Date published -2023-08-08

(This is a very truncated version highlighting excerpts of our full report which is available for our paid subscribers)

The surprise and market moving news last week was the decision by Fitch Ratings to downgrade its rating of the US government. In May, the ratings firm placed the US credit rating on ‘ratings watch’ with a negative outlook to its AAA rating. Despite a resolution to the debt ceiling debate in June, the ratings agency cited a rising debt profile and fiscal challenges including rising Medicare and Social Security costs as concerns justifying the ratings move. This brings Fitch’s rating of the US to AA+, a notch below the top tier of AAA and is the second time a major rating agency has downgrade the US after S&P similar move in 2011.

The announcement late on Tuesday led to a wave of risk off in markets and ironically a stronger US dollar against most major currencies. This was likely due to the fact that the US remains the global reserve currency of choice and that a flight to safety in the short-term favours USD cash. The market subsequently shrugged off the news. This highlights that a move like this is more likely to have longer term repercussions in spurring a move by other global players to attempt to establish alternatives to USD dominance in global trade.

On the data front, the release of ADP employment data in contrast to the release of nonfarm payrolls data two days later provided some market volatility. We unpack the detail and differences in our full report. Other global data included an unsurprising rate hike by the Bank of England (now 5.25%) as well as slowing inflation in Europe and generally weakening PMI data globally.

The big negative ‘surprise’ on the domestic data front was the release of South Africa’s trade balance for June. The trade balance swung from a surplus of R9.6bn in May to a deficit of R3.5bn in June. This takes the year-to-date surplus down to R5.6bn compared to R129.6bn for the same period last year. A weaker trade balance filters through to the current account and acts as a headwind to the rand and vice versa. We unpack some key drivers in the full report.

For the week ahead, global attention will shift to the release of US inflation data for July set for release on Thursday. We have Chinese trade data and inflation data which will also be watched closely earlier in the week along with UK GDP data on Friday. Domestically, we have South African mining and manufacturing data.

Our feature this week is about navigating market corrections and what process investors can follow to manage their risks. 

Financial markets are inherently dynamic, subject to periodic fluctuations, including corrections. While market corrections can be unsettling, they are a natural part of market cycles. As an investor, understanding how to approach market corrections is essential for safeguarding your portfolio and making informed decisions. Market corrections can present opportunities for prudent investors. By staying calm, reassessing your investment goals, and maintaining a well-diversified portfolio, you can navigate market corrections with confidence. Remember that successful investing requires discipline, patience, and a focus on long-term objectives.

Market update:

In equity markets last week, global markets sold off in tandem last week dragging the local indices lower along with them. While this was masked by a resumption in rand weakness for domestic investors, the headline decline in indices was largely in line. In company news, AbInBev (+1.7% for the week) was one of the few companies to buck the negative trend on domestic markets despite posting mixed results. Revenue was up 10% in the first half, but earnings were lower with specific pressure in US volumes. MPact traded higher(+8.5%) after the packaging group’s revenue rose by 8.7% with headline earnings per share up over 32%, closer to the upper end of recent guidance by management. Mondi traded sharply lower as it reported a decline of 28% in headline earnings per share. Goldfields (-10%) slumped after the company posted a trading update which showed expected headline earnings to decline by between 9 and 16%. Lower volumes and increased costs remain a feature of the industry at this point in the cycle. All-in sustaining costs per ounce at around $1400 remains more competitive than the $1600 of competitor Anglogold Ashanti which also traded around 10% lower for the week after its own trading update. Mobile telecoms giant MTN fell 9.4% last week after its trading statement for the 6 months to June. Headline earnings are expected to be between 0-10% higher with ongoing challenges at its African operations compounded by challenges in repatriating cashflows from those geographies.

In the US, the energy sector was the only headline winner in an otherwise weak market. A voluntary extension of Saudi oil production cuts has kept crude prices higher and helped energy stocks. Pressure across other sectors was widespread with only Amazon bucking the red trend among the megacaps to end the week 5.5% higher. The company reported revenue up almost 11%, improved margins and a strong outlook for its e-commerce and Amazon Web services businesses. By contrast, Apple disappointed the market falling around 7% for the week. Despite reporting a net profit increase of 2.3% in the quarter, the outlook remains clouded as revenue declined for a third consecutive quarter. Warren Buffet’s Berkshire Hathaway reported its highest ever quarterly operating profit on Saturday. However, the legendary investor highlighted that he is currently sitting on a record cash balance as he assesses the current risks in the market.

In aggregate the earnings season in the US has beaten analyst expectations but guidance has been weaker. This week, we expect Disney, Fox and Eli Lilly among the larger names reporting.

In our market carousel (10 markets we cover every week across equities, FX and commodities) this week we close 2 long positions (equity) after being in partial profit take for several weeks. We keep the speculative long (commodity) we opened last week taking our open long positions to only 1. We maintain our 1 short position (equity), keeping us at 1 short position. We now have a record of 8 'No Position' stances in line with our de-risked stance highlighted over the last few weeks. We highlight all the specific details in our full reports for paying subscribers.

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