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MARKET COMMENTARY

SOUTH AFRICAN MARKET COMMENTARY

Stocks on the Johannesburg Stock Exchange (JSE) traded higher, mirroring broader strength in equities as investors returning from a long weekend in the United States scooped up shares of mega cap growth and energy companies. Overall on the JSE, the All-Share index rose 0.6% to 66,747 points, while the Top-40 index closed 0.5% higher at 60,374 points. The government's benchmark 2030 bond firmed, with the yields down 7.5 basis points at 10.165%.

EUROPEAN MARKET COMMENTARY

European stocks moved higher on Tuesday, continuing a recovery seen at the start of the week. The pan-European Stoxx 600 index closed up 0.36%, paring earlier gains of more than 1%. Autos climbed 1.5% to lead gains while utilities slipped 0.9%. In terms of individual share price movement, Leonardo climbed 3.4% after the Italian aerospace and defense company announced that its U.S. electronics unit DRS had agreed a takeover of Israel’s RADA Electronic Industries.

US MARKET COMMENTARY

US stocks rose Tuesday following a brutal week as investors assessed a more aggressive Federal Reserve and rising chances of a recession. Energy was the best-performing sector in the S&P 500, up 5.1%, following a surge in oil prices. Mega-cap tech stocks also led gains. Shares of Google-parent Alphabet jumped 4.1%. Shares of Apple rose about 3.3% and Amazon gained 2.3%. Elsewhere, Kellogg’s stock price rose nearly 2% after the company said it would split into three separate companies. Meanwhile, the yield on the benchmark 10-year Treasury note continued to march higher.

ASIAN MARKET COMMENTARY

Shares in the Asia-Pacific region mostly traded lower this morning, as Wall Street bounced back after a turbulent week. The Bank of Japan, after maintaining its ultra-low interest rates last week, released the minutes from its April monetary policy meeting this morning. “Many members expressed the view that underlying inflation, measured by the CPI excluding such factors as energy, remained relatively low,” the minutes said. Most members of BOJ policy board expect short-term and long-term interest rates to remain at their present levels or lower, the minutes added.

CURRENCY MARKET COMMENTARY

The rand strengthened against a broadly weaker dollar on Tuesday, although worries lingered over aggressive interest hikes from global central banks. At the close of the session, the rand was trading around R15.89 to the dollar, 0.91% firmer. Meanwhile, the yen hit a fresh 24-year low against the dollar earlier today, having taken another tumble overnight as U.S. bond yields continued to rise, in stark contrast to Japan's stubbornly low interest rates. Moves in major currency pairs were muted, but the policy comparison between Japan and the rest of the world was underscored by central banks around the world continuing to emphasise the need for higher interest rates.

COMMODITIES MARKET COMMENTARY

Gold eased this morning, as the dollar and Treasury yields firmed, but prices were range-bound as investors awaited fresh cues on top central banks' monetary policy plans, especially from the U.S. Federal Reserve. Oil prices skidded in early trade today amid a push by U.S. President Joe Biden to bring down soaring fuel costs, including pressure on major U.S. firms to help ease the pain for drivers during the country's peak summer demand. Chevron Chief Executive Michael Wirth, however, on Tuesday, said criticising the oil industry was not the way to bring down fuel prices.

LOCAL COMPANIES

ABSA GROUP LIMITED (ABG) +1.7%

Based on our performance for the first five months, and our current expectations for the operating environment, our financial guidance for the first half of 2022 is as follows: We expect revenue for the half to increase by low teens year-on-year, driven by strong non-interest income growth due in part to improved life insurance revenue off a low base. We expect low double digit net interest income growth, benefiting from rising interest rates. Operating expenses are expected to increase by high single digits year-on-year, reflecting performance costs, plus continued growth in marketing and technology investments. We expect wide positive operating JAWS for the half to produce substantial pre-provision profit growth, while our our cost-to-income ratio is likely to improve noticeably to the low 50s. Our credit impairments are expected to increase year-on-year, resulting in a credit loss ratio in the upper half of our through-the-cycle range, versus 88 basis points in the first half of 2021.

Given the uncertain macroeconomic outlook, our loan coverage remains strong, with conservative forward-looking provisions. We expect our return on equity to improve substantially year-on-year to around 17%, well above our cost of equity. As previously guided, given our strong CET1 ratio, we expect to increase our dividend payout ratio to 50%, from 30% in the first half of 2021. Shareholders are advised that the Group’s IFRS headline earnings per share (HEPS) and earnings per share for the six months ending 30 June 2022 are expected to be more than 20% above the comparatives for the first half of 2021 of 986.2 cents and 983.3 cents respectively. Normalised HEPS for the six months ending 30 June 2022 is also expected to exceed the 1019.7 in the first half of 2021 by more than 20%. Risks to our guidance include any material unforeseen political, macroeconomic or regulatory changes. We will provide a more specific guidance range once there is reasonable certainty regarding the extent of our earnings increase.

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC (SCD) +1.2%

Key Financial highlights include: Net asset value (“NAV”) total return of 5.5% (31 March 2021: -0.4%). IFRS profit of €10.9 million (31 March 2021: €0.7 million loss), primarily driven by yield compression and estimated rental value (“ERV”) growth across the industrial and DIY portfolio and the release of €1.4 million of the Paris BB development post-tax profit. Ordinary dividends declared of €4.9 million/3.7 cents per share (“cps”) and a second special dividend declared of €6.4 million/4.75 cps for the six months to 31 March 2022. NAV decreased 0.2% to €199.1 million or 148.8 cps (30 September 2021: €199.5 million), reflecting the payment of the Company’s first special dividend of €6.4 million in January 2022. Underlying EPRA earnings of €2.5 million (31 March 2021: €2.8 million); this is expected to increase with the redeployment of the Paris BB sale proceeds. Low loan to value ratio (“LTV”) of 18% net of €36.9 million of available cash (28% gross of cash), with a low weighted average total interest rate of 1.4%.

INTERNATIONAL COMPANIES

Glencore (GLN) +0.2%

A British subsidiary of the mining firm Glencore has pleaded guilty in a UK court to corruption offences for the second time in the last two months. It was accused of paying millions of dollars in bribes to secure access to crude oil in several African countries. The Serious Fraud Office (SFO) found that bribes occurred from 2012 to 2016. It found that bribes of over $28m (£22.8m) were paid via the Swiss-based firm's employees and agents. The bribery charges stated that the firm's aim was for officials to "perform their functions improperly, or reward them for so doing, by unduly favouring Glencore Energy UK Limited in the allocation of crude oil cargoes, the dates crude oil would be lifted and the grades of crude oil allocated". Glencore expects to pay up to $1.5bn (£1.2bn) in fines but is currently making record profits.

Kellogg (K) +2.0%

Kellogg is planning to separate into three independent public companies, sectioning off its iconic brands into distinct snacking, cereal and plant-based businesses. The announcement Tuesday comes a decade after Kellogg’s $2.7 billion purchase of Pringles, which signalled the company’s shift to focusing on the global snacks business with people increasingly eating more often between meals. Kellogg has been weighing spinoffs as a potential strategy since 2018, executives told investors on a conference call discussing the announcement on Tuesday. CEO Steve Cahillane said all three businesses have “significant” standalone potential, although the company is exploring alternatives including a potential sale for its plant-based business.

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Research Team
Media, Sasfin Wealth