May 14, 2020
We are all Keynesians now.
Milton Friedman - 1976 Nobel Prize winner in Economics for his achievements in the fields of consumption analysis, monetary history and theory and the complexity of stabilisation policy.
Following a historic first quarter – characterised by extreme swings in financial markets, all-time high volatility and unprecedented sell-offs across most asset classes – April was a semblance of some return to normalcy. Notwithstanding the persistent rise in total coronavirus (COVID-19) cases during the month of April (in excess of 3.6 million at the time of writing), the rate of infections in some countries began to flatten during April, with some countries planning to slowly reopen their economies and ease lockdown restrictions. Financial markets appeared to shrug off a slew of troubling economic data during the month – choosing to rather look to the future, with the continued monetary and fiscal support from policymakers providing another shot in the arm for risk sentiment, while volatility came down from the extreme levels experienced during March. Developed market equities (MSCI World Index) led the strong recovery, up 11% over the period, ahead of emerging market stocks (MSCI Emerging Markets Index) which also posted a healthy +9.2%. Regionally, market leadership came from US equities, (notably big tech and pharmaceuticals) with the benchmark S&P 500 (+12.8%) posting its best month since 1987 and recouping close to two thirds of its declines since the advent of coronavirus. European equities also shrugged off the collapse in economic activity, as the Euro Stoxx 600 rallied 6.0% in April. In Asia, the Japanese Topix rose 5.2%, while targeted support measures propped up Chinese equity markets as the mainland China CSI 300 Index closed 6.5% higher. The “whatever it takes” mantra adopted by leading central banks in tandem with the unprecedented fiscal stimulus, shored up fixed income markets during the quarter. US Treasury yields tracked lower (yields fall as prices rise), while across the Atlantic, gilts and German bund yields drifted lower and further into negative territory. The Bloomberg Barclays Global Aggregate Bond Index ended the month 2.0% higher.
All returns are quoted in US dollars.
The novel coronavirus saw the United States economy record its sharpest rate of contraction over the first quarter of 2020 since the tail end of 2008, thus ending the longest economic expansion in the history of the US. The 4.8% contraction in GDP growth was worse than consensus expectations of 4.0%, and expectations for second quarter growth are even worse. Business and consumer spending went into freefall, export activity suffered severe shrinkage as lockdowns disrupted international trade. In labour markets, jobless claims surpassed 30 million in the six weeks since the start of the lockdowns. The persisting economic uncertainty and collapse in labour markets has ultimately sent consumer confidence into remission. The US Federal Reserve (Fed) Open Market Committee (FOMC) left the Federal funds target rate unchanged at 0.00-0.25% and left its open-ended quantitative easing (QE) programme intact. This decision found unanimous support within the committee following a string of aggressive policy easing measures implemented in preceding ad hoc committee meetings, which have included; a cumulative 150 basis points (bps) cut in rates, unlimited buying of government bonds, the purchase of investment grade corporate bonds and high yield bonds (T&Cs apply), as well as corporate bond exchange-traded funds (ETFs) and select high yield ETFs. In the subsequent press conference, Fed Chair Jerome Powell highlighted the importance of Congress stepping up in efforts to stem the economic malaise beyond the Fed’s remit. The White House has thus far committed more than US$2.5 trillion in stimulus to-date.
The euro area’s economy contracted by 3.8% in the first quarter of 2020. This was above consensus expectations of -3.5% and the sharpest contraction in growth since comparable records began in 1995 as COVID-19 forced large swathes of economies across the region into hibernation. Spain and Italy recorded the deepest contractions, while the French economy also entered a recession. The International Monetary Fund (IMF) forecasts 2020 GDP to contract by more than 7% alongside substantial deterioration in fiscal deficits and debt levels in the area. In comparison, the eurozone economy contracted by 4.5% in 2009 owing to the Great Recession. The European Central Bank (ECB) kept its QE programme and policy rates in place when the Governing Council (GC) met at month-end. Key policy rates were left unchanged in line with consensus expectations. There was also an increased flexibility and focus on government bond buying in the hardest-hit member states (i.e. Spain and Italy) as a result of the virus. In addition, the bank also eased collateral requirements to include high yield assets so as to support small -to medium-sized businesses. An emergency support plan to the tune of €540 billion was launched in April, while the European Council also announced a recovery fund, pending further details. On the health crisis front, the number of new cases in Italy began to flatten during the month, with authorities beginning to ease restrictions and a gradual reopening of the economy. The flattening of the curve has similarly enabled countries such as Spain, France and Germany to begin relaxing lockdown restrictions.
