TWINOAKS INVESTMENT MANAGEMENT (PTY) LTD
Volume 18 Issue 5– June 2020
Leadership is practised not so much in words as in attitudes and in actions. – Harold S. Geneen
COMMENT AND OUTLOOK – The World Restarts
The global economy is slowly restarting as many parts of the world end the lockdowns imposed to contain Covid-19 spread. Questions are being asked about whether the total lockdowns were an efficient means of slowing down the spread of the virus and saving lives or whether a more targeted approach should have been used. This debate will continue for some time, but Sweden has indicated that its approach of maintaining an open society and economy, could have been better managed. While debates about the medical science of the Coronavirus continue, the impact of the pandemic on the global economy is reducing as people return to work and economic activity resumes in the major economies. The economic downturn caused by the impact of the virus is the largest since the Great Depression. However, the global stock markets appear to have shrugged off the bear market that saw one of the steepest declines ever in markets. The recovery in markets that started in April, continued through May and early June and markets are almost back at the levels they were at prior to the crisis. If this is sustained it will be one of the biggest market corrections and recoveries on record. It also suggests that the economic recovery from the pandemic will be rapid and that economic activity will be back to pre-crisis levels in a reasonably short period of time. Given the economic downturn, markets are now more expensively valued than they were at their February peaks when there was economic expansion, rather than the severe contraction currently being experienced.
The economic downturn caused by the impact of the virus is the largest since the Great Depression.
The primary driver of the stock market recovery has been the intervention of the US Federal Reserve and other Central Banks in providing liquidity to the financial markets and direct participation in market activity. This has given investors the confidence to look through the current crisis and to take the view that the combination of central bank monetary intervention and government fiscal support, will result in a rapid return to economic expansion. The worst of the economic impact of the downturn is still to come as the second quarter of the year will be more affected than the first. Unemployment in many parts of the world has risen sharply, and in the USA, it reached unprecedented levels with close to 40 million people losing their jobs by the end of May. A recent US Bureau of Labour Statistics survey indicated that there had in fact been 2.5m new created jobs in May and that the US unemployment rate was 13.3%. This is a much better number than had been anticipated and it was welcomed by the markets. It does however seem that there has been a significant omission of some data from the survey and that the USA unemployment rate is in fact over 16%. These numbers matter in the world’s largest economy as it is a barometer for market behaviour. The real picture will emerge over the next few weeks and months.
The worst of the economic impact of the downturn is still to come as the second quarter of the year will be more affected than the first.
There are many sectors of the global economy that will resume activity quite quickly but others that will take longer. Some of the sectors that will take longer are the biggest employers, such as the hospitality, tourism, and travel industries. The increase in the oil price is an indicator of increased demand as activity picks up. It is also a function of agreed supply cutbacks particularly between Russia and Saudi Arabia. As the world emerges from the crisis the impact of what has happened will unfold. A staggering amount of debt has been created through the steps taken by central banks and governments to mitigate against the effects of the crisis. The US and European central banks have indicated they will continue to provide whatever support is needed to maintain stability. We just must hope that they can continue to fulfil that undertaking. While we have very low interest rates at present some commentators are suggesting that what is being done will result in an increase in inflation in time and lead to a reversal of the low interest rates that are in place. The very high levels of debt will make that a problematic outcome for many countries.
A staggering amount of debt has been created through the steps taken by central banks and governments to mitigate against the effects of the crisis.
In South Africa, the hard lockdown has been eased but the worst of the virus health crisis, lies ahead. Infection numbers are increasing and will continue to do so until infections reach their peak in 2 to 3 months. The reduction to level 3 lockdown has been welcomed from a business and economic perspective but it is still a long way from normal activity and many sectors are still not able to operate. The government has expanded its support programs, but these come at a cost. The revised 2020/21 budget will be presented on 24 June and that will give an indication of the plans for the future direction of the economy. Interest rates were cut again during April, but we may have seen the last of the rate reductions as inflation is now projected to be below the Reserve Bank’s target of 3-6% for the foreseeable future. If that is the case, then the need for further rate cuts may be reduced. The Rand has recovered from the very low levels it reached in April as investors look for higher yielding investments. Despite the credit rating downgrade returns on South African bonds are very attractive to foreign investors. The easing of the much-maligned lockdown regulations will start being felt as the pace of business activity picks up. It will not be what we were used to for some time, but it is a start. What is going to be more important are the policy decisions relating to the economy. We must watch this closely as it will give good guidance about which ANC faction is in fact in charge.
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.