February 2023


The Good: Resilient Earnings

Markets were on edge heading into the final earnings release of 2022, as inflation, geopolitical tensions and other macroeconomic concerns all contributed to a very challenging operating environment for companies. As has been the theme throughout the year, investors began to demand a focus on profitability in these uncertain times, with companies scrambling to support their bottom lines or see their share prices suffer.

With around 93% of S&P 500 companies having reported results, management teams seem to have been largely successful so far. 68% of companies have surpassed Wall Street’s earnings expectations, with an average beat of 1.60% over consensus estimates. High Street companies have done even better; 38 of our 49 companies have reported so far, with 74% of them exceeding expectations.

Source: High Street Asset Management, Bloomberg

What has been particularly pleasing to see is the scale at which earnings growth for High Street companies has exceeded consensus expectations, especially when compared to the wider market. Unlike the S&P 500, which has actually seen a contraction in Q4 earnings, our companies have managed to grow the bottom line by 7%. This discrepancy can largely be explained by our general preference for growth when it comes to stock selection, as companies have shifted their focus away from the top line and towards profitability. Another factor is that High Street companies typically have a sustainable competitive advantage, with a wide moat that ranks them highly in their respective markets. This gives them distinctive pricing power and allows them to pass input costs onto customers and preserve margins. All attributes that allow quality businesses to weather the storm in tough times but truly benefit when the outlook turns more positive.

The Bad: The Dark Ages

As expected, in the budget speech last week Treasury bailed Eskom out by signing off a massive debt-relief arrangement. The power utility is in melt down with continuous breakdowns of generation units resulting in the implementation of stage six loading shedding. Some South Africans are now without power for up to 10 hours a day.

Source: City Press


While we have become accustomed to the effects of Eskom’s inefficiencies, the current outlook is particularly bleak. The leadership is in tatters with outgoing CEO, Andre De Ruyter, becoming the twelfth CEO to leave in ten years. Corruption and political hurdles continue to hamstring Eskom, and many, De Ruyter included, believe that the government does not have the political will to end corruption within the utility. In his explosive exit interview, the ex-CEO offered some insight into the situation stating that “about R1 billion a month” is stolen from Eskom. This level of criminality is hard to comprehend.

Perhaps most frustrating is that this all could have been avoided, if not for a complete lack of action. What makes Eskom unique is that it is a vertically integrated utility i.e, it is responsible for generation, transmission and distribution. This is an anomaly in a world where 110 countries have at the very least unbundled transmission. Unbundling was proposed as long ago as in the 1998 Energy policy but more recently in the 2019 state of the nation address, with the president clearly announcing that Eskom would be split into three different entities. Four years later inadequate progress has been made and Eskom remains a vertically integrated, dominant state-owned power utility.

The current situation is indeed dire, however there are solutions available. Whilst there are no quick fixes, the most obvious start would be to bring all available energy onto the grid, and new power generation (from renewables and independent parties) must be added at a rate fast enough to compensate for the worsening failure of Eskom’s coal plants. This will not be a cheap process, and just from a transmission perspective an investment of at least R180 billion will be required to reconfigure the grid. While the pipeline for new power generation is strong, the projects must be concluded, delivered and not delayed. This should create space to allow for adequate maintenance and replacement of ageing power stations and key infrastructure in the longer term. The unbundling and restructuring of Eskom are key here. This requires brave actions by current and future ministers.

Load shedding will likely be with us for a while and will continue to cripple businesses and disrupt people’s lives. While we hope that the situation will eventually improve, this again highlights the importance of externalizing some of your wealth away from South Africa.

If interested the two articles below go into far greater depth on the power situation in our country.

ANTON EBERHARD: Ministers have let Ramaphosa down on unbundling of Eskom

JP LANDMAN: Electricity and load shedding


& The AI Arms Race

“Just Google it” – a phrase that we have become all too familiar with, in which Google became a verb that was synonymous with searching the internet. Yet for the first time in two decades, a considerable challenge has risen against the world’s leading search engine. The rapid rise of OpenAI’s generative AI chatbot ChatGPT has spurred a vigorous arms race between tech behemoths, throwing the future of search into flux. Microsoft made the first move by investing $10 billion in OpenAI, and Google followed mere days later, with its own AI chatbot called Bard.

Source: App Economy Insights

ChatGPT reached a staggering 30 million users just two months after its debut, cementing its place as one of the fastest growing software tools in living memory. To give context to this figure, it took Instagram almost a year to surpass the 10 million user mark. Bill Gates boldly praised ChatGPT and said it is as significant as the invention of the Internet itself. Other proponents believe that generative artificial intelligence will change the way we engage and work with the world as we know it. A Global AI study conducted by PwC identified approximately 300 use cases and forecasted that AI could contribute over $15 trillion to the global economy by 2030. The frenzy has created a unique opportunity for semiconductor companies like NVIDIA, who have already reported that demand for their AI infrastructure has “gone through the roof”.

Although it is incredibly difficult to imagine which tech giant will lead the AI revolution, one thing is certain – ChatGPT has captured the world’s imagination and flooded the market with excitement for the next wave of the AI boom.

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