While second waves of the Covid-19 virus are causing a major upheaval in some key developed markets this week, the biggest news item and risk to global stability is still next week’s US Presidential Election. I recall the French president, in the early to mid-2000s, saying that the US election was too important to the whole world for the US to decide it alone. Years later this thinking seems even more relevant, given the global impact on a connected planet.
Last year, House Speaker, Nancy Pelosi, was apparently misquoted as saying that, “it’s dangerous to let the voters decide Trump’s fate”, but this irony highlights the potential shortcomings in the whole democratic system, never mind the nuanced US Electoral College version.
Biden currently leads Trump in the polls and betting odds, but Trump also entered the 2016 race behind Hillary Clinton. The good news is that there are only a few days until the result becomes apparent … we hope. To this point, the biggest concern is around the potential for a no-result. We chatted to a senior member of one of our asset management partners in New York this week and he puts the probability of a contested result and an ensuing constitutional crisis at approximately 25%! If you think that is too high, try and apply your mind to the likelihood of Trump leaving the White House gracefully.
Even if we do have a decisive outcome next week, there will still be residual sources of global volatility – Covid-19, Brexit, Trade Wars, etc. – as there have been in the past. We are thus comfortable with our preference for quality equity funds in our clients’ portfolios, and with the protection that we have implemented in our local and global house-view funds, as we try to mitigate against the omnipresent uncertainty.
“As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart’s desire at last and the White House will be adorned by a downright moron.”
– H.L. Mencken, On Politics: A Carnival of Buncombe, 26 July 1920
- The Economist has published an article titled: Why it has to be Biden. In the article, they discuss Trump’s presidency over the past four years arguing that, whether one agrees with his policies or not, he has repeatedly desecrated the values, principles, and practices that made America. Additionally, they piece out why Biden should take leadership. It is interesting to note how the situation has led to, what could be regarded as a respectable publication, such as The Economist, clearly choosing political sides.
- Talking about President Trump leaving the White House gracefully: The conservatives on the Supreme Court have mapped out a way that could let President Trump win a contested election. A key signal came from Justice Brett Kavanaugh, who suggested sympathy for Trump’s unsubstantiated concerns that votes received after Election Day would be tainted by fraud, warning that “charges of a rigged election could explode” if late-arriving ballots change the perceived outcome.
- Global stocks faced a pullback this week as the second wave of Covid-19 took hold in Europe and the US. Many European countries have been forced to reinstate strict lockdowns which has rekindled concern over the economic recovery.
- Over the last few months, the US economy has been recovering since the various lockdowns and job losses, but experts are concerned that this rebound is losing steam. To add to this growing concern, the US is seeing a resurgence in Covid-19 cases and the stimulus package is facing further delays. This is especially perturbing for the sectors that have been hit hardest like the airline, tourist, and restaurant industries as well as small businesses. We have remarked for a while now about the sharpness of the recovery that the market is pricing in.
- The EU has initiated legal proceedings against the UK. This has come after the UK failed to withdraw legislation that breached the Brexit deal that both parties signed last year.
- Xi Jinping, General Secretary of the Chinese Communist Party, mapped out China’s 14th five-year plan. The strategy focuses on technological innovation, economic self-reliance, and a cleaner environment. If China’s growth trajectory matches that of recent years, it will become the world’s largest economy within the next decade.
- In the meeting, China also announced sanctions on the following US companies: the defence unit of Boeing Co., Lockheed Martin Corp., and Raytheon Technologies Corp. This comes as tensions between China’s regional rivals have been escalating and the US is involved in all of them. The US has been selling weapons to the self-governing island of Taiwan, much to China’s irritation. The US and Japan will perform joint military exercises in the Pacific this week, signalling to China that the US supports Japan’s claim to the Senkaku Islands, a Japanese-controlled area that both Japan and China lay claim to. Additionally, India has entered into a defence agreement with the US following standoffs with China along their shared border in the Himalayas.
- Jack Ma’s Ant Group Co. is set to raise about $34.5 billion through initial public offerings in Shanghai and Hong Kong, a listing that will rank as the biggest IPO ever and make it one of the most valuable finance firms on the planet.
- Covid-19 has made companies either winners or losers. A surprise winner has been Dunkin’. Shares of Dunkin’ Brands have more than doubled since March on investor optimism based on its mobile order app and loyalty program. Dunkin’ Brands Group, Inc. said that it is in talks to be acquired by private equity-backed, Inspire Brands. The New York Times reported that Inspire will take Dunkin’ private at $106.50 a share, making Dunkin’ worth nearly $9billion.
- The Medium-Term Budget Policy Statement left many cold and weary. Whilst most portfolios faced budget cuts, South African Airways is to receive R6.5 billion to settle its existing debt and an additional bailout of R10.5 billion to implement its business rescue plan. Other key takeaways were: The government aims to review Regulation 28 to make it easier for retirement funds to increase investment in infrastructure, but trustees are expected to put the interests of retirement fund members first; R23billion, which was previously budgeted for, has been allocated to Eskom; and an additional R6.7 billion has been committed to the Social Housing Programme aimed at poor, working South Africans. South African politicians are notorious for being able to say all the right things but fail when it comes to implementation. The rating agency, Fitch, has already expressed concerns about the government’s ability to negotiate the wage freezes. If you would prefer to read the speech in its entirety, please follow this link.
- Tim Cohen has written an opinion piece on how South African’s will know whether the country is in fiscal crisis or not. A definition of fiscal crisis is when a country is no longer able to honour its debt obligations. In this piece, Cohen outlines the pros and cons of South Africa’s current fiscal position, follow this link for the full article.
- In an exciting development, South Africa’s largest cities are preparing to source their own electricity after the energy minister approved letting them wean themselves off state utility Eskom. The decision comes after 13 years since the start of load shedding and allows cities to rely on electricity from independent power producers. This is not only positive from a reliability point of view, but it also means that the cities can move towards greener sources of power rather than the largely coal-based power provided by Eskom.
- The NPA received a blow in their battle to re-gain funds that were misappropriated from Transnet. Judge Maletsatsi Mahalelo found that investigative directorate head Hermione Cronje had failed to disclose “material facts” when she successfully applied in November 2019 for the assets of Regiments Capital directors Niven Pillay, Litha Nyhonyha, and Eric Wood to be frozen, on the basis they were the potential proceeds of crime. The Johannesburg high court has since reversed the freezing of more than R1bn in assets allegedly linked to the looting of Transnet.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc