Monthly economic and market review: February 2024

This February it was again time to synchronize our calendar to the solar year with the addition of a leap day at the end of the month of love. While there was no leaping in the S&P 500 in the month, there was plenty of love for the index which made nine new all-time closing highs during February, including leap day on the 29th. The steady increase in the index over the month saw it close out February with a 5.2% gain and a year-to-date gain of 7.4%. The FTSE/JSE All Share index, on the other hand, found no love in February, closing down 2.4% for the month and 5.4% for the year-to-date. The chart below of the past 12 months shows the steady increase in the S&P 500 index (in green) from 3,970 points to 5096.27 points while the FTSE/JSE All share index slid from 77,733 points to 72,729 points over the same period. That is a gain in the S&P 500 of 28.4% and a loss on the JSE of 6.4%. If one takes the rand depreciation over the period into account (R18.36/$ à R19.18/$), the JSE lost 10.4% in dollar terms against the dollar gain of 28.4% for the S&P 500.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 29 Feb 24

Source: Factset

The strength of a handful of shares drove the US market higher in February but general global market sentiment continued to be shaped by the changing views on the timing of central bank interest rate cuts. The rate of disinflation around the world has continued to slow but generally, inflation has been moving towards central bank targets. In the US, headline CPI inflation returned to 3.1% (see table of indicators below) while the Federal Reserve’s most favoured inflation measure, the Core PCE deflator, dipped to 2.8%. That is not far from the Fed’s target of 2% but it has not yet prompted Fed officials to start talking about the onset of rate cuts. Recent Fedspeak has had the effect of pushing market expectations of a first interest rate cut out to June or later this year. This market disappointment was captured in higher bond yields over the course of February. US two-year treasury yields rose 42 basis points in the month while 10-year bond yields moved 30 basis points higher. The prospect of “higher for longer” interest rates supported the US dollar which appreciated a little more in February to $1.08/€ from $1.09/€ at the start of the month and $1.10/€ at the start of the year. With rate cut expectations pushed out, the gold price gave up a handful of dollars but remained entrenched above $2,000/oz. The prices of other commodities broadly slipped lower to reflect weaker economic conditions and the consequent decline in demand. Oil prices remained fairly steady with Brent crude holding its own above $80/bbl as the OPEC+ group of producers continued to act in concert to manage production levels and reduce available oil supply.

Local bond yields followed US bond yields higher in February with government’s benchmark bond maturing in 2032 gaining 47 basis points in the month. The rand depreciated against all of the major crosses in the month and after two months of 2024 so far, the rand has given up almost 5% against the US dollar. The bond market’s weakness and the weakness of the rand can conveniently be blamed on US market movements but investors into the local markets had to contend with the State of the Nation Address (“SONA”) at the start of the February and the National Budget towards the end of the month. There was little in the SONA to excite the market and the state president’s address was widely interpreted as an attempt to promote the ruling party in an election year. The very immediate market reaction to the National Budget was positive as the finance minister moved to reduce the budget deficit over the coming years with a measured reduction in sovereign debt in the near-term. The shine of the fiscal consolidation was quickly lost though as the market digested National Treasury’s approach to reducing debt and debt-servicing costs by tapping into the South African Reserve Bank’s gold and foreign exchange contingency reserve account to the tune of R150bn. While not unprecedented, the approach was considered questionable and ultimately ineffective should there be no complimentary government initiatives to grow the economy and significantly reduce the country’s wide structural budget deficit.

The S&P 500 was not the only market index to make new all-time highs in February. The 30-stock price-weighted Dow Jones Industrial Average closed at the highest point of its 127-year life on 23^rd February at a level of 39,131 points. The index also experienced a rare change to constituents in the month when Walgreens Boots Alliance was removed and Amazon was added following the three for one stock split by Walmart. The much broader NASDAQ Composite index also closed the month at a record level with its close at 16,091 points surpassing the previous peak of 16,057 set in November 2021. The excitement around artificial intelligence and semiconductors did not abate in February and the spectacular results and guidance from Nvidia only served to fuel the technology fire.

Not to be outdone, the Nikkei 225 in Japan closed out February at a record level of 39,166 points. The index last peaked at 38,915 points at the end of 1989 but after decades of low or no inflation and a zero-interest rate policy, foreigners have taken renewed interest in the land of the rising sun as corporate profits improve and the prospect of higher interest rates looms. The Euro STOXX 50 has had its own particular set of drivers and while the February closing level of 4,894 points was not an all-time high, it was the best recorded closing level of the index since December 2000. The European index has been buoyed by its own version of the US’ “Magnificent Seven” in the 11 stocks that have been dubbed the “GRANOLAS” (GSK, Roche, ASML, Novo Nordisk, Nestle, Novartis, L' Oreal, LVMH, AstraZeneca, SAP and Sanofi). After the first two months of the year, ASML is up 31%, SAP is up 24%, Novo Nordisk has gained 22% and LVMH and GSK are each 15% higher (in local currency terms). In comparison, four of the Magnificent Seven are higher this year so far (Nvidia +66%, Meta +42%, Amazon +17% and Microsoft +10%) while three are lower (Alphabet -2%, Apple -7% and Tesla -18%).

