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Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.
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A quite week for corporate newsflow generally on world markets. The JSE trading week was cut short by one day on Tuesday due to a public holiday.
There has been continued SENS newsflow from listed companies. Whilst the JSE, certainly by market capitalisation, is in no way a mirror of the South African economy, it is clear from announcements by predominantly domestic-facing companies, including banks, that financial damage is already apparent - lockdown has simply added insult to injury in what was a deteriorating domestic business environment. We continue to take the view that investors need to navigate the local stock market with extreme caution - our global coverage reflects this, as there is a world of opportunity beyond the JSE.
As with foreign exchange, we see more opportunity in trading the volatility in shares rather than putting money in on a long-only basis, with some exceptions.
A selloff in US government bonds pushed yields to the highest levels since March fizzled out. Monetary stimulus will remain of powerful force through suppressing longer-term interest rates in developed markets - but unlikely in South Africa. The US 10-year yield had been stuck at near-record lows but closed this week at 0.7%. The Federal Reserve said it had no plans to raise short-term rates through 2022 and would continue buying Treasury's at a pace of at least $80bn a month.
In oil news, BP has revised its long-term energy price assumptions with Brent oil pegged at $55 a barrel, down from a previous assumption of $70 a barrel. It's forecasting a natural gas price of $2.90 per mmBtu for Henry Hub gas, down from $4. However, that brings them in line with peers. BP will take a write-down to its income statement. Our most recent note on Sasol entitled "Henry sends a message" has relevance in this regard and in fact addresses Henry Hub gas in the context of the Lake Charles Chemical Project.
Our call was on Sasol has also played out, falling sharply since last Monday. The stock stabilised on Friday at around R145, assisted by firmer oil and a weaker rand. Brent is now above $42/bbl and WTI above $40/bbl. The latest put/call oil hedges Sasol has taken out don't look that attractive in this context.
Sasol released an update on Thursday. Lenders previously agreed to increase the net debt: EBITDA covenant level to 3.5x times for the financial reporting period ending June 2020 but this has now had to be relaxed further to 4x through December 2020. The banks have little choice - if you have $10bn in borrowings the bank manager takes you to lunch. We also calculate that Sasol will now face a 13% higher annual interest bill, excluding any debt reduction. We previously forecast a 79% reduction in adjusted EPS for the year ended June 2020, but this is probably toast now and a loss is more likely. Our F2021 EPS figure is also under review, and it is not optimistic. Sasol is a stock for the traders to play on volatility, not for long-only new money.
The big foreign exchange news was an interview given to CNBC by Stephen Roach, Yale University senior fellow, and former Morgan Stanley Asia chairman. This follows on from an opinion piece he wrote for Bloomberg, in which he stated that the "era of the US dollar's 'exorbitant privilege' as the world's primary reserve currency is coming to an end." Roach is forecasting a 35% decline soon in the US currency against its major rivals (presumably on a weighted basket basis). There are various reasons, including the rise of China, increasing government deficits in good times and bad, persistent trade deficits, and an eventual collapse in confidence and willingness to hold dollars or fund debt.
Our view is that any other currency than the dollar would have already weakened considerably to force rebalancing but for now, we think the dollar is the only show in town, not least in a flight to safety. Both the US and Japan have the largest debt markets in the world and to date, the dollar and the yen have resisted a disorderly retreat, despite predictions to the contrary.
Our most recent analysis on FX was "What do the currencies say?" Our calls on FX pairs - short rand/USD, short lira/USD and long yen/USD - all of which played out profitably.
The rand remained under pressure after strengthening to below $16.40/$ last Wednesday but then giving up those gains to weaken to around R17.40/$ this Friday. This is not just relative weakness as the rand also weakened against third currencies such as the Australian dollar. This reversal has barely received comment but we make the point that the rand (including the Brazilian real) is especially vulnerable to risk on/risk off because of poor domestic fiscal fundamentals and lack of central bank firepower (see "South African Reserve Bank monetary policy emasculated").
On the topic of central banks, the Bank of England has pumped a cumulative 745bn into the UK economy and interest rate kept at record low of 0.1%. Inflation was 0.5% in May. The BOE has stopped short of negative rates though - that would mean charging banks to deposit money at the BOE to encourage them rather to lend it out. The US Federal Reserve seems to also rule out negative rates. But the Swiss National Bank has a policy rate of minus 0.75%.
Our calls on iron ore miners BHP and Kumba have played out (see ("Iron ore and steel defies COVID-19 macro gloom") but in "Kumba, qaphela!" this week we called time on Kumba and advised taking money off the table, for reasons explained in the note.
We also issued a note on BHP on Friday entitled "New hands on the financial tiller." Rather than a BHP insider the Board has gone for David Lamont, who is CFO of CSL, an Australian biotechnology group listed on the ASX. Vaccines have little in common with mining but then, as we say, in a COVID-19 world this recent experience won't go to waste and a fresh perspective will be useful. BHP has a huge capex programme that they can't afford to let overrun on cost, and a big chunk goes to petroleum, not iron ore.
As we said with Kumba, just be careful on share price levels.
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