In the UK, the forced lockdown saw manufacturing and services activity in the UK plunging to record lows. The manufacturing purchasing managers’ index (PMI) for April was revised lower to 32.6 in April 2020, reflecting the deepest contraction since the survey began back in January 1992. The severe deterioration in activity portends an even deeper downturn in the UK economy over the second quarter. The once robust labour market has also fallen from great heights, with millions of workers losing their jobs since March to mid-April. The government announced 100% state-backed and fast-tracked loans for small and medium enterprises, in addition to other measures such as the furlough scheme, extra credit provisions and tax deferrals. The Bank of England (BoE) projects an economic contraction of historic proportions, with output plunging c.30% in the first half of 2020. Unemployment is likely to rise to c.9%, despite government efforts to protect many employees from being laid off. This would cap the highest jobless rate since the global financial crisis. Speaking in a conference call mid-April, newly minted BoE governor Andrew Bailey warned that the continued “scarring” to the British economy is likely to create a long-lasting hangover. On the Brexit front, the first rounds of trade arrangements concluded in late April with very little progress, while the big end of June deadline looms. By end of June, the UK will be faced with two choices: 1) ask for an extension in the transition period, thus remaining under the EU trade regime, or 2) fully commit to an exit come year-end.
The Chinese economy has endured a pronounced slowdown, which has also had a material impact on the global economy at large on the back of the coronavirus pandemic. GDP growth contracted by 9.8% in the first quarter of 2020, slightly ahead of consensus expectations of -9.9%. This marked the first contraction on record as COVID-19 decimated production and consumption. While April has seen a recovery in production, investment and retail sales following the reopening of the economy, the pickup in economic activity is likely to stutter and forward momentum will rely on how successfully other economies manage to come back online. This is especially true considering demand for Chinese goods from large economies such as the euro area and the United States is likely to remain subdued due to lockdown restrictions. A second wave of contagion is also a major risk factor which could see authorities keep social distancing measures in place for sectors most conducive to contagion. On the monetary front, the People’s Bank of China (PBoC) provided more stimulus during the month as it reduced the 1-year targeted medium-term lending facility (TMLF) rate by 0.2% to sub-3%. The 1-year and 5-year prime rate loans (PRLs) were similarly reduced by 0.2% and 0.1% respectively. In politics, US President Donald Trump has reignited trade war rhetoric, suggesting that new tariffs on Chinese goods would be “the ultimate punishment” in plans by his administration to hold Beijing “accountable” for the coronavirus outbreak. This has left many in Washington and New York wondering whether the mini trade deal concluded a few months ago was credible or merely a domestic political play by the Trump administration.
