Episode Transcript
The Finance Ghost: Welcome to episode 293 of Magic Markets. This week, Moe will be taking us through the strange disconnect in the US – an economy that looks really strong even though consumers seem to be increasingly squeezed – and then I'll be doing much the same in South Africa, leaning on some of the comments we've seen from the consumer sector.
So, Moe, this is going to be an interesting show actually, because I think sometimes the macro data and the lived experience on the ground seem to be two completely different things, right?
Mohammed Nalla: Indeed, Ghost. I think it's quite topical because just last week in South Africa you had the SARB hiking interest rates and a lot of people pushing back against that, maybe because the macro data is saying one thing while the lived experience on the ground is quite different.
Let's start off with the US. If you look at the US, it's this very strange combination. The economy there increasingly looks as though it may not land at all. And I'll unpack what that really means, but on the ground, consumers feel as though it's already landed. They're feeling quite squeezed.
To define that landing concept very quickly, a hard landing (when you're speaking about the economy) generally means a recession. A soft landing means growth will slow enough to bring inflation down without causing a recession. But a no-landing economy is one where growth simply refuses to slow, it remains above trend, with employment trends holding up, but then inflation stays sticky, and that means interest rates remain high.
And that seems to be some of the backdrop that we're sitting with right now in the US. So, I'm going to jump into a couple of key headline data points and then try to bring that back to the consumer story.
At the top. If you look at something like the US Composite Purchasing Managers’ Index (PMI), that's a nice lead indicator in terms of how economic growth momentum is going. And the ‘composite’ bit means that it includes manufacturing as well as services.
Now, in the US, that composite indicator has risen from 56 index points to 58.4 index points most recently, and that's the strongest reading since 2021. For context, 50 is the line that separates expansion from contraction, so the current reading is showing you that you're strongly in expansion territory.
This means that annualised growth is likely to track around 4% in the third quarter, in the US. We've got final Q2 numbers coming out, but if you look at some of the higher frequency prints, they’re indicating as though Q3 will be significantly stronger.
If you compare that to what's happening in the jobs market, businesses are also hiring at the fastest pace in more than four years. The official data is showing you that 162,000 jobs were added in August, with unemployment holding at around 4.1%. Those are multi-decade lows in terms of unemployment in the US.
And then if you look at retail sales, those were up 1.2% in August, but on a year ago, that's up 6%. I know that's a nominal number, but it's still pretty strong if you're looking at that retail sales print. So, that’s showing you that, at a headline level, the growth story in the US economy continues to truck along at a fairly decent pace.
But then the flip side of the coin is that inflation is also refusing to disappear. Now, I know a lot of that is related to energy prices and what you're seeing come through there, but headline CPI was 3.4% in August – well above the 2% target set by the Fed. And at the same time, you've got businesses reporting the fastest increase in input costs in almost four years.
That's all really playing into this no-landing economy, which correlates with the forecasts you see from the Fed.
Now, if we compare that to the lived experience on the ground. You know, the headline macro prints are all looking as though the economy is running quite hot, but if you survey the consumers, consumer sentiment has fallen to 48.1 index points (which is down almost 13% from a year ago) and their expectations around one-year inflation have jumped to 4.6%.
If you compare that to their lived experience in terms of earnings, their earnings are growing at around 3.1% on a year-on-year basis, which is slightly below headline inflation. And so, that goes some way to explain why the consumer is starting to feel that squeeze.
Because consumers experience a price level. They don't experience the CPI rate that you and I are looking at, or that policymakers are looking at. And so just because inflation (even if it actually trends lower) is declining or the inflation rate is declining, it doesn't mean that prices are declining. Lower inflation just means that prices are rising more slowly. It doesn't reverse the increases that we've seen thus far.
Last point here, Ghost, is that there's also an inequality story. It's a distribution issue. Because in the US, and very much so in South Africa as well, higher-income households own most of your financial assets and they also account for a disproportionate share of spending. So, if you see resilience in that upper-LSM curve (if you want to call it that), that can keep aggregate consumer or headline data a lot stronger while the lower- and middle-income households feel increasingly squeezed.
Now, for markets, what does this actually mean? It's quite complicated, because a no-landing economy supports revenues and earnings, but it also keeps bond yields high (you've seen that in the US) and that keeps discount rates elevated. That means that companies can deliver stronger profits, but they don't necessarily receive higher valuation multiples.
