Money Matters
Issue 46

December 2022 / January 2023

We all want to be well informed yet in today’s world of information overload, this can be simply overwhelming. We hope to make it easier for you to discern what is interesting and important from what is simply ‘noise’ or media hype. Being independent allows us to curate viewpoints from different asset managers, business professionals and political analysts and integrate them into our newsletters to give you, our readers, objective insight. We start this year by including four articles.

Our year ended with De Ruyter’s shock resignation from Eskom, which understandably has us all concerned. We lead this edition with an article by JP Landman where he claims “Eskom is dying and cannot be saved in its current condition. Electricity provision however is not dying. It is important to distinguish between those two, lest we are overwhelmed by morbid symptoms”. This article provides significant insight into our energy crisis.

The year 2022 served as a turning point for the currency and capital markets as we witnessed soaring inflation and interest rates and the negative impact this had on asset classes. But what should we expect in 2023? Casey Delport addresses 10 factors that could impact global financial markets and Neville Chester, a Senior Portfolio Manager at Coronation, presents the case for investing in South Africa.

And finally, if you haven’t already, 2023 can be the year that you get your financial house in order. To help you kick off, we thought you could start the year by going through our 21 point checklist that can be used as a tool to identify weaknesses or gaps in your planning.

Our clients can relax knowing that every aspect mentioned in the checklist would have been taken into account during our rigorous financial planning process.

Linda Stonier

Antonio Gramsci had it right: ‘The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.’
Gramsci was referring to politics in Italy in the 1930s, but the quote also describes Eskom and load-shedding in South Africa in the 2020s. Load-shedding brings with it the morbid destruction of many small businesses and the merciless disruption of peoples’ lives. Eskom is dying and cannot be saved in its current condition. Electricity provision, however, is not dying. It is important to distinguish between those two, lest we are overwhelmed by morbid symptoms.

Load-shedding
We have load-shedding because South Africa does not generate enough power. The capacity gap is estimated at between 4 000 MW and 6 000 MW. As recently as November, Eskom put the capacity gap at 4 000 MW. Let’s assume the gap is the higher number of 6 000 MW. That is 6 000 MW of base load (ie energy that is available continuously for 24 hours of the day). To produce that from renewables (solar and wind) we need about 18 000 MW of renewable-energy capacity with a mix of storage and gas. That is the first of the new that must be born.

Investors are probably eyeing 2023 with much trepidation after what turned out to be a rather painful 2022 for bonds and stocks alike. A bumpy ride appears to be on the cards for this year, not counting any other idiosyncratic events that are yet to make a (potential) appearance.

Our base case is for softer and more volatile commodity prices as global economic growth slows. A global shift in monetary policy, to either pause or slow down the pace of interest rate hikes in 2023, will largely remain a function of inflation which is broadly expected to ease — especially towards the latter part of 2023. Consequently, central banks are likely to shift their tone from arresting inflation to supporting growth. Meanwhile, Russia’s war on Ukraine remains a key geopolitical risk that does not appear to be abating anytime soon.

Whilst it is always hard to say where surprise events might pop up, below, we highlight ten possible factors/events (in no particular order) worth taking note of as we shift into gear for the new year.

1. China to open post-Covid-19, easing global supply chain pressures

After a year of domestic economic volatility and international turmoil, China is expected to focus on economic growth this year, which means the country will further deepen reform and expand opening-up. In that vein, judging by the Central Economic Work Conference held in Beijing in December and the resultant speeches of Chinese leaders, the top policymakers will focus on economic growth to restore the pre-pandemic high-growth environment.
As such, fiscal support will be targeted and focused, whereas monetary policy will likely remain cautious and neutral until the end of the US Fed’s tightening. In turn, sectoral success is predicated on three critical areas: Covid-19, the technology sector, and the property market. For the rest of the global economy, normalising the Chinese economy could significantly ease supply chain disruptions that have contributed to rapidly rising goods inflation.
However, it is worth bearing in mind that a rebound in growth in China could also boost demand for global commodities, thus contributing to inflationary pressures and proving to be a double-edged sword for global inflation.

Significant opportunities may underlie a bleak outlook

• Fiscal consolidation and meaningful policy implementation is essential to restore investment confidence and a meaningful growth path
• Corruption, SOE failure and high debt levels have hamstrung the economy and the aftermath is likely to continue to do so
• It is in conditions such as these that remarkable opportunity can arise and some SA stocks are worth watching

The outlook for domestic equity in the period ahead is an exceptionally challenging call to make, given the two vast extremes that will potentially drive market returns and how one should be positioned.

On most metrics, the FTSE/JSE All Share Index (ALSI) shows up as extremely cheap compared to its history. Like all averages, this hides a number of desperately cheap shares and some that are still looking fully valued.

Companies that have been able to deliver consistent earnings growth despite the challenging environment trade at eye-watering valuations.