ECONOMIC AND MARKET OVERVIEW
Global
In January this year the World Economic Forum published its annual “Global Risks Report”. This report aims to quantify both the likelihood, as well as the impact, of risks around the world. To their credit, infectious diseases (such as the spread of the Coronavirus) made it on to the top ten list of having a global impact
While readers could be forgiven for thinking that this pandemic is the only factor that will drive investment performance, it’s probably sensible to pause and reflect on the matter. According to medical experts, the Coronavirus, when compared to other infectious diseases, has a far higher transmissibility and lower mortality rate,
suggesting it resembles more closely an influenza-like disease pattern. A vaccine to prevent COVID-19, or drugs that might help to ameliorate the disease, are likely to take a minimum of a year to identify and probably longer to definitively test, and as such are unlikely to influence the course of this current outbreak. While we see uncertainty ahead, given what we know at this point the more likely scenario is that the Coronavirus impact will have a significant effect on economic activity and company earnings, but will prove to be temporary in nature.
Knee-jerk reactions by policymakers could be a real risk should this result in economic activity being shut down for longer than warranted. The cost of policy missteps could far exceed the economic impact of the virus. The key point to remember is that earnings are a key driver of equity performance. A longer persistence of COVID19 and any policy overreaction could have a longer earnings impact on some companies. This should create an ideal environment for stock picking – astute investors will take all risks
and opportunities into account when allocating capital.
South Africa
South Africa could not escape the turmoil caused by the spread of the Coronavirus. It is, however, not quite at the top of the challenges faced by the local economy.
Finance Minister Tito Mboweni delivered a budget which showed good intent but is likely to be very difficult to achieve. Visio Capital reports that, following from last year’s medium term budget policy statement (MTBPS), the budget did not try and hide the difficult position that the country’s finances are in. However, in a change from the previous few budgets which showed a significantly better outlook than their preceding MTBPS, this time the outlook appears as bad. Positively, the focus is on expenditure cuts rather than revenue (tax) increases which could be considered more stimulatory. The expenditure reduction target depends on government’s ability to negotiate lower wage increases with the public sector (trade unions). This is likely to be a very tough process though. In short, the minister seems to have done well given his opportunity set, with the focus now on implementation.
According to Statistics South Africa the South African economy shrank by 1.4% in the fourth quarter of 2019. This followed a contraction of 0.8% in the third quarter, which means that the economy was in recession for the last half of 2019. This is the economy’s third recession since 1994, however it was not entirely unexpected following Eskom’s stage 6 load shedding in December. The precarious state of local economic activity, however, seems to be reflected in the valuations of companies that depend on SA Inc. and are starting to look quite attractive from an investment point of view.
