Ninety One Market Review - Quarter ending 30 June 2020

Macro Market Review

Jul 9, 2020

12 minutes

Macro Market Review

We have a lot more to go. So anyone who talks about a [coronavirus] peak today doesn’t understand that we have an incredible journey ahead of us yet

– Dr. Michael Osterholm is the director of the Center for Infectious Disease Research and Policy at the University of Minnesota

Global market performance

The second quarter was a welcome return to some level of normalcy on the economic and humanitarian front. The coronavirus (COVID-19) infection curve began to flatten across regions in April and many countries in the developed world have since begun the phase of lifting restrictions and reopening economies. Financial markets, however, appeared ‘disconnected’ from the real economy throughout the second quarter, as investors opted to take a more forward-looking view. Aiding and abetting this view has been the continued rounds of fiscal and monetary stimulus which has served as the buoy keeping investors afloat as they try to get their bearings right in these uncertain times. Nonetheless, trading activity remains fluid and highly sensitive to health metrics, developments in anti-viral drug trials and vaccines, and trade tensions between the US, China and the European Union.

By quarter-end, developed market stocks (MSCI World Index) had posted gains of 18.8%, ahead of their emerging market peers (MSCI Emerging Markets Index) which were not far behind at +17.3%. In regional markets, the US benchmark S&P 500 Index registered its best quarter since 1998 with a total return of +20%. The Euro Stoxx 600 finished the quarter up 16.4%, as positive data surprises on the economic recovery spurred cyclical sectors such as autos and financials. In Asia, Japan’s Topix (+11.2%) recorded one of its best quarters in recent years on improving health metrics and aggressive buying of exchange-traded funds by the Bank of Japan. Elsewhere, mainland China’s CSI 300 (+5.8%) closed relatively lower than major indices as tensions with the US ratcheted up. In yield-oriented assets, government bonds held up well despite the risk-on rally, with US Treasuries and Gilt yields moving lower on the back of torrential monetary stimulus. The Bloomberg Barclays Global Aggregate Bond Index finished the quarter up 3.3%, while global investment-grade credit rallied to near double-digit returns.

All returns are quoted in US dollars.

United States

The US economy shrank by -5.0% in the first quarter of 2020, capping the end of the longest ever recorded period of expansion in the US. This was the sharpest contraction in growth since the global financial crisis (GFC), owing to the forced shutdown of economic activity, brought on by COVID-19 and the millions of jobs shed since mid-March. The manufacturing purchasing managers’ index (PMI) came in just shy of the expansionary 50 mark, at 49.8, up from the previous month’s reading of 39.8 as cities and counties began to lift restrictions. In labour markets, non-farm payroll numbers were stronger than expected, with 4.8 million jobs added in June, while the unemployment rate coming down to 11.1%. This robust momentum, however, remains at risk given the resurgence of coronavirus cases across the country. The US Federal Reserve (Fed) presented a rather gloomy assessment of the US economy’s prospects over the medium term, which Fed Chair Jerome Powell said will require continued support from policymakers. The Federal Open Market Committee (FOMC) kept policy unchanged, leaving the Federal funds target range at 0.00-0.25%. The Fed currently forecasts US GDP growth to contract by 6.5% in 2020, before bouncing back 5.0% in 2021. The so-called ‘dot plot’ revealed that top officials expect rates to remain near zero, at least through the end of 2022. Yield curve control was also an item of discussion on the FOMC agenda as a potential policy tool and flexible approach that could be adopted in future to manage long-term interest rates. In politics, tensions between the US and China re-entered the spotlight as Washington rebuked Beijing over new sweeping national security laws for Hong Kong. Meanwhile, the inhumane killing of an unarmed George Floyd by police officers saw protests erupt across the US and the rest of the world, with the Black Lives Matter movement fuelling an unprecedented level of awareness on police brutality, racial intolerance and persisting systemic inequality.

Euro area

The eurozone composite PMI rose to 47.5 in June, from 31.9 in May, showing signs of a recovery underway as economies ease lockdown restrictions. While it is the best reading in four months since lockdowns were imposed, it nonetheless reflects an economy still in contraction given the marked contraction in manufacturing (46.9) and services (47.3) in June. Other more real-time indicators such as energy usage and large goods vehicle traffic on toll roads have also rebounded strongly across the region. The European Central Bank (ECB) expanded its bond-buying programme (Pandemic Emergency Purchase Programme) aggressively during the quarter, more than economists had predicted – further propping up hopes of a recovery. The central bank has for the first time offered multi-year loans to banks at interest rates below the main deposit rate under its main refinancing scheme, effectively subsidising the banking sector. The increase in the ECB’s lending programme to circa €1.6 trillion will balloon the bank’s balance sheet above €6 trillion – half the eurozone’s GDP. All that said, the recovery in the area will heavily be determined by a strong recovery in Germany, which has also served as a medical model on the COVID-19 response in the area. The country’s mammoth stimulus package of c.10% of GDP has been given an additional boost by the announcement of a bold post-pandemic stimulus package to the tune of €130 billion. The ECB expects the eurozone economy to shrink by 13% in the second quarter of 2020. Notwithstanding a recovery in the second half of the year, a return to pre-pandemic levels is only envisioned for 2023.

