Ninety One Market Review - Quarter ending 31 March 2020

Macro Market Review

9 Apr 2020

11 Minutes

Macro Market Review

Macro Market Review – Quarter ending 31 March 2020

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.”

- Nassim Taleb in his book Antifragile: Things that Gain from Disorder

Global market performance

The market moves witnessed in the final month of the first quarter were some of the sharpest in living memory. Global markets had initially downplayed the potential impact and the spread of the coronavirus (COVID-19) outside of China. New cases in other regions, however, quickly dispelled that narrative, as the reality of a potential health crisis began to permeate the discourse. Risk assets plunged as the virus forced an unprecedented sudden stop to large swathes of the global economy. Global equities (MSCI ACWI, -21.4%) recorded their worst quarter since the global financial crisis (GFC). Developed market equities (MSCI Developed Market Index) closed 21.1% lower, while emerging market equities (MSCI Emerging Market Index) came worst off, down 23.6%.

In the US, the Dow Jones Industrial Average index (-22.7%), tracking 30 large blue-chip stocks, booked its worst quarter since the ‘Black Monday’ crash of 1987. The US benchmark S&P 500 index fared little better at -19.7%. For these US indices, it was the fastest move into a bear market ever recorded.

In Europe, stock volatility tracked all-time highs as the Euro Stoxx 600 plunged 26.7%. In Asia, Chinese financial markets were less fragile over the quarter, with mainland China’s CSI300 index down only 11.5% as capital controls, domestic investor resilience and confidence that the government was on top of the outbreak helped limit losses.

Traditional safe havens (US Treasuries, German bunds, gold, US dollar, Japanese yen and Swiss franc) proved their worth. This was despite weeks of liquidity concerns in the treasury market, bullion experiencing the most severe volatility since the GFC, the greenback recording its worst week since 1985 and bunds coming under pressure from the EU’s failure to rally around a collective economic rescue strategy. The Fed’s unlimited quantitative easing (QE) and pledge to snap up as many government bonds and investment grade credit necessary helped ease some of the pressure on yield-oriented assets. The Bloomberg Barclays Aggregate Global Bond Index ended flat at -0.3%.

All returns are quoted in US dollars.

United States

On Monday 30 March 2020, the US recorded the biggest daily increase in COVID-19 cases of any country in the world since the outbreak of the virus in December. The “downside risks” risks cited by the US Federal Reserve (Fed) following the first emergency rate cut on 03 March have fully materialised into a humanitarian and economic crisis in a matter of weeks. Indeed, Fed chair Jerome Powell remarked late in March that the US economy may well already be in a recession. The manufacturing purchasing managers’ inded (PMI) slid into contractionary territory in March, coming in at 49.2 from 50.7 in February (the 50-mark separates contraction from expansion). The reading reflected the quickest deterioration in operations since the global financial crisis, although above consensus expectations of 42.9. In labour markets, US job claims shot up to a record 3.3 million on the back of the COVID-19 shutdown – the first real glimpse of damage to the US economy at the time.

The Fed was quickest out the gates among the leading central banks, and by quarter-end had slashed rates by a cumulative 150 basis points (bps), committed to unlimited quantitative easing (QE) and an unprecedented venture into corporate bond purchases following congressional approval. On the fiscal side, the White House agreed a $US2 trillion stimulus package in order to shore up the defence against COVID-19. In politics, the Trump administration has come under scrutiny for how it has handled the coronavirus outbreak, given the apparent lack of coherent strategy and messaging since the outbreak, a lack of coordination with local and state leaders as well as Trump repeatedly contradicting his own health experts during press briefings, especially in the context of the US becoming the epicentre of the outbreak.

Euro area

Europe’s economic conditions have severely degenerated since the outbreak, with many member states bringing their economies to a halt in order to tackle the health crisis. The infection rate on the continent surpassed 100,000 with around 75% of the cases coming from the four major economies of the region. The manufacturing PMI fell to 44.8 in March, from 49.2 in the previous month, although ahead of consensus expectations of 39.0. This was the sharpest pace of contraction in operations since July 2012.

