- Media Centre
Weekly Market Report
28 November 2023
Big Tech Mania.
The Competitive Food Retail Sector.
Global and Local Indicators.
Global Report: Financial Market Forecasts
By Nick Downing
Financial market forecasts are based on multiple factors including but not limited to valuations, inflation, interest rates, innovation, productivity, demographics, regulations, geopolitics, economic growth, liquidity and sentiment. The forecasts shown in the tables below are produced by independent research firm Capital Economics.
Historic returns provide a useful context. It is noticeable how poorly Developed Market bonds and US Treasuries have performed over the past 10 years, providing annualised dollar returns of -1.3% and 0.7% respectively. Bond yields have risen significantly but as a result once again offer decent returns. Over the next 10 years, bonds are expected to lag global equities by less than they did over the past 10 years and more successfully fulfil their traditional role of mitigating equity market risk. Also noteworthy is the historic 10-year outperformance of US equity markets. The annualised dollar return has been 11.7% versus 4.2% for Europe. This has resulted in US equity markets trading at a significant premium to other regions.
Current valuations suggest that US equity markets will underperform over the next 10 years as the valuation gap with other markets reverts to the long-term average. Although China is faced with regulatory and geopolitical constraints and has exhausted its main growth engines, being property, infrastructure and exports, it still enjoys healthy productivity growth and with its GDP per capita at a quarter of the Developed World average, there remains significant potential for growth. China’s equity market is expected to provide the best 10-year returns.
Despite their high relative valuations, US equity markets are expected to continue their recent outperformance over the next 2 years, due to their dominance in Artificial Intelligence (AI). AI is likely to have a transformative impact on the economy which will be positive for equity markets, especially for the technology sector in the initial years and more specifically for the US technology sector where the AI giants reside. The benefits of AI may take many years to filter through, but equity markets are forward-looking, and investors will tend to front load the prospects of higher productivity and faster earnings growth.
Due to its massive post-Covid surge and disruption of low interest rates, inflation is the most important variable in the current market cycle. The faster inflation comes down, the greater the chances of an economic “soft landing”. The inflation surge, which is more akin to the inflation shock which followed WW2 than the 1970s, is likely to come to an end in 2024, led by the US where shelter costs are due to come down sharply over coming months. The sceptics believe tight labour markets will prevent inflation returning to central bank targets, but improved labour productivity is providing sufficient relief, especially in the US. In the US, labour productivity growth has risen to 2.4% from a dramatic low of -2.4% during the pandemic. AI is expected to accelerate productivity growth.
The fastest increase in interest rates since 1979 has reached its peak and will begin to reverse course in 2024. The US, where inflation will subside first, will lead the way in cutting interest rates, followed by other developed market central banks later in the year. Central banks may not need to wait for a recession before cutting interest rates as it is likely that only a small reduction in demand will be sufficient to tame inflation. Falling policy rates will allow bond yields to decline across advanced economies. Lower policy rates and lower bond yields will stimulate economic growth, ushering in a new economic and investment cycle.
According to economists’ forecasts, there is only a 50% chance that the US economy will enter recession. Although rare and achieved more by luck than careful planning, there is a 50% chance the US will enjoy a “soft landing”, in which the economy slows enough for unemployment to rise and inflation to decline but without tipping into recession. Europe and the UK are expected to enter recession in 2024 but in the absence of structural imbalances the recessions are likely to be mild and short-lived. China should achieve its targeted growth rate of 5%.
Equity markets may suffer mild losses from current levels as economic activity slows due to the lagged impact of monetary tightening, but markets are forward looking and will look through the mild recessions towards falling interest rates and economic recovery. The US should maintain pole position based on its AI dominance and being first in the falling inflation and monetary easing queue. A bubble may well develop in AI-related stocks, which may continue into 2026, after which the US will likely pass the baton onto other cheaper equity markets over the remainder of the coming decade.
Local Report: National Health Insurance (NHI)
By Gielie Fourie
INTRODUCTION: Section 27 of the country’s constitution states that everyone has the right of access to healthcare. The National Health Insurance (NHI) bill, which has been passed in parliament, is the manifestation of this provision. Its aim is to ensure that all South Africans have access to quality health services. It will totally change the medical landscape in South Africa – but it comes amid both accolades and dire warnings. Proponents of the NHI see it as a vehicle for much-needed change in a healthcare system riddled with inequalities. The World Bank describes South Africa as one of the most unequal societies in the world. A successful NHI would introduce a radical shift towards health equity to create a more equal society.
