For the period ended March 2020
The following market review looks at the performance over the past quarter of local and global asset classes and currencies, and puts this into perspective relative to longer-term performance. The purpose of this review is to provide a context in which the performance of the investment solutions in which you are invested can be assessed.
The first quarter of 2020 saw investor risk appetite fall sharply, especially in the second half of the period when news flow on the Covid-19 pandemic, the global economic outlook, and financial markets conditions all deteriorated very rapidly. Whilst investors were of course monitoring the Coronavirus story throughout the quarter, the prevailing view was that it would be contained in China and it would not have a material economic impact across advanced economies. However, that assumption was quickly abandoned when it became clear that significant outbreaks had occurred in Italy, Iran and Korea, and that the virus was spreading globally.
Volatility across all asset classes rose to extremes in March, with occasional periods of significant stress. As governments reacted to the spread of Covid-19 by bringing forward increasingly draconian social restrictions, it became quite apparent that the economic fall-out would be severe, at least in the short term. In the financial markets, companies and individuals reacted to expectations that their cash flows and income could be disrupted
by drawing down on investments and reserves to help bridge the downturn. This “dash for cash” was compounded by enforced margin call pressures which led to unusual trading patterns, with some listed assets changing hands at very low prices.
With the benefit of experience gained in the 2008/9 financial crisis, policy makers reacted quickly to the growing crisis, announcing massive monetary and fiscal stimulus packages. Any central banks with room to cut interest rates did so, with most promising significant (and in some cases, unlimited) quantitative easing “QE”. Central banks will use QE to boost liquidity and lending, as well as to backstop critical markets such as the commercial paper (ie money markets), sovereign bond and corporate debt markets. QE will also be used to control (ie suppress) sovereign bond yields to minimise government borrowing costs. For their part, governments announced substantial fiscal packages offering a broad range of grants, loans, tax deferrals and guarantees aimed at supporting both businesses and individuals through the crisis.
As well as facing the fall-out from the COVID-19 pandemic, a second factor that added to market pressures was the collapse in the oil price which resulted from the breakdown of the OPEC+ talks. Having fallen over 50% in March, the oil price now trades in the low-to-mid US$20s per barrel, with reports that physical oil for immediate delivery is changing hands well below those levels. If this level of pricing is sustained, much of the North American oil industry (and various other higher cost producers) will suffer significant losses, and probably be driven to bankruptcy. Faced with such a drastic change in circumstances, energy-related equities and bonds (major sectors within both asset classes) fell sharply.
As risk appetite recoiled through the quarter, the MSCI AC World Index fell -21.4% when measured in US dollar terms. The decline in equity markets was broad based, with all regions or countries suffering. The most robust regions / countries were Japan (-16.8%), Asia ex Japan (-18.4%) and US (-19.8%), while the weakest were the UK (-28.8%), Emerging Markets (-23.6%) and Europe ex UK (-22.8%). At the sector level, defensive sectors significantly outperforming economically sensitive areas. As such, those that provided the most downside protection were Healthcare (-11.2%), Information Technology (-13.6%) and Consumer Staples (+13.8%), while those in the most trouble were Energy (-43.8%), Financials (-31.6%) and Materials (-27.1%). Finally, in terms of style, Growth (-15.7%) outperformed Value (-27.0%), while Smaller Companies (-30.1%) trailed Larger
The flight towards safe havens saw sovereign bonds rise, while other lower quality parts of the fixed income asset class sold off. Over the quarter, the JP Morgan Global Government Bond Index rose +4.7%. In contrast, corporate and Emerging Market bonds were knocked on worries about the impact of recession and the ‘dash for cash’ that saw heavy redemptions lead to forced sales and a rapid spread widening. Over the quarter, the ICE Merrill Lynch Global Corporate Investment Grade and High Yield Bond Indices were down -4.2% and –
13.5% respectively, while the JP Morgan Emerging Market Bond Index fell -11.8% (all hedged to US dollars).
Most commodities lost ground on worries about over economic decline and reduced demand. This was especially true in the case of oil, where concerns over rising production and inventories levels exacerbated the situation. Over the period, the Bloomberg Commodities Index fell -23.3%, with Crude Oil giving up an astonishing -66.5%, and Industrial Metals -18.5%. The only significant sector that bucked the trend was Gold (+4.5%), which reflected its safe haven status.
In the foreign exchange markets, one notable feature was the broad strength of safe haven currencies. The Japanese yen and Swiss franc were the strongest currencies, rising +1.0% and +0.6% respectively against the US dollar, while the euro (-1.6%) and the pound (-6.7%) were both weaker. A second notable trend was the marked weakness of some of Emerging Market currencies, which fell on worries as to how well their economies and finances will cope with the challenges they face. Some of the more significant fallers included the Brazilian real (-29.2%), South African rand (-27.4%), and the Mexican peso (-25.1%).
Note: All quarterly data is quoted in US dollar terms unless otherwise stated.
We started the year with electricity shortages continuing to plague the country. Eskom CEO Andre de Ruyter, informed South Africa that the power system will remain vulnerable to load shedding for at least 18 months to allow much needed maintenance work. This is likely to weigh on growth potential. However, a predictable schedule allows South Africans a better chance of navigating the impact until the door is opened for independent power producers (this was confirmed at the Mining Indaba but requires formalisation) and repair work at Eskom brings some operational stability.
