November 2024 newsletter

In this month’s newsletter

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for. “

– Robert Kiyosaki

Market summary

Source: Julius Baer, 02/12/2024

International market overview  

Source: Edmond de Rothschild

U.S. stock indices are trading at new all-time highs, driven by several factors, including optimism surrounding the newly elected U.S. president, robust corporate earnings and a ceasefire in the Middle East. A key topic of discussion in November has been the implementation of tariffs by President Trump and their potential impact on companies globally.

Summary of third quarter company earnings:

Nestlé’s organic growth of 1.9% in the third quarter of 2024 fell short of expectations and was weaker than Q2’s performance. This led management to lower guidance, resulting in mid-single-digit earnings reductions and a deteriorated outlook for 2025, further eroding investor confidence in the company’s long-term growth potential.

On a positive note, Nestlé Health Sciences reported 11% year-over-year growth, and the newly appointed CEO has initiated steps to simplify the management structure. While the shares have underperformed year-to-date, the market reacted positively to the third quarter report despite its weakness.

We believe the market’s sentiment is overly pessimistic, presenting an opportunity. Nestlé is currently trading at a relatively attractive valuation, an 8% discount to global peers, compared to historically trading in line with them.

Graph 1: Nestle forward price to earnings multiple

Source: Julius Baer

Microsoft delivered strong results, though its outlook was mixed. Performance remains robust across the board, driven by impressive demand and monetization in artificial intelligence. Following a recent pullback, the stock appears attractive, with accelerating Azure revenue expected to drive upward momentum over the next year.

During Q3, revenue grew 16% year-over-year to $65.59 billion, exceeding the high end of guidance at $64.80 billion. Key segments performed well, with productivity and business processes increasing 13% (in constant currency), intelligent cloud up 21% and personal computing expanding 17%.

Currently, Microsoft is trading near its long-term average price-to-earnings multiple, reinforcing its appeal as a sound investment.

Graph 2: Microsoft forward price to earnings multiple

Source: Julius Baer

Nvidia delivered another exceptional performance during Q3, with revenue reaching $35.1 billion, up 17% sequentially and 94% year-over-year. This significantly surpassed guidance of $32.5 billion and FactSet’s consensus estimate of $33.2 billion, marking the sixth consecutive quarter of exceeding revenue guidance by $2 billion or more. Despite these strong results, a negative stock market reaction after hours suggests some investors were anticipating an even larger beat.

For Q4, revenue is forecasted at $37.5 billion, reflecting a more modest 7% sequential growth. Nvidia currently trades at a forward price-to-earnings multiple of 35, which, while seemingly high, becomes reasonable when factoring in the company’s rapid earnings growth

Nvidia remains an outstanding investment opportunity, but its stock is likely to experience higher volatility compared to the broader market. Nvidia has a 15% weighting in the iShares U.S. Technology EFT (IYW).

Graph 3: Nvidia forward price to earnings multiple

Source: Julius Baer

LVMH stands out as a structural leader in the luxury goods industry, with a business mix focused on leather goods and accessories—segments that are less cyclical and deliver attractive margins.

Third quarter sales declined 3%, driven by continued weakness in the Chinese market. However, this was partially offset by positive trends in Europe and the U.S., along with robust growth in Japan. Despite economic and geopolitical uncertainties, management remains confident in the company’s outlook.

Year-to-date, LVMH shares have underperformed the sector, offering a defensive portfolio with excellent geographic diversification. At current levels, we see an attractive entry point into one of the most diversified and resilient global luxury groups.

Graph 4: LVMH forward price to earnings multiple

Source: Julius Baer

What do tariffs mean for American companies?

President Trump announced plans to impose significant tariffs on Mexico, Canada and China as part of his strategy to address immigration and drug trafficking. The proposed tariffs include a 25% levy on all products imported from Mexico and Canada and an additional 10% on goods from China. The dollar strengthened following the announcement, while stock market reactions were mixed.

During his campaign, Trump also suggested a 60% tariff on Chinese goods and a 10% blanket tariff on all imports into the U.S., emphasizing these measures as a means to boost domestic manufacturing and fund government spending.

The specifics of any second round of tariffs remain unclear, but its short-term impact could be costly for companies. Many have warned that higher import costs would either reduce profit margins or be passed on to consumers through higher prices. While tariffs do not necessarily lead to sustained inflation, it may weigh on economic growth.

Analysts at Goldman Sachs predict that these tariffs could increase consumer prices, erode disposable income, and create uncertainty which discourages business investment, potentially slowing economic momentum further.

