillips, has been forging ahead with plans to involve the private sector in the development of rail corridors and port terminals. She hopes to bring a number of new projects to the market by May this year, including a new manganese export terminal at Ngqura, an upgrade to the Durban/ Johannesburg corridor, a corridor between Pretoria and the Eastern Cape for motor vehicles and an upgrade to the terminal at Richards Bay. Obviously, if sufficient funding can be raised for all these projects, the impact on the South African economy will be substantial.

The Afrimat construction index comes out every three months. In the third quarter of 2024 it showed that construction activity was up 3,6% in the second quarter with seven of the ten component indexes up. Most of the growth came from a 23,3% jump in buildings completed followed by a 14,6% increase in employment in the sector and a 5,9% increase in the sales of building materials. The high level of interest rates remains a drag on the index, but rates are on their way down now and so should cease to be a negative factor in time.

The potential closure of ArcelorMittal’s (ACL) Vereeniging long steel plant with the loss of at least 3500 jobs is now the subject of an intense negotiation between government and the National Union of Metal Workers (NUMSA). Poor Transnet coordination, a weak local demand for steel and intense competition from cheaper imported products has made the plant uneconomic. The simple fact is that ACL cannot produce this type of steel at the same price that other countries can produce it and transport it to South Africa. ACL cannot compete with local mini mills, which now produce half of the long steel consumed in South Africa. The government imposes tariffs on steel imports to protect the local industry, but the effect of these interventions will be to distort the economy and push the price of steel up for local construction companies. In our view, local industries which cannot compete with imported products should be allowed to go out of business. The closure of the Vereeniging plant makes good business sense.

 

The Rand

The rand continues to suffer some fall-out from the uncertainty surrounding the new Trump administration in America. It is not clear yet exactly what tariffs Trump intends to impose on countries belonging to the BRICS group and it is difficult to assess the effect of those additional costs. After the appointment of the government of national unity (GNU) the rand was strengthening steadily against first world countries and reached a cyclical low of  R17,11 to the US dollar on 27th September 2024. Since then, it has been weakening, and we expect that it will probably continue to do so until there is some clarity on Trump’s actions in the international trade arena. Consider the chart:

South African rand/US dollar: March 2023 - 31st of January 2025. Chart by ShareFriend Pro.

Commodities

OIL

Consider the chart of North Sea Brent oil:

North Sea Brent Oil: December 2023 - 31st of January 2025. Chart by ShareFriend Pro.

The chart shows that the price has been in a descending triangle with cycle highs at $91.60 on the 5th of April last year and then at $82.31 on the 15th of January 2025. The support level at $72 remains in tact although it was repeatedly tested in the final quarter of 2024. The recent rise to above $80 was occasioned by the war in the Middle East – which has since been resolved resulting in the oil price falling back to around $76. This puts Trump in an extremely powerful position in any negotiations with Putin over the Ukraine war, because he could probably work with Saudi Arabia to bring the price down even lower putting further enormous pressure on the Russian economy.

KRUGERRAND

On 28th February 1985 you could have bought a one-ounce Krugerrand for R595. Today the same coin is worth R50 000. Gold, and especially Krugerrands, are the ultimate hedge against the weakness of paper currencies and other paper assets (like shares and bonds). As the most secure of all assets, gold offers no return. It pays no interest, dividends, or rent – but it holds its value almost no matter what happens in the world.  

Krugerrand: April 1985 - 31st Of January 2025. Chart by ShareFriend Pro.

More Krugerrands have been produced and sold than all the other gold coins in the world combined. Almost every country now offers a gold coin such as the American Eagle or the Canadian Maple Leaf – but Krugerrands are by far the best known and most widely accepted. A Krugerrand will sell for the same price in London, New York, and Tokyo as it does in Johannesburg.

We recommend that, because of the high level of political risk associated with this country, South Africans hold as much as 10% of their total wealth in Krugerrands. They will offer you a degree of security which no other asset can. Aside from being internationally accepted, they have the advantage that, unlike most other assets, they are highly transportable, and they do not have your name attached to them.

COAL

The coal industry has taken considerable strain in recent years due to Transnet’s problems. Various coal mines have had to reduce guidance because of the difficulty of getting their product to port. Over and above this, coal as a raw material has come under increasing pressure from environmentalists, making it difficult to obtain funding for new projects. The International Energy Agency reports that South African mining companies have a total of 16 new coal producing projects under development with a total expected output of 40m tons. Obviously, all this new production is for the export market since South Africa is precluded from building any further coal-fired power stations. South Africa now produces about 86% of Africa’s coal consumption and about 70% of South Africa’s energy comes from coal-fired power stations. Coal exports did increase in 2024 with Richards Bay Coal Terminal (RBCT) recording a 10% increase in coal exported to 52m tons. The terminal is aiming to move 55m tons this year.