The South African Reserve Bank (SARB) surprised the market on 16 January with a 25bps interest rate cut. The decision was unanimous, despite an acknowledgement of risks to the rand and financial stability from a strained fiscus. The December inflation print confirmed inflation for 2019 at 4.1%. With little inflationary pressures and a weak demand environment, the SARB had room to cut.
The State of the Nation Address on 13 February sought to highlight the areas where implementation (rather than pledges) was underway, including in critical areas such as energy reforms and youth unemployment. It remains painfully clear, however, how much more still needs to be done. The president drove home principles of accountability and the need for a social compact for change across the broader society. In many ways, this was a prelude to the steps to be announced in the February budget later that month.
Against a difficult backdrop and low expectations, Finance Minister Tito Mboweni presented a reasonable budget on 26 February that even delivered some positive surprises. Tax payers received marginal relief on personal taxes, in addition to transfer duty adjustments. Arguably the bigger surprise, the 2020 Budget also proposed meaningful reductions to compensation spending (circa R160bn over the medium term), signalling the clearest
resolve to date to slim down the public sector wage bill. After a short-lived rebound, domestic bond markets gave way to scepticism around the ability to successfully negotiate with unions and comments from credit ratings agency that commended government for taking steps in the right direction, but highlighted budget deficits that still look grim and a fiscal trajectory that fails to consolidate, even with the proposed expenditure cuts.
March 2020 was certainly eventful, with news flow predominantly centred around the outbreak of the Coronavirus – which was declared a global pandemic by the World Health Organisation in early March. In South Africa, on the:
We are in the early stages of this unprecedented time, but there is no doubt that the economic cost of the pandemic will be great. The government has provided relief through several fiscal measures, targeted at those that would be most affected, such as small businesses and more vulnerable communities. Banks are also providing relief, while private sector pledges will help at the margin. Government finances are however constrained and therefore less stimulus will be available than what has been offered elsewhere in the world.
The SARB responded to a benign inflationary environment – which was reinforced by the implosion of global oil prices – and recessionary backdrop with a 100bps interest rates cut. This is the largest move we have seen in some time. Although this preceded the lockdown announcement, more may be on the cards as the impact on the economy unfolds.
We can tell by the daily swings that markets did not always know how to react. The FTSE/JSE All Share ended the month down -12.1% – after experiencing 11 positive days with an average move of +3.1% per day, and 11 negative days with an average move of -4.1% per day. This is its worst monthly return since September 2008, when the domestic equity market fell -13.2% and only reached the trough of the Global Financial Credit Crisis
on 20 November 2008. Domestic equities already had a weak start to the year with the FTSE/JSE All Share losing -1.7% in January and -9.0% in February. Although the pain was felt across the board, smaller capitalisation counters were most exposed. The financial sector also saw significant price movement with bank share prices reaching multi-year lows.
The property sector continued its downtrend and ended the quarter down -48.2%. Landlords currently face unprecedented pressures as tenants, including large retailers, seek rental holidays while in lockdown and potentially beyond.
Domestic bond markets benefitted from an easing in monetary policy as well as international sentiment in favour of safe havens such as bonds, with the All Bond Index gaining +1.2% in January. The market moved little on Moody’s announcement at the end of March, overshadowed by the global crisis and the news that the WGBI rebalance would be delayed to the end of April. Nonetheless, the All Bond Index suffered a -9.7% decline in
March on the back of global uncertainty and poor investor sentiment.
After holding up well despite all the local travails, the rand finally gave way in February, depreciating with other Emerging Markets currencies and losing 6.8% against the US dollar as angst around the coronavirus increased over the month. The rand fell to its lowest level ever against the US dollar at the end of March and has since breached the R19-level. The recent weakness is mainly driven by Moody’s decision. The rand depreciated by 21.7% over the quarter.
The tables below provide a review of key local and international investment indicators for the past quarter, as well as over longer periods.
(Performance over periods to 31 March 2020)
|Asset class||Indicator||3 months||1 year||3 years||5 years||LT-average*|
|Equities||All Share Index||-21.4%||-18.4%||-2.1%||-0.1%
|Shareholder Weighted Index||-23.3%||-20.9%||-4.6%||-1.9%|
|Property||Listed Property Index||-48.2%||-47.9%||-23.0%||-13.5%||11.8%|
|Bonds||All Bond Index||-8.7%||-3.0%||5.3%||5.2%||6.9%|
|Inflation||CPI (one month in arrears)||1.5%||4.6%||4.2%||5.2%||5.7%|
Global asset classes ($)
(Performance over periods to 31 March 2020)
Asset class Indicator 3 months 1 year 3 years 5 years LT-average*
|Asset class||Indicator||3 months||1 year||3 years||5 years||LT-average*|
|Equities||MSCI AC World Index||-21.3%||-10.8%||2.0%||3.4%||8.5%|
|Property||FTSE EPRA/NAREIT Developed Property Index||-28.3%
|Bonds||Barclays Global Bond Index||-0.3%
|Cash||US 3-month deposits||0.4%||2.1%||1.9%||1.3%||4.3%|
|Inflation||US CPI (one month in arrears)||0.6%||2.3%||2.0%||2.0%||1.6%|
(Movements over periods to 31 March 2020)
|Currency||Value at month-end||3 months||1 year||3 years||5 years||LT-average*|
|Rand / Dollar||17.86||-21.7%||-19.3%||-9.1%||-7.5%||-5.5%|
|Rand / Sterling||22.15||-16.4%||-15.1%||-8.9%||-4.1%||-4.1%|
|Rand / Euro||19.60||-19.9%||-17.4%||-9.9%||-7.9%||-5.5%|
*Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
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