Weekly Market Report

7 February 2023

Global Report

IMF world economic growth update.

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Local Report

Investing for dividends.

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Market Indicators

Global and local indicators.

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Global Report: IMF World Economic Growth Update

By Carel La Cock

The International Monetary Fund (IMF) has updated its global economic growth forecast for 2023. It moderated expectations for beyond its October 2022 World Economic Outlook Update. The report, released at the end of January, shows that emerging economies are expected to be past the worst, while some developed nations face headwinds in the projected years. Global growth is forecasted to falter from an estimated 3.4% in 2022 to 2.9% in 2023 but recover by 2024 to 3.1%. For the 2023 projection it marks a 0.2 percentage points (pp) improvement compared to the October 2022 forecast, but 2024 growth is now expected to be 0.1pp weaker. World economic growth will trend below the average rate of 3.8% recorded in the two decades since the turn of the century.

The major headwinds for global growth in the two years ahead remains the same detractors from growth in the past year, namely rising interest rates because of high inflation, the war in Ukraine and to a lesser extent a resurgence in Covid cases in China. Tightening global financing conditions causing debt stress could further dampen global growth although the IMF concedes that adverse risks have moderated since their October report. Global inflation will ease from 8.8% in 2022 to 6.6% this year and falling to 4.3% in 2024 but remain above the pre-Covid level of 3.5%. Lower international fuel and nonfuel commodity prices, due to softer global demand, and tighter monetary policy conditions will assist in bringing inflation down.

Advanced economies will carry the momentum loss from the last quarter of 2022 into this year and will see economic growth stall from an estimated 2.7% for 2022 to 1.2% this year. Only 10% of advanced economies are expected to expand this year. Annual average inflation is projected to ease from 7.3% in 2022 to 4.6% by the end of 2023 and then settle at 2.6% in 2024, above the 2% target rate of most central banks.

UNITED STATES: Economic growth is forecasted to slide from 2.0% in 2022 to 1.4% this year before rebounding in the second half of 2024, outstripping the pace of expansion in the last quarter of this year, in line with other advanced economies. Growth expectations for 2023 were revised upwards by 0.4pp given the resilience in domestic demand but scaled back for 2024 by 0.2pp due to a higher expected terminal Fed funds rate of 5.1% in 2023.

EURO AREA: The region will see economic growth stall in 2023, eking out an expansion of 0.7%. Fortunes are expected to improve the following year, rising 1.6%. Euro area growth expectations were boosted by 0.2% for 2023, compared to the October report, reflecting the effects of lower wholesale energy prices, additional fiscal support in the form of energy price controls and faster rate hikes by the European Central Bank.

UNITED KINGDOM: The UK is the only advanced economy projected to contract in 2023, shrinking by 0.6% and revised downward by 0.6pp from the October report. The economic outlook has deteriorated due to tighter fiscal and monetary policies and stubbornly high energy prices constricting household spending. By 2024 the economy is expected to recover modestly with growth of 0.9%, sharing the bottom of the advance economies’ growth table with Italy and Japan.

EMERGING AND DEVELOPING ECONOMIES: Growth in emerging and developing economies are expected to accelerate over the forecasted period, gaining momentum from the estimated growth of 3.9% last year to 4.0% and 4.2% in 2023 and 2024, respectively. Emerging and developing Asia will be the driving force in this category, growing 5.3% and 5.2% in the two forecasted years. It follows the worse-than-expected expansion of 4.3% in 2022 due to the drag of China on the region last year.

CHINA: Economic growth in China, in real terms, slowed in the last quarter of 2022, prompting a downwardly revised estimate for the year of 3.0% and marking the first time in over 40 years that China’s economy was outpaced by the global average. However, the economy is expected to recover strongly in 2023, expanding 5.2% before easing to 4.5% in 2024 and settling below 4% over the medium term. Reasons for medium term pessimism includes “declining business dynamism and slow progress on structural reforms.”

INDIA: At the top of the world economic growth table, India is expected to outpace all other countries with growth of 5.4% in 2023 and 6.8% in 2024. Growth in 2022 is estimated at 6.8% and no revisions have been made since the October report. Together with China, the two countries are expected to generate half of global economic growth this year.

At Overberg Asset Management we have steadily redeployed cash in the portfolios, making forays into Europe and emerging Asia at depressed valuations, while lowering exposure to the UK after a relatively strong performance last year. The portfolios are now well placed to take advantage of the emergence of Asia and the forward-looking momentum in Europe.

