TWINOAKS INVESTMENT MANAGEMENT (PTY) LTD
Volume 18 Issue 3– April 2020
I find hope in the darkest of days and focus in the brightest. I do not judge the universe – Dalai Lama
COMMENT AND OUTLOOK – A Global Crisis Unfolds
The world as we have known it has changed dramatically as a result of the global Covid-19 Coronavirus pandemic. What the new normal will be remains to be seen, but things will change. The rapid spread of the virus and its impact on countries, societies and people will be felt for a long time. Economies around the world have basically come to a virtual standstill, as countries closed their borders and enforced lockdowns in one form or another. The human impact of the virus is being felt across the world. It is ramping up in some countries as the global death toll approaches 70 000 and the confirmed number of infected people reaches over 1.2 million, with the total number of cases probably quite a bit higher. Italy has been the worst hit country so far while the infections and deaths in the USA are accelerating. Spain and the UK have also experienced high levels of infection and deaths.
The rapid spread of the virus and its impact on countries, societies and people will be felt for a long time.
The impact on global markets during March was significant. Following the February declines, markets around the world fell further in March and experienced some of the most dramatic quarterly losses on record. Apart from China, global markets fell by more than 20% with some falling 30% or more. This onset of a bear market was quite swiftly replaced by a recovery of in excess of 10% but markets remain significantly below the highs reached earlier in the year. The impact on the global economy was probably most evident in the USA where first time unemployment claims reached unprecedented levels and were at 6.6 million in the last week of March with the prior week’s number being 3.3 million claims. To give this some perspective the previous highest number of initial unemployment claims was 700 000 in 1982. The market relief rally was driven by extraordinary steps taken by governments and Central Banks to provide funding to affected businesses, their workers and liquidity to financial markets, to avoid a complete collapse. The USA government came out with a stimulus and assistance package that amounts to 50% of USA gross domestic product. These are unusual steps that have been taken but the impact of global economic slowdown is rapidly being felt across the world and job losses are rising. The travel, tourism and leisure sectors have been particularly hard hit. Global sporting events have ground to a halt and the Tokyo Olympics have been postponed for a year. All this impacts on economic activity.
The USA government came out with a stimulus and assistance package that amounts to 50% of USA gross domestic product.
The oil price had a dramatic collapse of 50% during March, falling to below USD 25 per barrel. This collapse was caused in part by the slowdown in the global demand for oil as economic activity shut down, but mostly by a price war between Russia and Saudi Arabia as a result of disagreements about cutting back on production. The fall in the oil prices added to Sasol’s problems and it fell dramatically during the month. During the worst of the selloff, the JSE fell to levels last seen in 2012. It has also recovered to a degree with the rally in global stock markets but remains well below the recent early year highs. Listed property stocks have been amongst the sectors that have experienced the biggest recent price declines.
During the worst of the selloff, the JSE fell to levels last seen in 2012.
South Africa’s problems were unfortunately not confined to Coronavirus fears and the impact of a three-week national lockdown. Moodys Investor Services downgraded South Africa’s credit rating to below investment grade status or junk, as it is commonly known. They were the last of the 3 major ratings agencies to still have South Africa on an investment grade rating. This caused a rise in the yield of SA bond prices as they were sold off following the downgrade. There were also downgrades on SA banks and all the State-Owned Enterprises that have government backed debt guarantees. The logic of these additional downgrades is that the banks and SOE’s cannot have a credit rating that is higher than the country’s credit rating. The Rand has fallen very sharply since the downgrade and has reached record low levels, trading at over R19 per USD. The downgrade has been on the cards for some time now and the timing may seem unreasonable, but it could in fact be the best time for it to happen. There is so much uncertainty in markets and the fact that the global economy is heading to recession means that SA has been downgraded when everything elsewhere seems bad as well. Key factors in the downgrade were the trajectory of increasing government debt levels and budget and fiscal deficits that in Moodys view are not going to be curtailed in the current environment. Notable amongst these is the public sector wage bill and the unions are already indicating they will resist any efforts to curtail public sector wages. If they hold out and maintain their demands the outcome will be a very negative one for the country. The poor state of the country’s finances is directly attributable to the years of mismanagement and maladministration during the Zuma led government. South Africa as a country did remarkably well during the 2008/9 global financial crisis. The reason for that was that the prior years of sensible economic policies and fiscal restraint had created the capacity to get through that period without too much impact. The situation now is very different and is going to require structural reforms in several areas to regain the lost ground. President Ramaphosa seems to have created the political space that will enable that to happen. We must hope that the right decisions are now made for the country.
Source: Twinoaks
Twinoaks Investment Management (Pty) Ltd (Twinoaks) is a FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks.