The Covid-19 pandemic is a source of anxiety and suffering for many people around the world. While political leaders, scientists, NGOs, and other stakeholders are working on solutions to the humanitarian and health dimensions of the crisis, our primary objective as Dynasty is to protect clients’ wealth and look after their financial interests during this difficult time. To that end, we will continue to provide you with regular updates about the economic and investment impacts of the coronavirus pandemic.
Most economies not yet close to reopening
Stock markets this week cheered the apparent slowing of coronavirus infections and deaths in parts of America and Europe. However, economists and epidemiologists agree that more widespread testing is needed in the US before it can be determined whether it is safe for people to return to work. By some estimates, the US would need to ramp up testing to 750 000 a week before considering reopening major centres for business.
Some European countries like Austria are looking for an exit from the shutdown, but others including Spain, Italy, and the UK appear to have several weeks to go before they can loosen current restrictions on economic activity. Given that the world’s rich economies look set to spend most of Q2 in lockdown, we can expect quarterly earnings to be poor. Have a look at this article for some insight into what it will take for major cities to start reopening.
Structural change after the pandemic
The rise of populism and nationalism in recent years has put globalisation and multilateralism under pressure. For example, OPEC+ (an alliance of Organisation of the Petroleum Exporting Countries and 10 non-OPEC members) has helped stabilise oil prices in recent years. The current conflict between Saudi Arabia and Russia however, shows that this level of international cooperation is at risk.
One of the key trends to watch post-Covid-19 is whether global institutions like the World Trade Organisation can weather the storm, or whether the spirit of global cooperation will start to falter. We believe that international collaboration, cooperation, and trade has been positive for the world economy and that a retreat into isolationism and protectionism would pose a threat to global growth and stability.
UBS expects large S&P 500 profit slump
A UBS model aimed at eliminating the influence of stale estimates suggests earnings in the S&P 500 will fall a lot more than currently envisioned by the consensus of Wall Street analysts. The investment bank estimates existing data on earnings in the next 12 months are probably underestimating the scope of the decline in S&P 500 earnings by a factor of two. These projections highlight how uncertain the market is. We will only get a clearer picture of how bad things really are when companies start reporting on Q1 and Q2 earnings. Dynasty, therefore, expects another selloff in global markets as many investors are following consensus earnings forecasts that have not yet been revised to take the full impact of the pandemic into account.
Bank shares fall as SARB asks them not to pay dividends
JSE-listed banking stocks opened 4% down on Tuesday this week after the South African Reserve Bank advised them not to pay dividends this year. The financial sector has traditionally found favour among South African active managers because of the high dividend yield and low PE ratios for most bank shares. Despite the fact that bank shares have subsequently recovered some of the losses from this week and earlier this year, it is a concern that dividends may not be forthcoming.
Covid-19 testing looks affordable for South Africa
Developing the capability to mass-test people for the novel coronavirus so that carriers can be quarantined holds the key to rolling back the lockdown and allowing people to start returning to work. The National Institute for Communicable Diseases reported that 63 776 tests have been conducted to date. This represents only 0.1% of our population. According to Analytics Consulting, it will cost around R470 million to increase testing to 1% of South Africa’s population. This represents around 0.01% of South Africa’s GDP, which should be well within our financial capability.
Rand rallies as risk demand soothed by falling infections
South Africa’s rand firmed on Tuesday and the rest of this week, as investors showed a renewed appetite for risk with increased hope that Covid-19 death rates and cases are stabilising in Europe and the US. The rand had fallen by 24.7% from the beginning of March until Monday morning, thanks to local factors including a downgrade in the country’s sovereign credit rating from Moody’s and Fitch, together with international factors such as market moves related to the virus. It has recovered by 6.9% over the balance of the week.
This underlines a point we at Dynasty return to time and again: the performance of the rand is often determined as much by factors external to South Africa as by our country’s own political and economic landscape. The rand remains vulnerable and under pressure in the short-term and should continue to decline in the longer-term, but we can see some relative strength in the medium-term (over 12-18 months).
Dynasty’s response to the coronavirus crisis
As mentioned last week, in the face of an unprecedented shutdown of the world economy, it cannot be ‘business as usual’ for our Investment Committee. We continue to challenge certain maxims (viz asset allocation) and to revisit every passive and active component within our portfolio construction. With reference to the latter, we have now engaged with each of our underlying managers to understand their thinking and positioning for this time of uncertainty.
