Hello Voornaam,
Welcome to another Ingham Analytics weekly research summary, highlighting what has been recently published and what has been among some of the most read notes in the past few weeks or months.
This week we've had yet another interest rate cut. The repurchase (repo) rate was reduced by 0.5% to 3.75%. In just under 18 months the rate of interest has fallen by 3% and by 2.75% since January. The SARB has flagged further repo rate cuts. We see the repo possibly falling to 3% and the prime rate to 6.5%. This will further weigh on banks earnings at a time when bad debts are soaring - in "Say buddy, can you spare a dime?" we see delinquent loans as a percentage of total loans higher than in the 2008/2009 global financial crisis.
The banking and financial system has been a featured topic of our analysis for some time because of the systemic risk issues that we've seen building up.
We try to be ahead of the curve, assessing what could lie ahead for markets, and we think unfolding developments have shown that we've been on the money.
We don't look at the local markets in a one-dimensional manner and bring our experience and practical involvement in international markets into the research mix for a holistic picture. We also identify opportunities to profit because although the newsflow is terrible it fuels volatility and emotional responses, which creates trading gaps.
This week we issued an Insight entitled "Poseidon and the other banking gods". The note takes inspiration from Greek mythological god Poseidon (and the 1972 movie the Poseidon Adventure) as a pointer for the coronavirus tidal wave impact on the global banking system. The sector is serving as a buffer at a time when the world is facing COVID-19 induced recession. There is an excerpt too from another movie "Margin Call". Executives must make decisions fraught with financial and public relations risk. Share prices of banks in South Africa, America, and Britain tell their own story. Whose is going to be left standing? Can you profit?
Following on from that "Say buddy, can you spare a dime?" deals purely with the South African situation. It pulls apart the loan guarantee scheme to supposedly assist small and medium businesses and finds plenty of pitfalls that if you're thinking of applying you'd benefit from reading about first. For banks, the scheme itself is not the problem but it adds to the indirect risk associated with sensitivity of commercial banks to the sovereign, and possible sovereign default. The note presents data and graphs that underscore the fragility and danger in the economic system - the yield gap and sovereign spreads tell a scary story whilst rising bond yields accompany a weakening rand. Whether you are a shareholder or a customer we think this is need to know analysis.
Other recent notes on the topic of banks and the fiscal situation around the world include "Why do central banks do what they do?", "Lower for longer on rates?", "Fixed income leads the way for equities", South African economic and financial fragility", "Eurozone Stress Fractures - Dj vu all over again", "Whose telling fibs, equity or credit?" and "A negative endowment".
"The volatility of low volatility" last month analysed COVID-19 induced market mayhem and the striking phenomenon of historically low volatility, low beta, higher Sharpe ratio (risk-adjusted return) stocks performing in an abnormally atypical way.
One of our most popular notes was issued last week, a Trader entitled "Iron ore and steel defies COVID-19 macro gloom". It was a profitable trade too, with BHP and Kumba shares performing strongly (as did Anglo American, which owns 69.7% of Kumba).
Thank you all for visiting us.
