Trends from earnings season
What could we glean from the recent SA earnings season about our economy from a market perspective?
What we have seen in the US earnings season is that tech is king and the world is obsessed with the future from the lens of artificial intelligence (AI). Those who have led the AI race have found disproportionate favour from the markets.
Before getting into markets, and the earnings season, most of us are aware of the macroenvironment we find ourselves in locally. It is characterised by low confidence and spending levels from both businesses and consumers, elevated unemployment, high debt levels, stubborn cost-push inflation, increased rate environment coupled with an energy crisis and logistical challenges which add further strain to economic growth. All of this in an election year that potentially promises surprises and uncertainty.
Big events that have influenced markets locally have included the national budget in which the Treasury tapped into its gold and foreign currency reserves to contain rising government debt levels and the cost of servicing debt. This was liked by markets, as we saw government bond yields compress. However, we did see a weakening of the rand against the US dollar as a reduction in foreign currency reserves would have SA slightly more risky from an exchange perspective. In addition, monetary policy uncertainty has fuelled dollar strength against most major currencies across the globe.
Locally, a couple of themes have emerged. One is in the mining and manufacturing sectors. They have continued to post declines in earnings growth, primarily as China has been struggling — in particular the manufacturing and property sectors. These are major labour absorbers and have announced job cuts across the board.
After posting a revenue decline of 24% year on year and an earnings per share decline in excess of 70% year on year, Anglo American Platinum announced it was likely to cut 3,700 jobs as part of an aim to cut costs by about R5bn. Sibanye-Stillwater announced that it could cut as many as 2,600 jobs after it posted negative earnings per share and a revenue decline of more than 15%. Kumba Iron Ore, despite a revenue increase of 16% year on year on the back of some currency depreciation and slightly stronger iron ore export prices over the period announced it would still cut close to 500 jobs due to railway challenges.
The economic implication of this is that elevated unemployment levels will probably remain at least over the short to medium term.
We have seen retailers passing inflationary pressures to their customers, with consumers struggling to keep pace as revenue growth has come in below price increases. Notwithstanding the pass-through effect, retailers have had to contend with margin pressure as earnings per share growth has come in below revenue growth, with no volume growth to speak of.
Despite a 5.1% increase in revenue from continuing operations at Woolworths after the disposal of David Jones, earnings per share declined by 7.4%. Pick n Pay has seen negative earnings per share, with the retailer announcing the liquidation of some of its stores, raising vacancy concerns in the local property sector. Shoprite continues to outperform its peers even as the environment is challenging, but it has also seen margin pressure with earnings per share growth of only 4.6% on the back of double-digit revenue growth.
Some food producers, including RCL and Astral, showed strong earnings per share recovery, but from low bases from the bird flu crisis. Producers like Sea Harvest are seeing a decline in volumes and earnings. Shifts to more affordable foods such as pilchards, as seen in the Oceana Group, continue to be sustained as consumers are under pressure.
Looking at the big banks, we continue to see the theme of a struggling SA consumer playing out. We have seen some decent revenue growth across the board as private credit extensions grew in real terms in 2023. However, private credit extensions are starting to slow down. Further, there has been a general increase in credit loss ratios, as well as the impairment reserves that banks set aside from a capital perspective. This indicates that consumers are struggling to get financing and service their existing finance agreements in the elevated rate environment.
Our local equity portfolios have been partially shielded from some of the negative moves seen in our market this year due to our relative underweight position in resources coupled with an overweight rand-hedged exposure. Within the resource sector we have taken higher position-sizes in the larger and more established diversified miners as opposed to single commodity miners.
Other areas where our portfolio has done well includes Richemont, which has benefited from the recovery in the Chinese retail market, posting strong results which demonstrate the resilience of its brands as well as the higher LSM consumer. Bidvest and Aspen, both holdings in our portfolios, also posted strong sets of results with positive share price rallies, highlighting their defensiveness.
While the markets may not paint a glowing picture of our local economy, there are opportunities and positivity. We look to the expectation of compressing duration spreads in bond markets, indicating that future economic prospects are expected to be better than they are now.