GOLD

South African production of gold dropped 11,5% in the year ended 30th November 2024. November was the 13th consecutive month of declining production. The gold in South Africa is in conglomerate form. The reef breaks the surface just South of Johannesburg and tips downwards at an angle of about 20 degrees. Generally, the grades get higher the deeper the reef is, but there comes a point where the reef is just too deep to be economically viable. The deepest mine in the world, Mponeng, is now mining at well below four thousand meters. At that level, the grades are excellent but the difficulties of cooling the mine sufficiently to get the ore out of the ground are enormous. South Africa, which in 1970 produced gold more than the rest of the world put together, has been reduced to a small player in the industry, not even in the top ten producing countries. Gold, which once dominated our economy, is now relatively unimportant. Of course, gold revenues have increased on the back of the rising gold price, despite the fall in production.

PLATINUM

The demand for platinum has been impacted by falling marriage rates over the past decade throughout the world. Marriage rates in the US, China, Europe, and Japan have been falling steadily. Chinese demand for platinum rings has declined and is now being overtaken by the demand from other countries. Jewellery demand accounts for about one quarter of the demand for platinum and has fallen from three million ounces in 2014 to less than two million ounces in 2023. Platinum demand in China has been falling by an average of 13% per annum and demand from the rest of the world has been increasing by 4% per annum. The rising price of gold has meant that the two precious metals have almost reached price parity.

 

Companies

RICHEMONT

Richemont is one of the iconic international businesses founded by South African businessman Johann Rupert in 1988. Although headquartered in Switzerland, it has a global presence and specializes in supplying and selling luxury products such as jewellery, watches, fashion, and accessories all over the world, particularly in America, China, and Europe. This makes the share a rand hedge which can be useful if the rand is weakening. In its latest quarterly results published on the 16th of January 2025, the company reported sales up a strong 10% in constant currencies at 6,2bn euros. Consider the chart:

Richemont (CFR): 20th of November 2024 - 31st of January 2025. Chart by ShareFriend Pro.

Richemont had been trending up for some time before we added it to the Winning Shares List (WSL) on 9th January 2025 at a price of 292438c. It has subsequently risen by 24% in just over 3 weeks. The company has a market capitalization of close to R1,95bn, making it one of the JSE’s largest shares. We believe that it still has upside potential.

 

HUDACO (HDC) – acquisition of Isotech for R709m

Hudaco is a company involved in importing and selling industrial, automotive and consumer products, mostly in Southern Africa. It has a diverse range of companies which it is constantly adding to by making bolt-on acquisitions. A bolt-on acquisition is one that is relatively small in relation to the parent company, which can usually be paid for from existing cash balances and which does not require shareholder approval. The key with making acquisitions is that should fit in well and compliment your existing businesses so that there are cross-marketing opportunities and economies of scale. The risks are substantially reduced if the acquisition is relatively small and so does not require the parent to take on significant debt and does not divert management attention away from the existing business. Over the years, Hudaco has made something of a science of this type of acquisition. Consider the chart:

Hudaco (HDC): May 2020 - 31st of January 2025. Chart by ShareFriend Pro.

We first wrote about and advocated investment in the company in an article on 8th February 2021 when its shares were trading for 10046c. We wrote a second article a year later on 14th February 2022 by which time the share was trading for 15762c. Finally, we added it to the Winning Shares List (WSL) on the 20th of June 2024 when it was 17500c and it has subsequently risen to 20188c. 

Its latest acquisition was Isotech for R709m, was completed and reported on 20th January 2025. Isotech is a provider of insulation materials and solutions in South Africa. It has a turnover of R500m a year and an after-tax profit of R90m. It fits well with Hudaco’s existing Powermite and Varispeed businesses. For more details read our article, Growth by Acquisition, published on the 27th of January 2025.

Hudaco represents an excellent investment opportunity for private investors because of its steady growth over the years. It is a Southern African business which pays regular dividends and which will benefit directly from the new government of national unity (GNU) and any improvements in the economy.

HYPROP (HYP)

Hyprop is a real estate investment trust (REIT) which owns several well-known shopping malls in South Africa including Rosebank Mall, Canal Walk, Hyde Park Corner, and Clearwater Mall. In a trading update for the six months to 31st December 2024 the company reported South African tenants’ turnover up 4,9% and trading density up 4,4%. The company said, “Hyprop's portfolios in South Africa and Eastern Europe continued their growth trajectory during the six months ended 31 December 2024, with sturdy trading performances during the period.” The company has a net asset value (NAV) of 6032c per share, but the shares are trading for 4394c – a discount of 27%. The important issue with a REIT is that the assets included in its NAV are valuable properties and not intangible assets which makes its NAV very reliable. Consider the chart:

Hyprop (HYP): 2nd of August 2024 - 31st of January 2025. Chart by ShareFriend Pro.

As you can see, we added Hyprop to the Winning Shares List (WSL) on 15th August 2024 at 3439c and it has appreciated significantly since then. You will note that the share price is cyclical and that it is currently at the bottom of a cycle, making it relatively cheap at current levels. We are confident that the share price will rise to make a new high in due course.

 


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.



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The Confidential Report - Archives

The Confidential Report - Dec 2024

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