Local Report: Investing for Dividends

By Gielie Fourie

INTRODUCTION: John D Rockefeller, widely considered the wealthiest American of all time, famously said: “Do you know the only thing that gives me pleasure? It is to see my dividends coming in.” Dividends are one way in which companies “share the wealth” generated from running the business. Dividends are usually cash payments to shareholders. Companies that pay dividends are usually more stable and established, not like companies still in the rapid growth phase of their life cycles. South African companies normally pay dividends once, and often twice, a year.

Dividend investing can be a great investment strategy. Research in the US has shown that dividend stocks have historically outperformed the S&P 500 with less volatility. That is because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return, the combination of capital growth plus dividends, can add up over time. Because of their lower volatility, dividend stocks often appeal to investors looking for lower-risk investments, especially those in or nearing retirement. A diversified portfolio of dividend stocks can produce reliable income, come sunshine or rain.

DIVIDENDS AND EX-DIVIDEND: On the date when the dividend is paid, the company goes “ex-dividend” (ex-div). On the ex-div date, the stock price is adjusted downward by the amount of the dividend paid by the exchange on which the stock trades. In other words, when you receive a R100.00 dividend on your Anglo American shares, the share price of Anglos will likewise drop by approximately R100.00. For most dividends, this is usually not observed amid the up and down movements of a normal day’s trading. It becomes more apparent, however, on the ex-div dates for larger dividends, such as the R100.00 dividend in the example. The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company, but to the shareholders. Benjamin Graham, American economist, professor, and investor, summed it up like this: “The stockholder wants both income and appreciation, but in general the more he gets of one the less he realizes of the other.”

IMPLICATIONS FOR INVESTORS: Dividends used to be tax free in South Africa. Dividends are paid by companies out of after tax profits. Taxing dividends amounts to double taxation. However, on 1 April 2012, government introduced a 15% tax on dividends received. This tax has increased to 20% in 2018. The dividend tax is a withholding tax – government first take its 20% share before the balance of 80% is paid to shareholders. The Dividend Withholding Tax (DWT) is payable by natural persons and trusts. Even non-residents are taxed – there are almost no exemptions. The DWT is a harsh double taxation. American politician Mitt Romney said: “I will eliminate the (dividend) tax entirely for those with annual income below $200,000.”

DOGS OF THE DOW: A tried and tested dividend strategy is called “Dogs of the Dow,” or the “Dow 10” strategy. “The Dow 10 strategy has been regarded by some as one of the simplest and most successful investment strategies of all time.” (Jeremy Siegel, professor of Finance at the Wharton School of the University of Pennsylvania). The strategy has been tested over the last 60 years and has returned 12.63% per year, consistently above its benchmark. The strategy calls for investors at year-end to buy the ten highest yielding stocks in the Dow Jones Industrial Average and to hold them for the subsequent year and then repeat the process each December 31. These high-yielding stocks are often those that have fallen in price and are out of favour with investors – which is the reason the strategy is often called the Dogs of the Dow. The strategy has excelled. Another natural extension is to simply apply the strategy to buy the five highest yielding stocks – it has a record of beating the S&P 500. There is no magic formula for investing, but this comes pretty close. US fund manager, Peter Lynch, said: “Never invest in an idea you cannot illustrate with a crayon.” The Dogs of the Dow strategy passes the crayon-test of Peter Lynch.

DOGS OF THE JSE: Applying the strategy to the JSE Top 40 would be an interesting exercise. At the start of 2023, the five shares in the Top 40 with the highest dividend yields were: Impala Platinum 6.99%, Nedbank 7.37%, Growthpoint 8.76%, BHP Group 9.37%, and Exxaro 12.94%. These yields are substantially higher than the current average dividend yield of 3.26% for the Top 40. We will follow the performance of these five shares in 2023. Looking back, their performance in 2022 was not too bad. Their capital appreciation during 2022 were satisfactory: Impala -7.52%, Nedbank 20.22%, Growthpoint 3.29%, BHP Group 14.35%, and Exxaro 25.62%. They have comfortably outperformed the -0.9% performance of the JSE All Share index for 2022, the -19.34% performance of the S&P 500, and the -32.87% of the Nasdaq Composite index.