The table below highlights some of the bigger winners and losers from amongst the 100 largest companies in the S&P 500 in February and for the year-to-date (“YTD”). The bulk of S&P 500 companies reported quarterly earnings in February and while excellent results were rewarded by the market, poor results or any weak guidance from management saw share prices being punished. Biotechnology firm Amgen was the biggest loser in February despite earnings and revenue for the fourth quarter coming in modestly ahead of expectation. The company, which is developing and testing its own weight-loss drugs, was criticised by competitor Eli Lilly as having “underwhelming” initial test results. Amgen’s approach to blocking the effect of particular hormones as opposed to mimicking the actions of hormones (as with Eli Lilly’s and Novo Nordisk’s drugs) was also questioned by Lilly and the market uncertainty that resulted saw the share price follow the path of least resistance lower. Adobe was also under the cosh in February as artificial intelligence company OpenAI revealed a text-to-video generator called “Sora” that threatened to eat Adobe’s lunch. Creating a realistic video from a text description is a reality now and it may only be a matter of time before Sora’s minute-long videos develop into full-length features. Palo Alto was another stock that found itself on the wrong side of the market when it announced results and guided to lower short-term revenues as it subsidised companies as they migrated more fully to its cybersecurity platform over the medium-term (with associated higher revenues). The market opted only to see the short-term negatives and the share lost 8.3% in the month. Boeing lost 3.5% in February to remain the biggest loser in 2024 so far (-21.8%) after the Alaskan Air fuselage fiasco where a Boeing 737-Max 9 lost a door plug mid-flight as the hinge bolts failed.

The table below reflects some of the JSE’s biggest winners and losers in the month of February. At the start of the month French media company Groupe Canal+ made a non-binding indicative cash offer of R105 for every Multichoice share that it did not already own. Multichoice had closed at R75 a share at the end of January and the share price jumped to R95 initially. The Multichoice board spurned the offer, believing it to not fully value the company and its growth prospects. The board also signalled its intention to speak to any bidder who offered the right price. Post management’s rebuff of Canal+, the Multichoice share price edged up to close just under R105 at month-end. Also post the initial offer, Canal+’s holding in Multichoice edged above 35%, the level above which a mandatory offer to all shareholders is triggered in terms of the Companies Act. At the end of the month the Takeover Regulation Panel ruled that Canal+ had to make an immediate offer to all ordinary shareholders but post month-end, the Panel extended the deadline to 8 April. The substantial share price gain of Multichoice in February saw it top the list of gainers in the month (+39%) and the YTD (29%).

The beleaguered Pick n Pay initially saw its share price rise from R23.40 at the end of January to a close of R27.17 on 16 February but the company’s announcement on 22 February of the need to raise around R4bn in additional capital this year sent the share price falling sharply back to R21.71. A one-day bounce above R23.00 was followed by further declines and the share ended the month at R20.24. The company, which also announced its intention to separately list the Boxer chain of stores, has much to do to regain investor and customer favour and sits atop the loser’s list in February (-13.5%). The loser’s list is also well populated with commodity counters given the lower prices received for many of the mined metals and minerals. The platinum group metals stocks have been particularly hard hit and their share price declines have continued in 2024 after the annus horribilus that was 2023. MTN has found itself in its own particular world of pain as rand profits from its largest subsidiary, MTN Nigeria, have been decimated following the collapse in the value of the Nigerian naira. That collapse has been brought about by the removal of the naira peg to the US dollar. In mid-June last year, the naira was trading at ₦463/$ (around the peg at ₦461/$) before jumping to trade around ₦800/$ for most of the rest of 2023. On 30 January 2024 the currency closed at ₦896.50/$ before spiking higher and closing out February at ₦1,617.66/$. The net result is that for the 2023 financial year, MTN expects to report headline earnings per share that are between 60% and 80% lower than last year.

The quarterly earnings announcements from the S&P 500 companies for the final quarter of 2023 are almost at an end. In the final analysis, the quarter is likely to have shown low single-digit earnings growth year-on-year after being fractionally positive in the prior quarter. Earnings are expected to continue to grow over the course of the year with around 10% earnings growth from around 4-5% revenue growth. Earnings growth should support the market but valuations have crept up to the point where they are above five- and 10-year averages. Many of the high-flying counters caught up in the AI and obesity drug frenzy have notched up lofty price/earnings ratios and other valuation metrics but many have the growth rates to support those valuations. However, any hiccup in that pace of growth or any weakness in guidance will not be met favourably by the market. Such disappointments are not expected in the near-term but even the greatest companies can have cyclical tendencies where the pace of growth moderates or accelerates, particularly as they operate in a world where demand ebbs and flows. The winning strategy is to identify those quality companies that may be out of favour at a particular point in time and shed some love, building what will ultimately be a happy and long-lasting relationship.