ECONOMIC AND MARKET OVERVIEW
Global
It feels like ages ago that a global trade war dominated news. It is sobering how quickly the spread of Covid-19 and the subsequent lockdown regulations changed the world while we were making other plans.
Most governments around the world are in the process of figuring out how to best balance a return to full economic activity whilst simultaneously curbing the increase in mortality rates associated with the spread of Covid-19. Harvard epidemiologist Marc Lipsitch made a very interesting distinction; He said that there are facts, informed extrapolations from analogies to other viruses and, lastly, opinion or speculation. Against this backdrop Howard Marks of Oaktree Capital added that “the scientists are trying to make informed inferences, and there’s not (yet) enough data to…turn these inferences into facts. Most of what we have today is opinion, and much of it is either optimistic or pessimistic. The gulf in between is massive: if you read just the optimistic pieces, you’d think the virus will soon be eradicated, and the economy brought back to health, and if you read just the negative ones, you’d think we’re all done for.”
There are many theories conjecturing what the best path from lockdown to freedom of movement is. The fact of the matter is that we simply do not know for sure, and that the range of potential economic outcomes varies greatly. Markets will reflect this uncertainty as it waxes and wanes along with the changes in investor sentiment. What we know for sure is that the global economy has shrunk significantly in the last two months and won’t recover to its pre-crisis levels anytime soon. It’s therefore not clear whether the market has reached a bottom yet, as Gavekal Research’s Monthly Strategy piece for April noted (with respect to the S&P 500):
“…markets rarely clear after one massive decline. In 15 bear markets since 1950, only one did not see the initial major low tested within three months. In all other cases, the bottom has been tested once or twice. Since news-flow in this crisis will likely worsen before it improves, a repeat seems likely.”
So is now the best time to buy? Maybe not. It could, however, be a good time to put some cash to work.
South Africa
Compared to the rest of the world, South Africa had one of the stricter lockdown routines in order to curb the spread of the coronavirus. It has put an already fragile economy under enormous strain with many businesses (especially smaller establishments) struggling to pay wages and other running expenses at the end of April.
The government announced various fiscal packages to support business through these trying times. The almost R4 per liter reduction in the fuel price and 2.25% reduction in the prime interest rate (since January) equates to about a R800 billion stimulus package. This amounts to more than 15% of GDP and compares very well to similar initiatives around the world.
The flipside is that South Africa’s government debt will increase significantly in order to fund most of this fiscal stimulus. In order to successfully reduce its debt over the long term, South Africa will have to grow its economy much faster. This puts a lot of pressure on the ruling party to make significant structural changes to labour and other laws in order to improve the ease of doing business. Only time will tell if President Rampahosa and his close allies have the political will and power to enforce these changes during this trying period.
On the ratings front Standard and Poor’s Ratings Services decided to cut SA’s international credit rating from BB to BB- (BB- is three notches below investment grade) but revised the outlook from negative to stable. This reflects a qualitative view on South Africa’s ability to repay its debt. What’s interesting though is that the market (or quantitative) view went the opposite direction – South African government bond yields have rallied significantly in recent weeks and are now at lower levels than when they were rated investment grade a few months ago.