Companies have outlined several strategies to mitigate the impact of potential new tariffs under a Trump administration:

1. Price increases: Many businesses expect higher import costs and are preparing to pass these on to consumers to safeguard profit margins. Earnings calls reveal that price adjustments are a primary focus for many firms.
2. Diversifying supply chains: With China as a key target of proposed tariffs, companies are actively exploring alternative sourcing options. Several U.S. CEOs have highlighted plans to reduce reliance on Chinese suppliers and shift to other regions.
3. Stockpiling inventory: Some businesses are building up inventory ahead of potential tariff implementation. For instance, Lifetime Brands CEO Robert Kay noted that increasing inventory levels during the previous tariff cycle proved beneficial, despite the temporary strain on cash flow and liquidity.

These measures, while defensive, highlight the short-term challenges and operational adjustments companies face in response to heightened trade uncertainties.

Summary

The impact of tariffs will vary across industries and companies. Firms reliant on imports may face compressed margins, while those with domestic sourcing or operations outside the tariff scope could gain a competitive edge. Additionally, companies with strong pricing power might offset costs through price increases, potentially boosting earnings if demand remains steady.

Despite the risks of short-term market volatility from tariff-related concerns, the broader environment remains supportive for global equities, particularly in the U.S., where economic fundamentals and corporate resilience provide stability.

Did you know?

Arabica coffee prices have soared to its highest levels since 1977, reaching nearly $32 per pound. Futures contracts for the commodity have surged by almost 70% since the start of the year, with a sharp acceleration in price increases observed this month.

Chart 5: Arabica coffee futures, $ cents / lb

Source: Edmond De Rothschild

South African market overview

Source: Edmond De Rothschild

SARB reduces prime lending rate amid cautious optimism

The South African Reserve Bank (SARB) has reduced the prime lending rate by 25 bps. However, SARB Governor Lesetja Kganyago has cautioned that the improved inflation outlook may be temporary. He cited ongoing global geopolitical tensions and the protectionist policies of president Trump as key risks to economic stability.

Allianz Trade projects that South Africa’s exports to the US could decline by as much as $4 billion (R72 billion) in the 2025/26 fiscal year if the Trump administration implements its proposed tariffs. The automotive sector is expected to bear the brunt of these changes.

Sectors such as precious metals and chemicals, which are critical to the US, are likely to be less affected. South Africa’s exports of platinum—valued at $5 billion in 2023 and comprising roughly half of its total US exports—are expected to remain steady. Other chemical products, including wattle extract and sodium dichromate, may also see limited impact.

Business confidence sees sustained improvement

South Africa’s RMB/BER Business Confidence Index (BCI) increased to 45 points in Q4 2024, up from 38 points in Q3. This marks the third consecutive quarter of gains, pushing the index nearly 20 points above its recent low of 27 in Q2 2023.

Business confidence is now at its highest level since Q2 2021, when the index stood at 50 points, and slightly above its long-term average of 43 points. Despite ongoing challenges, this upward trend signals steady recovery and resilience in the business sector

The gradual but consistent improvement in business confidence over recent quarters is a positive development for South Africa’s economy. Key factors driving this recovery include the absence of load-shedding and increased political stability following the May elections. Additionally, improved consumer demand has further boosted sentiment, particularly in the fourth quarter of 2024.

The retail and wholesale sectors have been the primary beneficiaries of stronger consumer demand. However, manufacturers and building contractors have also experienced notable improvements in business conditions and activity, leading to increased confidence within these industries.

The new vehicle dealership sector, which is more sensitive to interest rate fluctuations, continues to face significant pressure despite the broader recovery trends. This divergence highlights the uneven pace of recovery across different sectors of the economy.

Chart 6: RMB/BER Business Confidence Index (BCI)

Source: BER, SARB (Shaded areas represent economic downswings)

The Two-Pot system: A balancing act for today and tomorrow

The recently introduced two-pot retirement system in South Africa aims to balance immediate financial accessibility with long-term retirement security. Now, two months after its implementation, its impact on individual investors, the economy and the SA Revenue Service (SARS) is becoming clearer, reshaping the country’s financial landscape.

SARS has received 2.1 million withdrawal applications, with 1.9 million directives issued, resulting in withdrawals totaling just over R35 billion. The revenue implications are significant, with SARS projecting tax collections of approximately R3 billion from these withdrawals, which could positively influence the national budget in February 2025.

