Macroeconomic View

Julius Caesar was warned to beware the Ides of March but investors had no need to fear that day or any other in the month named after Mars, the Roman god of war. After closing at an all-time high at the end of February, the S&P 500 “marched” on to several new highs before closing out the month at a fresh record high. The S&P 500’s 3.1% gain in March added to its monthly gains in January and February to leave the index up 10.2% for the year. The US equity market benchmark has been on something of a charge since the low point it reached in late October last year (see the green line in the graph below). Local investors also had something to cheer this time around, with the FTSE/JSE All Share index posting its first monthly gain of the year. At mid-month the index was in the red but it rallied in the closing fortnight to be up 2.5% in March (see blue line below). That helped to trim the JSE’s losses in 2024 to 3.1% (-6.4% in US dollar terms given the rand’s 3.5% depreciation year-to-date).

Much of the market positivity was based on more dovish sentiment coming from the world’s major central banks. March was a busy month for central bankers and one of the highlights was a fresh quarterly “dot plot” from the US Federal Reserve. More formally known as the “Summary of Economic Projections”, the document details the interest rate expectations of both the voting and non-voting members of the Federal Open Market Committee (“FOMC”). The good news from this update was that the FOMC members were still anticipating three rate cuts this year (totalling 75 basis points).  Expectations of further monetary policy easing in 2025 and 2026 were scaled back modestly but the market focused on the looser policy to come in 2024. Fed Governor Jerome Powell talked to the inevitability of lower rates this year, following the bumpy but lower trend in inflation towards the official 2.0% target. The Fed has six remaining meetings this year (May, Jun, Jul, Sep, Nov & Dec) and the expectation is that rate cuts will be loaded towards the second half of the year, with the first cut coming in June at the earliest. The European Central Bank (“ECB”) has telegraphed a first rate cut at its June meeting and that message could be further entrenched with the commentary at the next meeting on 11 April. The remaining meetings of the ECB are in Apr, Jun, Jul, Sep & Dec and the market is expecting around 75 basis points of easing this year.

The disinflationary trend in UK inflation has pushed market watchers to expect three rate cuts from the Bank of England this year (75 basis points in total) with a first cut also in June. This view was given credence when the governor of the Bank of England, Andrew Bailey, noted that interest rate cuts were “in play” at future meetings (remaining meetings in May, Jun, Aug, Sep, Nov & Dec). The Swiss National Bank surprised markets with its first rate cut in late March but the biggest news was the rate hike by the Bank of Japan (“BoJ”) which ended 17 years of negative interest rates. With Japan having had its own unique problems of deflation, the BoJ’s monetary policy approach has been quite different. Now, with modest inflation expected to be sustained, a new monetary policy order has been established.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 Mar 24

Source: Factset

China has been something of an outlier, with sub-par economic growth a consequence of the delayed emergence from COVID lockdown and the bursting of the property development bubble. After growth of 5.2% in 2023, the authorities have set a target of “around 5%” for 2024. Investors in the Chinese markets have so far been disillusioned by the robust regulatory oversight in certain industries along with the lack of a more substantial policy response to the economic slowdown. The impact of the slowdown has been felt in many global companies operating in China and the lack of domestic demand has impacted resources prices, the retail sector and even the luxury goods industry. In the January update to the World Economic Outlook of the International Monetary Fund, Chinese growth was seen slowing to 4.6% this year and to 4.1% in 2025. It remains to be seen what further stimulus the Chinese authorities will apply to the economy but the more recent rally in Chinese equity markets appears to be due to a combination of extremely oversold conditions and deeply discounted share prices.

Commodity price fortunes have been mixed and very market/industry specific. Iron ore prices, for example, are down 20% this year, chiefly on the back of lower Chinese demand (see table below). Lower demand for the platinum group metals from vehicle producers in the face of surplus production has also seen those metals prices under pressure. In contrast, oil prices have remained firm and edged higher as the OPEC+ countries have continued to limit production in a market where demand is still increasing. The gold price has continued on its record-setting ways as promises of lower interest rates and a weaker US dollar have spurred demand. Central bank buying of gold to diversify away from US dollar reserves has further supported the price of the metal.

After shifting higher in February, US treasury yields closed out March largely unchanged. Domestic bond yields, however, rose sharply in the month despite a modestly improving rand.. Consumer price inflation edged back up to 5.6% and concerns began to mount around renewed inflationary pressures from food and energy prices along with administered prices such as electricity. While the outlook remains for consumer price inflation to return to the 4.5% midpoint of the target range by end-2025, expectations for the first rate cut from the South African Reserve Bank (“SARB”) were pushed out further. Governor Lesetja Kganyago has regularly pointed out that the SARB is not beholden to its Quarterly Projection Model for the timing and magnitude of policy changes but the model is currently indicating 50 basis points of easing in the repo rate in 2024. That’s potentially disappointing for a developing economy that is only expected to grow at between 1% and 2% for the foreseeable future. The SARB’s monetary policy committee (“MPC”) has meetings set for May, July, September and November this year and with the cautious and data-dependent nature of the MPC, a rate cut of 25 basis points at each of the September and November meetings looks like the best bet right now.