The NHI bill has been contentious since its inception. There have been multiple court challenges, with more to come, and numerous different voices have been raised against it. The aim of the NHI is good and noble. But the NHI bill is bad law because it fails to provide reasonable certainty. Several court rulings have flagged this. The NHI will be a mandatory state-run medical aid. It will be available for all South Africans irrespective of their socio-economic status. Your health needs, not your financial status, will determine what form of service you get.
A new healthcare system: South Africa’s two-tier healthcare system has failed to guarantee good quality healthcare for all. Those who have the financial resources, or medical insurance, use private healthcare practitioners and facilities not funded by the state. Those who do not have medical aid use public practitioners and the facilities provided and funded by the state. Due to the state’s incompetence, its current healthcare system has failed to provide good quality healthcare for all. We will move to a uniform “one-tier” system. under the NHI, the new normal will be “medical aid for all”. Everybody will be able to consult doctors in private practice and use private hospitals, because the NHI Fund will pay for this care. The reality is that in a just world, the sickest people – not the richest – should receive the largest share of healthcare.
NHI Cards: The NHI will use its central healthcare fund to pay both private and public medical providers. It will pay both these providers on exactly the same basis and expect the same standard of care from them. Lower income groups will be the major beneficiaries of the NHI, while higher income groups might be worse off. With the new system you will have to register for NHI at a NHI registration centre and you will be issued with a NHI card. It will be a “one card fits all” system. The present system of different medical aid plans and cards will disappear.
A shock to the system: For South Africans who do have medical aid plans, the NHI may be a shock to the system. South Africans within a certain income bracket will have to make additional mandatory monthly payments towards healthcare in addition to carrying a higher tax burden, plus they may have to settle for lower standards. Medical aid schemes will not be able (or allowed) to offer any services that are offered by the NHI. The NHI will set the maximum medical service levels allowed. Private medical insurance will only be able to provide for “complementary or top-up cover” that doesn’t overlap with services covered by the NHI.
Cas Coovadia, CEO Business Unity SA (Busa), has sharply criticised this. Busa has consistently said the NHI bill is unworkable and unaffordable. It pointed out that the government’s estimate cost of R480bn a year is far too low and would require increasing personal income tax by almost one-third, VAT from 15% to 21% or applying a payroll tax that is 10 times higher than the current Unemployment Insurance Fund. This would cover only very basic healthcare, it said.
Funding: The bill is vague on how the NHI Fund will be financed. Recent estimates have put its cost at more than R480bn a year. And what will happen to medical aid schemes? Section 33 of the NHI bill is unclear and open to the interpretation that these schemes will disappear. We cannot allow medical aid schemes to simply disappear. The NHI Fund will get a large amount from general taxes. Every person in South Africa will contribute to the fund because we all pay some kind of tax. The fund will eliminate direct, out-of-pocket payments at the point of care – there will be no co-payments. Critics fear that with South Africa’s limited tax base and sluggish economy, the NHI might lead to increased tax burdens.
What are the disadvantages of NHI in South Africa? It will be a blow to freedom of choice as all South Africans will be forced to make use of NHI, regardless of whether they want to or not; The healthy paying for the sick and increased burdens on taxpayers; Uncertainty and vagueness surrounding the financial aspects of the NHI. Critics cite potential administrative and funding challenges, pointing to the public sector’s track record of poor management and corruption. It will be a blow to doctors. Private healthcare groups have warned that the planned implementation of the NHI scheme could lead to a wave of doctors and other skilled professionals leaving the country due to the additional working and earning restrictions placed on them. Organised business has described the NHI bill as mockery – yesterday it appealed to the National Council of Provinces (NCOP) to delay its vote on the controversial NHI Bill and send it back to Parliament to have another look at it. South Africa has excellent private healthcare and modern private medical facilities which should not be ruined by an idealistic, impractical, and costly NHI.
BOTTOM LINE: Universal access to healthcare and the ideal of a national system of health insurance are important concepts which relate directly to core human rights. In an ideal world it may be conceivable. However, it is often the case that the ideal falls short in practice. It is a case of: “The map is not the territory”. The NHI bill is no exception. The transition from the existing two-tier system to the new one-tier system will be complex and turbulent with potential job losses at medical aid funds. The NHI cannot be avoided. Even politicians shun state hospitals in favour of private healthcare. But to benefit all and live up to its potential, it should be fully thought through, planned in detail and not rushed. It will affect all of us.
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.
Spend some time with our team to find out which one of our portfolios is best for you!