The Money Show | Market trends and global dynamics

Arthur Karas, on 702’s The Money Show this week, delves into the twists and turns in today's financial landscape. From the JSE's surprising rebound to the impact of global inflation on market trends, this interview is a must-listen for anyone navigating the financial terrain.

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Transcript

Bruce: To markets, to markets, to markets we go. Turned out to be a positive day on the JSE by the time everything all had been tabulated and counted. Arthur Karas is a portfolio manager at Old Mutual Investment Group. And yeah, for spending most of the day in the red, we ended in the black, I suppose. Arthur, we should be grateful for small gains on a day where there wasn't too much appetite for investing, practically anywhere.  

Arthur: Yes, we had some strong performances out of the likes of Northern Harmony, MTN. I think that helped the market into positive territory, considering that one of the larger stocks in the market, Anglo Americans, continued its weakness from Friday. But we're pretty much headed into a week where we were waiting for the US inflation number tomorrow and looking to see what direction that provides for us for 2024.  

Bruce: Did I see on the weekend that the S&P 500 last week hit a 12-month high? I think it did, didn't it?  

Arthur: I think it did, yes. But the market has been very strong. So, there's no question that the key US indices have been very strong. It is a bit unbalanced. It's driven by a handful of the very large tech stocks, which is why you hear these arguments about people saying, well, we have got expensive shares, but the entire market is not expensive. So, you do have to go into a little bit more detail there to understand what's actually happening. 

Bruce: No, exactly right. And it is a handful. I mean, they've got the Naspers effect in a handful of shares on the S&P 500. We had Naspers as a disproportionate contributor, of course, to our market for many, many years. We're still 10 percent below the peak we reached in February. February, the market rocketed all the way to 80, 000 for no rhyme or reason. And ever since then, we've been languishing. And I wonder how much of it is to do just simply with the inflation picture and the inflation outlook and this obsession, as you've just pointed now, to what's happening to American inflation. Because that's, I suppose, going to be the be all and end all of 2024. 

Arthur: And it runs into a whole bunch of sectors. So, if we're going to have a hard landing next year, if the economies, global economies slow down a lot, that's going to weigh heavily on our resource stocks. You can't expect a resource price recovery if you see weak markets there. You'd expect a different kind of share to do well. If inflation struggles to come down, you'd expect the companies that are better passing on inflation to do better. So, depending on that inflation outlook and it's feeding into interest rates, which feeds into the banks - any number of those things that you've got a whole bunch of pictures that are dependent on how those things play out. So, the most benign outlook is for a soft landing where you have inflation coming off while growth slows, but we don't hit into recession. And that, that would allow markets to say relatively strong, and interest rates to kind of start ticking off because inflation is coming down. And that's the kind of goldilocks scenario that some people are holding out for.  

Bruce: I did see a comment out of the UK today saying that it's possible that there might not be interest rate cuts in that economy until 2025, 2026. I mean, that seems unbelievable, doesn't it? I mean, it seems inconceivable. But this is one of the big research bodies in the UK looking at the inflation outlook, looking at the fact that yes, it's been tamed, but not necessarily contained. I wonder if your viewers shifted at all on the outlook for interest rates. 

Arthur: I think that’s a very good point because the various interest rate outlooks are dependent on the inflation outlooks. None of the central banks can be seen as being weak on inflation so they do need to have the inflation rate in their own country coming down. And while they're all linked, if we come to have oil prices going up, pushing up everyone's inflation outlook, they all are behaving in their own individual way. So, for example, one of the views that has changed in the last couple of days is people are saying, well, Europe is looking so weak, and inflation is coming down quite quickly there. They might be pushed to cut before the US, which everyone thought that the US was going to lead this cycle down. So, there's still quite a bit of data that needs to come out. And quite a bit of deliberating by the central banks before we can see who's going to start this, who's going to be going down first. But I would say that it's far from clear exactly how this is going to play out. But the one thing that we do believe is that rates are not going to go down as fast as what they went up. That it's going to be a higher for longer scenario and that rates will come down far more slowly because you don't want to over stimulate these global economies by cutting rates too quickly and then you're back again to where you started.  

Bruce: Yeah, I mean that view of the UK rates coming down in 2026 is from the business lobby group CBI. And they're saying that the Bank of England will not cut interest rates until 2026 at the earliest. And that's astonishing because I mean, lots of speculation that we'd start getting interest rate cuts in the first quarter, second quarter, third quarter, fourth quarter next year. There is so much uncertainty. And I suppose the best clarity we're going to get this week is from the US Fed, the European Central Bank, and I think the Bank of England, all three of which are going to be talking about interest rate decisions this week. I think they're all coming out. So, it's the language of the central bankers, which is really going to determine our mood into 2024. 

Arthur: Yes, we've had the view for some time that, that rates are going to come off slower than what the more bullish, market participants believe. But I think that the danger is that you base your entire view on the latest data point that's come out and then you get pulled left and right and up and down, as it were. A little while ago, we did think that, you know, the kind of consensus was that we would see rate cuts quite early in 2024. And I think that's gradually been pushed out a bit further, partly based on the comments made by the likes of Jerome Powell saying, you know, don't get too excited. This is going to take some time. 

Bruce: Can we get a little bit excited about what's happening in the South African domestic economy? Because we can't, I don't think, in retail and in banking. Those shares were under pressure today. But one little outlier was Italtile. They did exceptionally well during COVID as in that mini building boom that happened as people renovated their houses and retiled and reshaped their homes. Then everybody in that sector took an incredibly bad knock. They seem to be making a bit of a comeback, however, based on today's update.  

Arthur: Tough to bring that back to the update. They did mention that their sales were down and that they see things as being, as being quite tough. It's a well-run business. I don't think you need to be concerned about, about a period of weak sales. The thing to note there is that the amount of shares, about 17, 000 shares traded on the day. So, it's not necessarily indicative of what the overall market thinks about, about the share price. You know, sometimes these smaller companies can move quite dramatically on a small amount of trade. I mean, normally they trade a couple hundred thousand shares a day. So, it was a small trade that potentially moved the share price. And we need to see if that, if it sticks there, um, as it goes through the week. 

Bruce: So, don't get too excited in the short term. Thank you. Arthur Karas, Portfolio Manager at Old Mutual Investment Group.