In South Africa, the government extended the initial 21-day lockdown which took effect on 27 March 2020 owing to an uptick in coronavirus cases. While the government’s response to the outbreak has thus far managed to stem contagion from spiralling out of control, concerns continue to escalate regarding containment measures, with national support for the lockdown waning due to the economic implications and some ministries coming under fire. On the economic front, Statistics South Africa (StatsSA) rolled out a survey between 30 March and mid-April which found that circa 46% of businesses were on temporary shutdown. The disruption to supply chains has also hamstrung activity, with nearly a third of respondents saying they have been unable to source goods, services and inputs for their operations. More than 40% of responding firms expressed concern that they are unlikely to come out the other end of the pandemic. The manufacturing PMI tumbled further down to 46.1 in April from 48.1 the month prior. The latest reading marks the ninth consecutive month of contraction in the manufacturing activity – reflecting the strain on factories from the lockdown. Adding salt to the wound, S&P Global ratings downgraded the country’s long-term foreign currency debt to three levels below investment grade, citing the strain COVID-19 will place on the country’s budget and economic trajectory. The IMF projects South Africa’s economy to shrink by 5.8% this year, while the South African Reserve Bank’s (SARB) are for a 6.1% contraction, a massive jump from the mere 0.2% it projected late March. The central bank opted to cut the repo rate by a further 100 basis points at an emergency Monetary Policy Committee (MPC) meeting over the Easter Weekend, bringing the benchmark rate to 4.25%. The MPC looks set to announce further interest rate relief and support when it convenes at its scheduled 19-21 May meeting.
Covid-19 has sent commodity markets into the depths of sorrow, and the energy sector has borne the brunt of the calamity. The virus has had an immense impact on both the demand and supply of most commodities in recent months. The sudden stop in economies and the unprecedented halt to travel has tested the resolve of oil prices, with the US benchmark crude price briefly turning negative during the month. April saw demand for oil plunge by nearly a third, with oil traders scrambling to shove barrels of unwanted oil to every nook and cranny on the planet – from salt caves in Sweden to train cars in Chicago. The Bloomberg Commodities Index ended the month down 1.5% in US dollars, largely owing to the major drop in the price of brent crude mid-way through April.
|Commodity||April 2020% change (US$)|
|Brent Crude Oil||11.1|
Source: Bloomberg as at 30.04.20.
The South African stock market tracked the remarkable turn of fortunes in global equity markets, despite the economic realities on the ground. The benchmark FTSE/JSE All Share Index bounced back from -12% to a solid +14.0% total return in April, capping the biggest monthly return since Bloomberg started tracking the bourse. The Capped SWIX was even more impressive, up 14.2% in April, from -16.7% in the previous month. At a super sector level; resources (+23.0%) led performance as gold and platinum prices edged higher, financials rebounded 11.9%, while dual-listed companies lifted industrials 9.6% higher. Local government bonds (JSE ASSA All Bond Index, +3.9%) underperformed their equity counterparts as they fell out of the FTSE World Government Bond Index (WGBI), but pared back almost all their losses since the coronavirus-induced sell-off, helped by a late surge in the rand during the month. Following a bruising first quarter that wiped out almost half the value of the sector, local listed property (FTSE/JSE All Property Index) found some much needed respite in April, up a healthy 5.7% as the easing in restrictions improved sentiment for the sector. Cash remained broadly stable as the STeFI Composite Index closed +0.5% higher. In currencies, while the rand shrugged off the S&P ratings downgrade during the month, it still ended the month down 2.8% against the US dollar, 3.5% against the euro and 5.1% against sterling.
At the sector level, the local bourse was a field of green. Basic materials were standout performers with the platinum-group metals miners (Impala Platinum and Anglo American Platinum) and diversified miners (BHP Group and Anglo American) among the biggest contributors over the period. Gold miners AngloGold Ashanti and Gold Fields also lifted sector performance as the yellow metal continued to be highly favoured as a store of value. The severely bruised chemicals and energy company Sasol was the biggest percentage mover on the bourse as it more than doubled its share price over the month after it outlined proactive measures to bolster its finances against the negative impact brought by COVID-19 on the demand for its products. Consumer services were modestly positive as the general retailers were buoyed by news of a move lower to level four lockdown restrictions and hopes to see consumers return to stores for winter essentials. Online services and entertainment have become the new normal during the Great Lockdown, and this has handsomely benefited tech stocks such as Naspers (also helped by a healthy stake in Tencent) and Prosus. Consumer goods delivered robust performance, led by British American Tobacco.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||April 2020 % return (ZAR)|
Source: Bloomberg as at 30.04.20.