I think, if I wrap this up, I see the no-landing scenario as a rising risk rather than a confirmed outcome. We'll know within the course of the next couple of quarters. But I do think that we are at risk of seeing an overheating economy in the US, rather than a recession.
And that's a very interesting contrast with South Africa because, in the US, you've got strong growth alongside the sticky inflation. In South Africa, much weaker growth and then you've got sticky and imported inflation as your shock.
The Finance Ghost: Yeah. You've used the word ‘shock’ there, and I think that's exactly what's happened here in South Africa, because if you look back, I don't know, six months? Domestic reform was actually what everyone was talking about, and it was actually looking quite good. We had quite a lot of momentum, it felt like we were making progress, and then along came a conflict in the Middle East and fuel prices went bananas. And that's when South Africa starts to look very vulnerable, really quickly, right?
We have inefficient transport systems which hamper our lower-LSM consumers. They spend an incredible proportion of their income just getting around, getting to work and back. You've got very high real-world tax rates on the middle class. In other words, they pay their tax, and then on top of that they pay private security, private school fees, private health care. All South Africans know that drill. So that also leaves them with nowhere near enough of a buffer.
And that obviously is a concern, especially if you look at what's coming out of the SARB recently in terms of cutting the growth forecast and then a rate increase, Moe, which everyone hates here. Obviously because, well, most people are sitting in debt in South Africa, I would say, so rate hikes are not the most popular move, that's for sure.
And obviously I couldn't resist making the joke at the time about how I spoke to my car that day and it sweetly agreed to use less fuel now that the SARB has increased rates. Pointing out the, shall we say, rather tenuous link between those two things.
But jokes aside, I guess the truth of it is that, actually, rate increases by the SARB in this environment do help with fuel prices, don't they? Because they need to actually do this to help support the rand and avoid inflation getting out of control, right?
Mohammed Nalla: Yeah, you've hit the nail on the head, right? I'm not going to step in to defend the SARB. I think they've really communicated fairly clearly. They're focusing on the rand; they're focusing on inflation expectations and how that filters through – how the rand filters through – to inflation.
Because, at the end of the day, South Africa buys its oil in dollars. You buy all your imports in dollars. And so, by raising the repo rate 25 basis points to 7.25%, the SARB helps preserve the return on rand assets.
Now, that's very important because it's against the backdrop where other major central banks are also raising rates. So, you've got to look at that differential, because hiking rates can then discourage any capital outflows. It limits rand weakness in theory, it helps protect the currency, but it's not a guarantee that the rand will strengthen.
I mean, if you look at it from the decision last week to now, the rand has weakened in nominal terms. But if you compare that to a much stronger global dollar, the rand has held its own. And so, I would argue that the rate hike by the SARB seems to be doing its job.
But the more important point is that they are also concerned around second-round effects of inflation. I mean, you mentioned it – fuel is up around 20% year-on-year in August (probably a little bit more now). And that filters through to transport inflation, which is around 8.8%. Headline inflation is 4.4% and the SARB expects that headline number to move above 5% later this year, which is well ahead of their 3% target with a 1% tolerance band around it.
So, I think the trade-off is quite painful, yes, but the SARB's worried around those higher fuel costs feeding into second-round effects through distribution, food and so forth, and so that is what justifies their decision.
Now, very quickly, I mentioned how the growth story in South Africa is very difficult compared to the US. GDP actually contracted in the second quarter in South Africa by 0.2%. And so, the SARB's not making this decision lightly. They've got to accept some additional pressure on growth and household finances now, but that is the tough medicine required to really weather the risk of a weaker rand or more persistent inflation later on. I think that really is what gives you that backdrop.
Now, Ghost, I really want to understand, as we bring this back to what it means for companies and consumers on the ground: what are some of the comments you've been seeing from the retailers (maybe even from certain consumer groups), not just on the latest results, but probably more generally over the last year?
The Finance Ghost: We've certainly seen no shortage of pressure here, Moe, on the consumer stocks. If you go and have a look at those charts, many of them are trading at horrible 52-week lows (or very close to 52-week lows), so the story on the ground for consumers is not good, even if there are elements of the macro story that at times have looked better.