The system has provided a short-term spending boost, as evidenced by increased retail activity. For instance, major retailer TFG (The Foschini Group) reported an 8% rise in sales following the system’s implementation, reflecting the immediate impact of accessible retirement savings on consumer behavior.

While the spending surge can stimulate economic growth, especially in retail, there are concerns about its broader implications. The reliance on retirement funds for everyday expenses could compromise long-term financial security for individuals. This underscores the importance of balancing present-day needs with disciplined retirement planning to avoid potential financial strain in the future.

We would like to remind you that the deadline to utilize your 2024 annual allowances is fast approaching. Ensure you make the most of your contributions and allocations before the calendar year ends.

• Single Discretionary Allowance (SDA): R1 million per individual, no Approval for International Transfers (AIT) required.
• Foreign Capital Allowance (FCA): R10 million per individual, AIT required.
• AIT Processing Times: Due to recent SARS changes, processing times are longer than usual.

Share of the month: Boxer (BOX)

Boxer made a highly anticipated debut on the Johannesburg Stock Exchange (JSE) in November, with its shares surging by as much as 20% during trading. Opening at R63.01—well above its initial public offering (IPO) price of R54—the IPO raised R8.5 billion, primarily from institutional investors. This listing marks the largest on the JSE this year and is unique, as Boxer is the only discount retailer on the exchange. The market’s enthusiastic response reflects strong investor confidence in the discount retail sector, which continues to gain traction as consumers prioritize value amid ongoing economic challenges.

Impressive growth trajectory

Boxer’s growth plans are ambitious yet compelling. From its current store base of 477, the retailer aims to double its footprint within seven years while maintaining double-digit sales growth annually. Over the past three years, Boxer has achieved an impressive annual sales growth rate of 19%, demonstrating its ability to resonate with South Africa’s price-sensitive consumers. In its latest financial year, Boxer reported R37.4 billion in sales and R2.1 billion in profit, achieving a respectable profit margin of 5.6%.

This outpaces its parent company, Pick ‘n Pay, and even Shoprite, which boasts a 5.5% margin—widely regarded as one of the strongest globally in the grocery sector. With its robust financial performance and ambitious expansion strategy, Boxer is well-positioned to capitalize on the growing demand for discount retail in South Africa, making it a standout performer on the JSE.

Graph 7: Compelling track record of uninterrupted turnover growth

Source: Currency News

Boxer listing: A lifeline for Pick ‘n Pay

The decision to unbundle Boxer has proven to be a strategic masterstroke for Pick ‘n Pay, offering a much-needed infusion of capital. Coupled with the R4 billion raised through its recent rights offer, proceeds from Boxer’s IPO should help Pick ‘n Pay return to a net cash position.

This marks a dramatic turnaround from six months ago when concerns about the retailer’s solvency loomed. Boxer has a market cap of R30bn and is trading on a forward P/E ratio of 20x.

This valuation is striking compared to Pick ‘n Pay’s current market capitalization of R22 billion. It suggests that the value of Pick ‘n Pay’s non-Boxer operations is effectively zero—or even negative—a scenario that underscores Boxer’s pivotal role within the group.

A strategic turnaround in progress

As Boxer continues to outperform with robust sales growth and sector-leading profit margins, its IPO not only boosts Pick ‘n Pay’s liquidity but also highlights the strength of its discount retail division. This unbundling could begin a new era for Pick ‘n Pay, allowing it to refocus and stabilize its core operations while leveraging Boxer’s value as a standalone powerhouse.

The welfare factor: A key driver for Boxer

Boxer’s origins date back to 1977 in KwaZulu-Natal, but its fundamental transformation began in 2002 when Pick ‘n Pay acquired the company to tap into the mass discount market. Since then, Boxer has maintained a stable and experienced leadership team, with CEO Marek Masojada, a 31-year veteran of the company, at the helm for the past six years.

As a “soft discounter,” Boxer bridges the gap between hard discounters—stores with limited product ranges and no fresh foods—and traditional supermarkets that offer a wide variety of goods. This unique positioning has allowed Boxer to cater effectively to price-sensitive consumers while maintaining a broader appeal.

Boxer’s fortunes are closely tied to South Africa’s social grant system, a lifeline for nearly half the country’s population. Social grant payments totaled R250 billion last year and are projected to rise to R300 billion by 2027. This dependency on welfare spending underscores the retailer’s focus on serving low-income consumers, a demographic that remains central to its growth strategy.