United Kingdom

The UK economy contracted at the sharpest pace in the first three months of 2020, owing to weak investment and export activity as well as a consumer staying indoors due to social distancing measures. April growth shrank by a record 20.4%, which is being viewed as a bottoming out in the downturn. The easing in lockdown restrictions has already seen manufacturing activity lifted over the 50 mark with a reading of 50.1, from 40.7 the previous month as output picks up from a partial reopening of manufacturing plants. This direction of travel is likely to carry into the third quarter as sectors such as hospitality and tourism come back online, as well as the relaxation of social distancing from the 2 to 1-metre rule. On the monetary front, Bank of England (BoE) Governor Andrew Bailey noted in an opinion article that he prefers reversing some of the £300 billion of quantitative easing rather than raise interest rates. This came following growing concerns surrounding the bank’s independence and that it is financing the government’s deficit after Bailey commented that the UK government would have run out of money had the bank not stepped in with monetary stimulus in March. In politics, Prime Minister Boris Johnson struck a cautious tone as he announced plans to end the lockdown, acknowledging the backlash in how the government handled the outbreak as well as the potential risks of reopening too soon.


In a symbolic move mid-way through the second quarter, China’s National People’s Congress abandoned setting a GDP target for the first time. In the work report delivered on 22 May, China expects to raise the fiscal deficit to more than 3.6% of GDP, from 2.6% in 2019, alongside treasury bond issuance totalling RMB1 trillion as part of the COVID-19 economic response. Official data releases at quarter-end confirmed that the gradual pickup in economic momentum remained on course, with exports and services bolstered by government support and reopening in other economies. The official manufacturing PMI rose to a three-month high of 50.9 in June, up slightly from 50.6 the previous month. The reading was a beat on consensus expectations of 50.5, sustaining the expansion for four consecutive months of expansionary activity and the largest reading since December 2019. While China might see growth return to positive territory in the quarter, the regional and sector-wide variance in recoveries will continue to hamstring forward momentum, and the jobs data releases suggest that demand is still lagging. The silver lining here, however, is that the fiscal and monetary taps are likely to remain open for some time, though far from a deluge. The People’s Bank of China (PBoC) reiterated its commitment to “more powerful” measures to counter the weight of the economic challenges brought on by the pandemic as it pledged temporary purchases of loans made out to small businesses from some local banks – signifying a new policy response to bolster the supply of credit to the real economy. In politics, Hong Kong is shaping up as the new battle ground for Cold War 2.0 between China and the US after Beijing passed new security laws for Hong Kong which it describes as the “sword of Damocles” hanging over its most strident critics. The laws give Beijing a much stronger grip in policing dissent in Hong Kong, criminalising “acts of secession, subversion of state power, terrorist activities, and collusion with foreign or external forces to endanger national security.”

South Africa

At the time of writing, coronavirus cases in South Africa had climbed to 144, 864 cases and 2,529 confirmed deaths. The uptick in infections has quickened ahead of initial forecasts with the Gauteng province (which is home to the economic and administrative capitals, Johannesburg and Pretoria, respectively) recording a c.15% rise in cases since early June. Health Minister Zweli Mkhize warned that this new surge in cases may see the reintroduction of “localised restrictions”.

South Africa’s economy contracted by an annualised 2.0% quarter on quarter in the three months ending March 2020 – the third consecutive quarter of negative growth and the longest losing streak since the GFC. While the reading came in better than economist expectations surveyed by Bloomberg, of a 4.0% contraction, the weakness is likely to elongate through the second quarter. Although the easing in restrictions since 01 May 2020 have seen a rebound in economic activity, the severe restrictions imposed on 27 March (which only allowed for essential goods and services) have led to the demise of many businesses which have not survived the economic quarantine period, and many jobs have been shed in the process. Already weak pre-COVID-19 business confidence has hit multi-decade lows, limiting private-sector investment, while the consumer remains equally depressed by growing fears over the effects of COVID-19, which are still playing out through the economy. National Treasury projects an economic slump of 7.2% for 2020, which would mark the sharpest contraction since 1931.