The European Central Bank (ECB) launched a bigger-than-expected Pandemic Emergency Purchase Programme, which comprises an expansion of quantitative easing by €750 billion over the next nine months, in addition to the €120 billion announced earlier in March. ECB President Christine Lagarde tweeted “there are no limits to our [ECB] commitment to the euro” following the plan’s unveiling. Policymakers are, however, mindful that monetary policy alone will need to be supported by a coordinated fiscal response by member states. Thus far, the lack of any conclusive outcomes from EU meetings highlights the existing deep divisions within the EU regarding the degree to which common resources ought to be deployed to alleviate the economic devastation brought on by the pandemic. Countries such as Germany and other northern states have rejected calls for the issuance of joint debt, which has been dubbed ‘coronabonds’.


Economic sentiment dropped sharply in the first half of March before a nationwide lockdown came into effect in an attempt to contain the coronavirus outbreak – measures which threatened thousands of jobs. The sentiment indicator dropped to 92 in March from an already low 95.5 in February, paring some of the gains since Prime Minister Boris Johnson’s victory in the general election. While the government and the Bank of England (BoE) have thus far worked closely to coordinate counter measures, the UK economy nonetheless appears to be heading towards a recession in the first half of 2020. From a fiscal perspective, the chancellor announced a package of £12 billion aimed at COVID-19 spending. On the monetary front, the BoE pledged to do whatever necessary to prevent financial market disarray, which could exacerbate the downturn. The Monetary Policy Committee (MPC) left the benchmark policy rate unchanged after exhausting conventional policy responses to boost the economy following two emergency meetings in March and the reduction of the policy rate to the minimum 0.1%. QE has also been rebooted, with an additional £200 billion of sovereign and corporate bonds pledged to be bought. According to the meeting minutes, the central bank’s actions will now turn to minimising disruption and ensuring liquidity and lower costs of borrowing for firms and households in the coming months.


While China was initially the hardest hit economy from the deadly spread of COVID-19, the country now seems to be slowly returning to normalcy, following strict and intensive lockdown measures implemented by authorities. As such, the rebound in the official PMI (52 in March) from record lows in February (35.7) was not surprising, although the magnitude of the recovery surprised ahead of consensus expectations. This is another example of how effective containment measures can lead to a quicker resumption in economic activity.

China’s recovery has also been supplemented by a ramp up in stimulus measures. That said, the People’s Bank of China (PBoC) has refrained from announcing unlimited QE, a route taken by other central banks in developed markets. During the quarter, authorities have rolled out a series of interventions to limit the damage on the economy. The PBoC reinforced counter-cyclical adjustments to monetary policy via open market operations. The bank also pledged US$173 billion in additional liquidity to money markets, the largest single-day open market operation since 2004. Bank lending rates are being lowered to support companies that have been heavily affected by the pandemic, especially small and micro firms and the manufacturing sector. Additional special central bank lending to the tune of ¥300 billion has been directed toward large banks, select local banks in Hubei and other heavily impacted provinces. On Monday 30 March 2020, the PBOC reduced interest for banks further just days following Politburo approval for more borrowing.

South Africa

In South Africa, the exogenous shock of the novel coronavirus outbreak has only compounded the idiosyncratic challenges the country is battling through. Before the outbreak, the South African economy had already slipped into its second recession in as many years, shrinking by an annualised 1.4% quarter on quarter in the final three months of 2019 - much worse than consensus expectations of a 0.1% drop. This was mainly due the worst spate of rolling power outages which severely constrained several industries. The weakness in the local economy will no doubt be further intensified by the strict lockdown measures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services.

The South African Reserve Bank (SARB) cut the benchmark interest rate by 1% to 5.25% at its 19 March MPC meeting. Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this as a monetary policy reaction designed to facilitate the transmission of monetary policy – not QE or monetization of the deficit. In what felt more like a sideshow in the midst of the coronavirus outbreak, ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade within the next 18 months. The move meant that South Africa will no longer form part of the FTSE World Investment Grade Bond Index (WGBI), effective 1 May 2020.