BOTTOM LINE: Finally, the bad news – To comply with all the rules of SARS is an administrative nightmare. But there is good news – When you invest with Overberg Asset Management, we will do all the administration for you. At the end of the year, you will receive a “Tax Pack” with a comprehensive summary of all your transactions. Finally, some advice – do not try this at home. Dividend stocks can still be risky if you do not know what to avoid. Contact one of our consultants for a free consultation. They will take the sting out of investing.

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Reference: References can be supplied on request.

The Bottom Line: Innovation and the Magic of Compounding

By Carel La Cock

The oldest investment trust listed on the London Stock Exchange can trace its beginnings back to the surging demand for rubber at the advent of the car industry. Following the Panic of 1907 when the New York Stock Exchange fell nearly 50% from its peak, credit markets dried up and realising the opportunity to lend to rubber plantations in Asia, Colonel Augustus Baillie and Carlyle Gifford established The Straits Mortgage and Trust Company Limited that would ultimately become the behemoth: Scottish Mortgage Investment Trust (SMT), a constituent of the FTSE100.

Baillie Gifford & Co, the investment management company that stewards SMT, oversee total assets in the fund of £16.67bn as at the end of February 2022. Outgoing manager, James Anderson, defined his career with early investments in Amazon and Tesla, which propelled the fund to cumulative growth of 696.8% in the last 10-years, compared to 220.4% for its benchmark, the FTSE All-World Index. Anderson’s investment philosophy has always been based on the belief that technological improvements will drive innovation and that even picking a small number of these successful future companies and holding on to them long enough to let the magic of compounding work, will lead to exceptional returns for clients. Tom Slater, co-manager since 2015, will take over the reins at the end of April and believes that it matters less failing to sell the holdings you should sell, than selling the holdings you should not sell. When they go long on investments, they remain long offering support as patient investors often nurturing private holdings until they go public.

After a stellar performance in 2020 which saw net asset value (NAV) grow by 106.5%, 2021 was more subdued by its own standards, up only 13.2%. This year the share price has come under severe pressure from rising inflation and the rising interest rate used in discounting long duration income flows on many of the growth stocks in its portfolio. Moderna, the manufacturer of Covid-19 vaccines and the largest holding in the portfolio at 8% is down nearly a third year to date, while Tencent, the Chinese e-commerce giant, at 4% of the portfolio is down nearly a fifth this year. Others in the top five holdings: ASML (-13%), Illumina (-9.6%), Tesla (-13%) and NVIDIA (-10.4%) have all been downgraded due to expectations of a steepening yield curve.

Is now the time to panic and if not now, then when? Geopolitical risk is at an all-time high, the US federal reserve has just hiked interest rates for the first time since 2018 and global inflation is running rampant while oil and gas prices have spike on supply fears. However, listening to manager, Tom Slater and deputy manager, Lawrence Burns discuss the current environment and the outlook for the portfolio in a recent investor presentation, you don’t get the sense that now is the time to panic, or indeed ever. Their strategy is long-term, and they have positioned the fund to participate in structural changes and technological advances in society. They have incredible deal flow built on decades of strong relationships and a reputation for stability and patience. Entrepreneurs are keeping companies private for longer and having early access to investment in these opportunities often leads to extraordinary returns.

As for its current top holding, asked if Moderna is a “one-trick-pony” with reference to the major windfall from the Covid19 vaccine, but recently downgraded as investors see the end of the pandemic and the Covid-19 vaccine franchise, Lawrence answered “Moderna is a one trick pony, but that one trick is a broad and important one and that trick is mRNA.” The biotechnology behind the Covid-19 vaccine is a powerful one with programmes to cure zika, HIV, cancer and a range of other ailments making the recent windfall unlikely to be a once-off.

Regarding the tightening of regulation in the Chinese technology sector and its impact on Tencent, the team thinks that the Chinese government is ahead of the curve in terms of regulation and that democratic western nations will eventually implement similar regulatory changes. They believe that companies that “go with the grain of society” and who are aware of their broader impact on society will find it easier to prosper. In this regard, Chinese tech companies are further along the route of enlightenment.

Lastly, Tom Slater does not agree that higher inflation and rising interest rates should lead to lower valuations on growth stocks. He cautions investors to also consider the impact of pricing power on some of these high growth companies as they become market leaders in their field. Therefore, with higher expected future inflation, one should also adjust the future cash flows that will yield a better current valuation. Looking past the current volatility, the fund has invested in some ground-breaking technology and the managers are excited by the intersection of computing power and biology calling the opportunity set “large and varied” They have 49 investments in private companies, and it is not difficult to imagine the next Amazon and Tesla coming from that pool.

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