In public finances, Minister Tito Mboweni delivered a bleak assessment of the fiscus in his special adjustment budget announcement. This was a fiscal consolidation budget, rather than a stimulus/relief budget. Expenditure is budgeted to decline by roughly R230 billion over the medium-term, over and above the R160 billion reduction in wages that was budgeted in the February 2020 budget. Overall, these cuts amount to R390 billion over the medium-term expenditure framework (MTEF), which is roughly 8% of GDP. There was no detail on the additional R230 billion in cuts, which will likely be discussed in the October Medium-Term Budget Policy Statement (MTBPS). The cuts in the wage bill meant that the government had to reopen the 2018 wage agreement. In this budget the government has not budged on the compensation cuts, despite being taken to the labour court by the unions. The budget points out that the R160 billion in wage cuts is yet to be finalised. However, there is a stern warning that should the wage cuts not materialise, larger reductions to wages and other expenditure will be necessary in the outer years.

Commodity markets

After a harrowing first quarter as COVID-19 decimated global demand, commodity markets enjoyed a turnaround in fortunes over the second quarter, with most commodities finishing the quarter on solid footing. While the virus and Saudi-Russia prices war saw oil prices fall below US$0 for the first time ever in late April, the glut in supply has since receded on the back of record supply cuts by OPEC+. Furthermore, the resumption of fuel demand as major economies eased lockdowns saw the oil price surge to c.US$41 per barrel at the close of the quarter. Iron ore has also seen a reversal of fortunes underpinned by supply disruptions in Brazil and the pickup in industrial activity in China, where steel output is now trending at robust levels. Precious metals traded on the front foot as Fed Chair Jerome Powell stressed the economic damage to be expected from COVID-19. Bullion recorded its best quarter in four years as the muddy waters of the economic recovery and super low rates attracted demand for its ‘safe haven’ appeal. The Bloomberg Commodity Index ended the quarter up 5.1% in US dollars.

Figure 1: Q2 2020 % change (US$)

Market Review - Q2 2020 commodity table

Source: Bloomberg as at 30.06.20

Domestic market performance

The South African stock market participated in the global rally over the quarter, posting its best quarterly performance since the Dot-com Bubble burst in 2001. The benchmark FTSE/JSE All Share Index ended the quarter up a robust 23.2%, with the Capped SWIX Index not far behind at +21.6%. At a super sector level; resources (+41.2%) continued to spearhead performance, led by the gold miners, while industrials and financials rallied to close 16.6% and 12.9% higher. Despite falling out of the FTSE World Government Bond Index (WGBI), local bonds (JSE All Bond Index, +9.9%) recorded near double-digit returns for the quarter, tracking a firmer rand and the boost in risk sentiment from the tidal wave of central bank stimulus. Local listed property (FTSE/JSE All Property Index, +18.7%) managed to finish the quarter strongly as severely affected sectors such as hospitality and retail resumed operations – year-to-date returns however remain deep in negative territory at -38.4% – reflecting the dislocation to bonds. Cash as measured by the STeFI Composite Index closed +0.5% higher. In currencies, the rand rallied 2.8% against the US dollar, 3.1% against sterling and 1.0% against the euro.

At the sector level, basic materials led the rally on the back of robust precious metals prices with platinum-group metals (PGM) (Northam Platinum and Anglo American Platinum) and gold (DRDGOLD and Harmony Gold Mining Co) miners the standout performers. Chemicals and energy company Sasol (+258%) was the biggest percentage mover on the bourse as positive strides to shore up its finances and a recovery in oil prices attracted investor attention. The healthcare sector has been among the best performing sectors on the bourse amid the ensuing health crisis with Aspen Pharmacare seeing an unusual spike in demand for its drugs since the advent of coronavirus. Telecommunications and media have also been benefactors of the Great Lockdown. The former has been among the more resilient businesses during the pandemic as populations have been forced to work and be entertained from home. With online services and entertainment becoming the new normal during lockdowns, index bellwether Naspers benefited handsomely (also helped by a healthy stake in Chinese online giant Tencent, which has been on a tear in Hong Kong) over the period. Consumer services on the other hand struggled immensely under lockdown conditions, with many names releasing disappointing results during the period.

Selection of FTSE/JSE All Share Index stock performance

Name Index weight Q2 2020 % return (ZAR)
Sasol 1.1 258.0
Harmony Gold Mining Co 0.5 81.7
Aspen Pharmacare 0.8 55.2
Discovery 0.6 34.1
The Foschini Group 0.2 -4.4
Shoprite Holdings 0.8 -14.7
Clicks Group 0.7 -18.4
Intu Properties 0.0 -70.7

Source: Bloomberg as at 30.06.20

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