Commodity markets

Returns from commodities over the quarter reflect the realisation of initial fears that COVID-19 could severely curtail demand for raw materials, fuel and food supplies worldwide. The Bloomberg Commodities Index ended the month down 23.3%. The big story running parallel to the coronavirus outbreak over the quarter was the oil price shock. Saudi Arabia ignited an oil price war with Russia, following disagreement over production cuts as a response to tackle the decline in oil demand due to the virus. The move by Saudi sent oil prices tumbling c.30% - recording the biggest one-day fall since the 1990s Gulf War. The collapse in the oil price has also dragged soft commodities such as sugar and coffee lower as the global growth outlook quickly deteriorated.


Q1 2020 % change (US$)

Brent Crude Oil -65.5
WTI Oil -66.5
Gold 3.9
Copper -19.8
Platinum pot/td> -25.2
Palladium 21.5
Silver -21.7
Iron Ore -7.5
Nickel -17.7
Aluminium 5.1
Zinc -4.5
Source: Bloomberg as at 31.03.20

Domestic market performance

South Africa’s equity markets continued to endure severe weakness in line with the worldwide selloff in risk assets. The benchmark FTSE/JSE All Share Index erased 21.4% of its value over the quarter, while the Capped SWIX was worse off, down 26.6% over the same period. At a super sector level; financials (-39.5%) were the hardest hit, resources extended weakness, falling 25.3% as lockdown measures sapped demand, while industrials outperformed, down only 8.4%. The South African Government bond market, much like most markets globally, unravelled during the month of March, with most of the repricing stemming largely as a reaction to flows and a preference for liquidity from foreign bond holders. Local bonds nonetheless fared better than their equity counterparts, down 8.7% for the quarter. The first three months of the year were brutal for the local listed property sector, with the FTSE/JSE All Property Index down almost 50% in the first three months of the year against a backdrop of deteriorating domestic growth conditions and external headwinds. Cash was king over the period, the only positive return across all asset classes as the STeFI Index closed +1.7% higher. In currencies, the rand delivered its worst quarterly performance since the GFC, falling 21.7% against the US dollar,19.6% against the euro and 16.1% against sterling.

At the sector level, it was red across the board, with the deterioration in demand dynamics and the growth outlook continuing to exert immense pressure on base and bulk commodities, while gold and palladium were the only green shoots. The diversified miners, including but not limited to BHP Group, Anglo American, and Glencore, posted double-digit returns. The turmoil continued for Sasol over the quarter, owing to a myriad of headwinds such as weaker-than-anticipated rand oil prices, a collapse in demand for its chemicals and oil products, as well as idiosyncratic factors such as cost overruns and operational delays at its Lake Charles Chemicals Project in the US.

Sectors that are highly sensitive to the domestic consumer and economy continued to endure weak domestic growth conditions with diversified financials (PSG Group and Old Mutual) and lenders (Nedbank and Absa Group) ending deep in negative territory on the back of a pummelled local unit and negative rating action. The bleeding continued for the food and general retailers, with Massmart recording its first full-year loss since listing on the bourse back in 2000 and The Foschini Group among the biggest laggards over the quarter. In consumer services, British American Tobacco was a ray of hope with tobacco one of a handful of industries with resilient sales during the lockdown.

Selection of FTSE/JSE All Share Index stock performance


Index weight

Q1 2020 % return (ZAR)

Naspers 1.1 11.5
British American Tobacco 3.1 2.3
Clicks Groups 2.4 1.4
AngloGold Ashanti 2.4 1.4
Growthpoint Properties 0.7 -41.8
The Foschini Group 0.3 -54.7
Nedbank Group 0.6 -61.4
Sasol 0.4 -87.8
Source: Bloomberg as at 31.03.20

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