One of the key points that keeps getting raised is online betting and gambling in general. It's a big, big issue for local retailers. And look, I'll be honest, when I saw that narrative coming through over SENS and in some of the earnings releases, I did wonder if it perhaps was just a convenient scapegoat for some of the weaker names in local retail.
But having spoken to a number of management teams in the space, actually, even the stronger players – even the strongest players – will mention to you that online betting is a huge issue, and they see it in things like the Black Friday data and that kind of thing. So, that is a concern.
And it affects discretionary categories more than it affects grocery. We, at least, don't seem to have reached a point where people are gambling instead of eating – but never say never, I suppose.
Jokes aside, though, it's an interesting debate whether someone is actually worse off genuinely wasting money on betting versus “wasting money” on clothes they don't actually need. It's just an interesting one, right? If you're filling your cupboard with stuff you didn't need anyway, are you really wasting by spending that entertaining yourself online?
But without getting too philosophical about that argument, I will say that the country is definitely worse off. Because betting is an extractive industry here versus spending in the retail sector (which then flows through into jobs and into local suppliers and all the rest). That's obviously not helping the local retailers, especially on the discretionary side.
So, you've got that issue. You've got structurally high interest rates. You've got inflationary pressures everywhere on our personal income, because inflation might not look too bad in areas like food, for example, but believe me, it's there in a whole bunch of other places like health care, education, security, municipal charges, cost of housing. It's very definitely there and all of that hurts the consumer.
Now, the Mr Price results for the period to September 2025, yes, they might be a year out of date, but there was a very cool stat in there (well, also very depressing) that South Africans are spending 60% of their income within two days of payday.
Now, obviously all your debit orders go off just after you get paid, so in some respects that's not as shocking as it sounds, perhaps. But that stat is relevant because I think it does show the extent to which South Africans have to then stretch their budgets to get through the rest of the month. So, that's a difficult issue that all of our retailers are dealing with.
And that same slide also referred to how spend has been diverted to international online retailers in addition to online gambling. So, it's not just that people are spending their money on Betway, it's that they're also spending their money on Temu and SHEIN and all the rest. And obviously that's a serious issue, once again, for the local discretionary retailers, and those are the companies who have been smashed the hardest.
It's not just the low-LSM consumers either, or even the mid-LSM consumers. In their latest results, Woolworths noted a higher impairment coverage charge in Woolworths Financial Services.
Bring all of those pressure points together and what do you find? You find a consumer who simply cannot make ends meet in South Africa. And we can go back to that Two-Pot withdrawal period to really see that play out. It was amazing for me at the time and it's just a reminder of how bad the struggles are out there, so you had people withdrawing from their retirement savings just to live.
Old Mutual had a survey at the time, and the stat was that over 35% of people withdrawing money were estimated to be using it for day-to-day expenses. I've seen some other stats and some other analysis on credit card spending, etcetera, that wasn't quite as severe as that. But the point is that people dug into their retirement savings just so they could live, or pay off debt, or try to catch up on the fact that they fall behind every single month. So, that is why the consumer sector here has been so tough.
What does that mean for investors? Short and sweet, it means two things. One, your value-based, grocery-type retailers are probably your safest bet, and value-based apparel probably is your second safest bet. Discretionary categories obviously struggle more.
Second point I would raise: turnarounds are really hard. In this environment, a weaker consumer business is going to really struggle to actually turn the corner, whereas a strong consumer business can at least do okay. I think that's maybe the third point there. That in an environment like this, it's hard to have a winner. It's just relative losers. There are very, very few winners in South African consumer stocks at the moment.
Mohammed Nalla: That is incredibly sobering. Relative losers. You’re seeing some commonalities between the pressure points I've mentioned for the mid- and lower-LSM consumer in the US and what you're seeing down in South Africa. In fact, this week in Magic Markets Premium we're covering Costco, because that's a great way to have a look at what's happening with the consumer picture in the US, but from the bottom up rather than looking at the macro data.
In South Africa, I think you see that. In the US, it's being masked by a lot of those other mega-themes like AI and a lot of the investment that's happening up there. And that's very different to what you're seeing down in South Africa, where there's maybe a deficit on the investment side as well.
Unfortunately, that's all we have time for this week. To our listeners, let us know what you thought of the show. Hit us up on social media.
It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or go find us on LinkedIn. Pop us a note on there.
Until next week – same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
