Hello Voornaam,
Welcome to another Ingham Analytics weekly research summary. Level three week it is. For those who enjoy a glass or two, a chance to have restocked the drinks cabinet.
Stock markets in the US, Europe and Asia ended the week firmer, buoyed by optimism that recovery is in the wings. Even the beleaguered JSE All Share Index ended firm, 44% higher in deflated rand than in the third week of March. We can raise a glass to that.
The US regained 2.5m jobs in May and the unemployment rate fell to 13.3%, against Wall Street expectations for yet more layoffs. Employment jumped widely, including leisure and hospitality, construction, education, health services and retail. Economists had forecast a loss of 7.3m jobs in the US and an unemployment rate of 19%, up from 14.7% in April.
One swallow doesn't make a summer, and the US jobless rate is still very high at 21m unemployed, with the speed of layoffs breath-taking, but it does suggest that recovery from a healthcare induced shutdown rather than a replay of the 2007-2009 global financial crisis could be fairly rapid, boosted by huge fiscal and monetary stimulus.
The unreality of economists' spreadsheets lies in this yawning gap between forecast and reality. COVID-19 has brought out who knows how many know-it-all "experts" cluttering up the media, typically with dire predictions of doom and gloom for the planet.
Economists are also now medical experts on the coronavirus too. But they aren't alone. All manner of other instant experts have pitched up on the topic. To quality as an epidemiologist, microbial geneticist or virologist used to take many years of study and tough exams. Nowadays, it takes a day to get your bachelor's and maybe a week for a doctorate, with google the primary source for CPD points to retain your new-found professional credentials.
And any number of newly minted futurologists have joined the mle, prognosticating on what this transformed brave new COVID-19 world will look like where Zoom and Microsoft Teams will be the insidious new big brother. At Ingham Analytics we suspect that the post COVID-19 world won't look terribly different to the pre-COVID-19 world. Trends that were already apparent in February may well be accelerated and some new habits may become baked in
Let's not kid ourselves.
The economic self-harm countries have caused themselves by often hysterical overreaction, guided by sometimes conflicting "science", will not be recoverable as quickly as stock markets are recovering.
That word "science" has seemingly been misappropriated to vindicate all manner of authoritarian interventions on life, livelihoods and liberty to "save" us from this silent "enemy" and keep us all "safe" as government's wage "war" to "fight" COVID-19. Except in war entire industries don't get shut down by fiat, indeed several industries have thrived during wars and new stuff has emerged to make the world a better place, spurred by innovation in adversity and can-do to solve pressing challenges.
On the topic of war and fighting, we'll avoid the violent mayhem that is Main Street America and rather return to Wall Street.
Interestingly, the five largest companies in the S&P 500 -- all Tech related companies -- account for nearly 20% of the market value of the entire index and are the primary driver. Apple and Microsoft each make up about 5% of the S&P 500's market value - higher than the weightings for the energy, utilities, real estate and basic materials sectors combined.
This is a very lopsided index therefore and if Tech weakened or went out of favour it would also disproportionately impact the index. It's almost an eggs in one basket story. The last time the S&P 500 had such a high weighting in a single sector (Tech) was right before the dot com bubble burst in 2000. Financial stocks were a disproportionately large part of the index in 2007 just before Lehman Brothers went under and then the GFC. It was the case with energy in 2008.
Overload on one sector usually doesn't end well over time and something we take note of in asset management allocation.
The S&P Global Broad Market Index covers 11,000 stocks from 25 developed and 25 emerging markets. However, even the S&P GBMI, which is float adjusted, is dominated by US stocks, with tech at almost 20% by market cap and then large US banks and financials at around 14% - with US stocks 56% of the total. The largest constituents don't pay a dividend or very little. Just four countries make up 73% of total S&P GBMI market cap - US, China, Japan and UK (the German market is only at #8).
But what is interesting about the global markets rally since April is that $120bn of flows came out of stocks since February. In other words, a net outflow. This is unusual as the rally happened without flows coming into equities, which particularly for stocks outside the US is rare. The difference is investors are no longer short US stocks or have been badly burned by selling to cash in a panic. New long positions and fresh money hasn't driven the market so when that returns it should be a positive. However, the panic vs. euphoria behavioural equation could still unsettle things. The irrationality (driven by fear) since late February has been epic.
This past week we've issued another banking themed note ("South African banks' balance sheets surge") with local relevance and a note on Sasol ("Henry sends a message"), which has been our most popular to-date based on the number of downloads. Sasol is a core stock for our coverage, and we'll keep you regularly abreast of our thinking.
Sasol has climbed from a low of R20 in March and we posed the question in "Henry sends a message", is this the beginning of a major recovery? Whilst lower for longer on the price of natural gas is good for the Lake Charles Chemicals Project, we point out that it is but not good enough to offset other pressing challenges for the beleaguered oil & chemicals Group. We're also expecting a thumping fall in EPS for the year to June and it may even be worse because of several variables. This is a good example of share price action driven by sentiment rather than fundamentals. We've also given you our latest call on the investment merits and a trading tactic for the day traders to take advantage of volatility.
We've been keeping readers up to date with banking related matters for several months. It hasn't been rose tinted and the lockdown has made a poor situation worse. Our take on the banks sector of the JSE has saved us a lot of money. FirstRand on Wednesday warned of higher impairments and future credit losses. The other issue FirstRand raises is the negative endowment effect of interest rate cuts and margin pressure - factors we've assessed in earlier notes and which we emphasised in "A negative endowment" dated 17 April. "South African banks' balance sheets surge" shows just how the collective balance sheet changed in only one month and why.
Other recent notes you may find of interest and which have been popular are "Illusory value" (Prosus/aspers/Tencent), "Say buddy, can you spare a dime?", "Iron ore and steel defies COVID-19 macro gloom" (BHP and Kumba), "Lower for longer on rates?", "A raw state" (Sasol), "Why do central banks do what they do?", "Poseidon and the other banking gods", "Fixed income leads the way for equities", "South African economic and financial fragility", "Eurozone Stress Fractures - Dj vu all over again" and "Whose telling fibs, equity or credit?".
Thank you all for visiting us.
