April 2024

Insights

The Good: In Big Tech we Trust

Growth stocks faced their first bout of weakness in many months as inflation data sparked fears that higher interest rates could persist. The MSCI World Growth Index was down as much as 6% in April as investors factored in this more risk-off narrative. However, the Index recovered sharply in the last few days as a spree of positive Big Tech earnings restored some calm to anxious market participants.

Microsoft rose 5% after it released results for the quarter that continued to showcase its operating excellence. Year-on-year revenue growth of 17% came in firmly above analyst expectations, while an emphasis on cost-discipline drove net income 20% higher than in Q1 2023. The world’s largest company also continues to invest heavily in cloud computing and artificial intelligence, with capital expenditures increasing by a massive 79%. Despite some initial investor scepticism, significant demand for these services has firmly justified their investment case. Cloud computing division Azure grew 31% in the quarter, with 7 percentage points of that growth being directly related to AI services. Strikingly, there are no signs of this demand letting up soon, with the company noting that more investment was required because “AI demand is a bit higher than our available capacity”.

 

Source: PICOS Technology via Linkedin

Google parent Alphabet put out an equally strong set of numbers, driving the share price higher by 11% on the day. Total company revenue increased by 15%, its fastest rate of growth since early 2022. Cloud computing was a particular highlight, with revenue growing 28% and operating income more than quadrupling thanks to improved efficiencies. Ad sales were also significantly higher than in 2023 as a reacceleration in the digital ad market boosted their core business. Strong growth here also helped alleviate some investor concerns that AI chatbots were impacting Google’s dominance in Search. Looking ahead, Google is also planning to invest heavily in their cloud infrastructure, with capital expenditure increasing by 50% or more this year. Despite this elevated spending, Alphabet remains in an extremely positive financial position. A cash balance of $108bn has allowed management to distribute some profits back to shareholders, with a $70bn share buyback programme as well as through the company’s first ever dividend.

Given these huge capital spending programmes, we are also eagerly awaiting Nvidia’s results in the coming weeks. Nvidia has been one of the biggest beneficiaries of elevated capex spend, since their world-leading chips are first choice for powering advanced AI tools. Across our funds and products, High Street continues to prioritise strong operating fundamentals above all. Regardless of the narratives and noises moving markets in the short-term, exposure to these kinds of business is likely to reward investors in the long term.

The Bad: Operational Risks Turn Off South Africa’s Glow

BHP’s recent bid for Anglo American plc (Anglo) serves as a reminder of the operational hurdles businesses face in South Africa and their impact on investor interest in local assets. The unreliable power supply, inefficient transportation networks, and frequent policy changes create significant uncertainties for investors and businesses alike. This uncertainty affects their ability to achieve an attractive return on capital that justifies the risks involved. The Johannesburg Stock Exchange (JSE) may face the challenge of potentially losing a stalwart of the South African economy.

Founded in 1917 and once constituting a quarter of South Africa’s GDP, Anglo received an all-share offer from BHP during the month. Notably, this deal is contingent on Anglo splitting off its listed South African platinum (Anglo American Platinum, Amplats) and iron ore (Kumba) units. These assets, representative of the broader South African mining industry, grapple with significant infrastructure challenges and regulatory hurdles. BHP’s condition isn’t surprising, given their prior separation from South Africa in 2015 by unbundling their aluminum and coal assets into South32.

 

 

Source: Hugo Pienaar on X (@hugopien)

Examples of these challenges are evident in Kumba, which had to reduce production and lay off 500 employees due to South Africa’s ailing rail system, which struggled to transport materials to ports, forcing the business to cut back on production rather than increase it. Amplats faced similar obstacles that were compounded by costs that have risen faster than inflation rates as well as depressed platinum prices. The company recently announced they were to cut about 4000 of their workforce, constituting a 17% reduction in headcount.

 

In its latest trading statement, Sasol, another significant presence on the JSE, provided further insight into the difficulties of operating within South Africa. The company’s synfuels division saw a decline in revenue, citing operational obstacles rooted in South Africa’s unique challenges. These hurdles encompass operational instability, constrained equipment availability due to load shedding, transport infrastructure issues, supply shortages, and heightened pricing from chemical suppliers.

The potential loss of Anglo American, and the continued struggles of existing JSE giants like Sasol, raise concerns about the future of the already concentrated JSE.. With fewer companies to invest in, and those companies facing continual operational constraints, the JSE is likely to struggle to attract significant investment interest, particularly from foreign investors.

Whilst we do hold select South African companies in our portfolios which we believe have compelling business models and proven management teams, our preference is to invest on behalf of our clients in quality, global multi-national businesses which operate in well-regulated jurisdictions and have attractive financial fundamentals.

& Walking Along the High Street – Part Two: Navigating The JSE Blues Through Global Diversification 

As High Street continues to grow, the next milestone on the horizon is the ‘Meet the Mangers 2024’ event (Meet the Managers registration). To build on the growing momentum we have experienced in the institutional market, Ross Beckley High Street’s Chief Investment Officer, will be delivering a comprehensive session on “Maximising Offshore Exposure within Regulation 28”. In anticipation of the event, High Street is launching a five-part series that will be published in Citywire. These articles aim to share our insights on various aspects, including the success of the High Street Balanced Prescient Fund, comparisons between local and offshore market performance, the current landscape of retirement savings options in South Africa, and how High Street distinguishes itself within the asset management industry.

Source: Bloomberg

In this month’s edition, we take a look at how listed South African companies have performed relative to their global counterparts, which can be seen in the image above. We analyse the differences in performance and delve into the drivers of growth that have been propelling offshore household names such as Amazon and Microsoft in recent times. Additionally, we discuss how South African investors can take advantage of global companies listed on the JSE. If you are interested, please click the link below:

A Walk Along the High Street: Part 2

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