While Boxer has established itself as a dominant player in KwaZulu-Natal and the Eastern Cape, its presence in other regions, particularly further south, still needs to be improved. This presents significant opportunities for expansion as the retailer aims to double its store footprint over the next seven years. Boxer’s strong alignment with social grant spending and its potential for geographic growth position it as a key player in South Africa’s evolving retail landscape, offering both resilience and opportunity in challenging economic times.

Boxer vs. Shoprite: A new challenger emerges

Boxer’s closest competitor in the discount retail space is likely Shoprite’s Usave division, which reported a robust 13.2% sales growth in the year to July from its 463 stores. While Shoprite doesn’t disclose standalone figures for Usave, the combined sales of the Usave and Shoprite brands reached nearly R100 billion during the same period.

Boxer’s ambitious expansion plans and strong performance make it a serious contender in this competitive space. With its focus on bridging affordability and variety, Boxer is well-positioned to challenge Usave’s dominance, particularly as it seeks to expand beyond its core markets in KwaZulu-Natal and the Eastern Cape.

Graph of the month 1: Breakdown of global freshwater reserves 

Source: U.S. Geological Survey

Graph of the month 2: Reasons for two-pot withdrawals 

Source: Discovery Corporate and Employee Benefits

The Psychology of Money – Lesson 12: Understand your biases

In Lesson 12, Understand Your Biases, Morgan Housel highlights the profound impact that our inherent biases have on our financial decision-making. These biases are shaped by a combination of personal experiences, cultural influences, and psychological tendencies. While often subconscious, they can significantly skew our perceptions of risk, reward, and financial priorities, potentially leading us astray in managing our money.

Housel emphasizes that biases are natural; they stem from the lens through which we view the world. For instance, someone who grew up during a period of economic instability might have a bias toward extreme caution, avoiding investments that carry any perceived risk. Conversely, someone who has only experienced booming markets may be overly confident, underestimating the possibility of a downturn. Recognizing these biases is the first step toward mitigating their impact and fostering more balanced, objective financial choices.

One key bias Housel discusses is recency bias, where individuals give undue weight to recent events. For example, during a bull market, people might assume that strong returns will continue indefinitely, leading them to over-invest or take excessive risks. Similarly, after a market crash, fear of further losses can paralyze investors, preventing them from re-entering the market even when opportunities arise. Understanding that markets are cyclical and that recent trends don’t always predict future outcomes can help counter this bias.

Another common bias is confirmation bias, where individuals seek out information that supports their pre-existing beliefs while ignoring contradictory evidence. This can lead to poor financial decisions, such as clinging to underperforming investments because they align with an initial assumption. By actively seeking diverse perspectives and challenging one’s own viewpoints, investors can make more informed and balanced decisions.

Cultural influences also play a significant role in shaping financial biases. Societal norms about money, status, and success can pressure individuals into making choices that align with social expectations rather than their own goals. For example, the societal emphasis on material wealth might push someone to overspend on luxury goods instead of prioritizing savings or investments.

Recognizing these cultural pressures allows individuals to align their financial strategies with personal values and long-term objectives. Housel encourages readers to approach financial decisions with humility and self-awareness. Accepting that we all have blind spots and biases enables us to take proactive steps to overcome them.

This might involve seeking advice from unbiased financial advisors, relying on data rather than emotions, or adopting systems that remove the influence of subjective judgment, such as automating savings and investments.

In conclusion, Understand Your Biases is a call to reflect on how our unique life experiences and psychological tendencies shape our financial behavior. By acknowledging and addressing these biases, we can move beyond emotional or reactionary decision-making and adopt a more rational, objective approach to managing our money. This awareness not only improves individual financial outcomes but also builds resilience and adaptability in an ever-changing economic landscape.

Sources

Alpine Macro, Anchor, Bloomberg, BNY Mellon, Charlie Bilello, Credit Suisse, Compound Advisors, Edmond De Rothschild, ETFMG, FactSet, Haver Analytics,  JP Morgan, Julius Baer, Morningstar, Morgan Stanley, Refinitive, RMB, Statista, Sygnia, Strategas, The Intelligent Investor, UBS

Disclaimer

VEGA Asset Management has taken care that all information provided in this document is true and correct. VEGA Asset Management does not accept responsibility for any claim, liability, loss, expense, or damage. Any information herein is not intended nor does it constitute financial, tax, legal, investment, or other advice. VEGA Asset Management is an authorised Financial Service Provider with FSP number 776. Past performance is not necessarily an indication of future performance.