The sustained high level of interest rates has taken its toll on local borrowers and domestic banks have taken larger impairments for bad debts as credit loss ratios have generally risen. Standard Bank, Nedbank and Absa reported 2023 annual results in March after FirstRand posted interim results on the last day of February. Nedbank bucked the trend with a gain of 4.3% in March but Absa (-9.4%), Standard Bank (-8.2%) and FirstRand (-4.7%) were all casualties of the tough economic conditions. The resources/materials counters were the big winners in the month with nine commodity companies amongst the top 12 performers. Gold stocks were the standout achievers as the gold price posted new all-time records and Harmony (+40.4%) Gold Fields (+20.7%) and AngloGold Ashanti (+17.1%) led the way higher in March. A pickup in platinum, palladium and rhodium prices helped lift some of the PGM miners in the month, although even after a 20.9% gain in Impala Platinum’s share price, the counter remained down 14.2% for the year.

The table below reflects some of the JSE’s biggest winners and losers in the month of March and the YTD. The Canal+ bid for Multichoice leaves the local communications company as the best performer for the year so far (+40.2%). The gold stocks are in the winner’s enclosure for the YTD and while Richemont is also close to the top of the list (+12.5%), it did give up 5.9% in March as luxury companies came under pressure from weak sales out of China. Lower demand out of China also had a marked impact on the iron ore price, which tumbled from an early January peak of $144/t to a March close of $109/t. That decline pushed Kumba Iron Ore down 13.9% in the month and left it down 24.8% for the YTD. Investment company Remgro fell in a heap in the month (-16.1%) after it posted interim results reflecting a sharp drop in earnings, a wide discount to its intrinsic value and a domestic investment environment fraught with structural and economic barriers making it difficult to strike deals. The interim report bemoaned the “general erosion of investor confidence in the country”.

The Spar Group topped the list of the worst performers this year with a March decline of 9.4% leaving the retailer down 25.0% for the first three months of 2024. The stock traded between R110 and R120 from October 2023 to January 2024 but began a precipitous slide from R119.20 on 6 February to a March close of R88.44. This followed the 20-week sales update posted on 21 February and the 24-week trading update posted on 26 March. The latter update helped stabilise the share price but the earlier update reflected ongoing issues with the SAP implementation and lower turnover in Switzerland and Poland in domestic currencies. In rand-terms, turnover growth was up 9.3%. The Spar Group is divesting of its interests in Poland and reviewing its capital structure and its optimal debt structure will depend upon the outcome of the Polish disposal.

During the course of March the S&P 500 index returned 3.1% with Energy (+10.43%), Utilities (+6.30%), Materials (+6.22%), Financials (+4.67%), Communication Services (+4.33%), Industrials (+4.32%) and Consumer Staples (+3.17%) outperforming the index and Consumer Discretionary (+0.01%), Real Estate (+1.12%), Technology (+1.93%) and Healthcare (+2.23%) underperforming. The table below highlights some of the bigger winners and losers from amongst the 100 largest companies in the S&P 500 in March and for the year-to-date (“YTD”). While technology lagged as a sector, the artificial intelligence (“AI”) and semiconductor party bus barrelled along in March. Market darling Nvidia added 14% in the month to be up 82.5% YTD (after a gain of 238.9% in 2023). Memory chip maker and AI-enabler, Micron Technology, was the big winner in the month (+30.1%), leaving it second on the YTD performance table (+38.1%) after Nvidia. In late February Micron announced that it was starting volume production of its high bandwidth and energy-saving memory chip that would be included in Nvidia’s H200 GPU from the second quarter of 2024. After trading below $80 per share as recently as mid-February and starting the new month at $95.15 per share, Micron closed out March at a price of $117.89 per share.

Floridian-based renewable energy company NextEra Energy rose 15.8% in the month as oil prices moved higher but the closing price of $63.91 was simply a recovery back to September 2023 levels and still a long way from the 2022 peak above $90 per share. The top 20 performer list for March was littered with financials including Citigroup, Bank of America, Morgan Stanley, Charles Schwab, JP Morgan Chase and Goldman Sachs. With financial and industrial counters outperforming technology stocks in March, value stocks got the better of growth stocks for the first time in some time.

Slowing electronic vehicle (“EV”) sales, increasing competition and analyst downgrades continued to weigh on Tesla in March. The stock lost 12.9% in the month to top the YTD loser’s list with a decline of 29.3%. Opinions remain divided on this “Magnificent Seven” stock but the “no growth” party is getting the better of the “growth will come” party for now. Adobe was another stock under the cosh as the “AI is bad for Adobe” proponents won the battle over the “AI is good for Adobe” advocates in March. The company reported earnings in mid-March and by month-end was down 9.9% and 15.4% YTD. After Nike posted results at the end of the quarterly reporting season that beat revenue and earnings expectations, the share fell further on reduced management guidance and analysts’ downgrades on revenue and profitability. Nike’s 9.6% loss in the month left the share down 13.4% for the year.

The bulk of the Magnificent Seven took something of a backseat during March as the broader market played catch up. The S&P’s market gains were supported by growing earnings but valuations remain at levels above historical averages. The forward 12-month price/earnings ratio of the S&P 500 stands at 20.9x, which is above both the 5-year average (19.1x) and the 10-year average (17.7x). Nevertheless, Q1 2024 earnings season is set to kick off in early April with expectations of earnings growth of 3.6% y/y. Such a result would mark the third consecutive quarter of year-on-year earnings growth. Year-on-year revenue growth in the first quarter is expected at 3.5%. A generally positive and growing trend in revenue and earnings should support the markets going forward (see table below of forecasts collated by FACTSET). Caesar ignored the soothsayer’s warnings but investors should remain more vigilant. The fundamentals remain positive but be fearful though, when the car guard at your local supermarket parking lot starts telling you to buy Nvidia.

About the Author

Craig Pheiffer
Chief Investment Strategist, Sasfin Wealth

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