What we know today is that even though the Coronavirus pandemic continues to spread across the world, with certain emerging market populations being particularly vulnerable, there is evidence that regional infection rates can indeed be contained, as evidenced this past week in China. Last Friday, in our opinion piece entitled ‘The Coronavirus – Economic Crisis or Health Crisis?’ we wrote that in order to effectively fight the pandemic, the collaboration between economists, policymakers and medical practitioners will be of paramount importance. Encouragingly, there are signs now of this taking place by way of economic stimulus; central and regional governments regulating social behaviour; and the sharing of information between scientists and medical practitioners on a global basis.
In these extraordinary times, with more pain certainly to follow, we at Dynasty are cautiously looking beyond the crisis to the next few years and are critically examining where substantial wealth can be both recovered and created over this timeframe.
As markets and indices continued their plunge this week it is important to consider that irrespective of how bad the circumstances are, markets tend to overact before they ultimately recover, which was certainly the case in the Global Financial Crisis (GFC) of 2008/2009. As an example, during the GFC, emerging markets were down over 50% in dollars, but gained 79% the next year.
- As at close of business on Thursday 19 March, the MSCI was down 30.2% in dollars from its peak on 12 February 2020. Selling of equity in this environment has been indiscriminate, with even unleveraged quality companies’ share prices being brutally punished.
- Coronavirus statistics – controlling the trajectory of infection rates and deaths. This week the global infection rate increased to 255 846, whilst the number of deaths grew to 10 495, at the time of writing. Yesterday there were no new infections reported in China, whereas in Italy the cumulative number of deaths rose to 3 405. This means that Italy has officially surpassed China as the epicentre of the pandemic.
- The convergence of risk – as the Coronavirus has spread across the globe, financial markets are now firmly in a bear market grip, with sharp pullbacks in equity, property, corporate credit, and commodity markets having taken place over a mere 16 trading days. Even gold, which is traditionally regarded as a safe-haven asset, has fallen in value.
- Global stimulus numbers are staggering – governments and central banks across the world have initiated fiscal and monetary stimulus in an endeavour to mitigate economic disruption. For example, the World Bank has added another $2-billion to a fund aiding organisations in coping with the Coronavirus pandemic, taking it to a total of $14-billion; the US Fed has cut rates by 150bps since 1 March and quantitative easing has resumed by purchasing $500bn in Treasuries and $200bn in mortgage-backed securities; the Bank of England has cut rates to 325-year lows; and Japan has passed small business loan packages of $19.6bn, and accelerated its quantitative easing program.
- Will the dollar devalue due to the enormous amount of stimulus? The US monetary system has gone through many iterations over many years. For most of its history, the US issued paper notes which could be traded for gold or silver pieces, the so-called ‘gold standard’ or ‘silver standard’. It was gold that became the metal of choice and seen as a hedge against hyperinflation and monetary policy tampering. Critics of gold warned of the danger of the US economy being too closely linked to the fortunes of gold mining output versus actual economic growth, and thus the Bretton Woods System (BWS), was introduced after World War 2, whereunder the world’s currencies were pegged to the dollar which in turn was pegged to a particular gold price. The US unilaterally terminated the BWS in 1971, causing the dollar to effectively become the world’s reserve currency, which remains to this day. Many economists hold the view that international demand for dollars allows the US to maintain huge trade and fiscal deficits without fear of major devaluation, as was seen in Mexico in 1994 and Russia in 1997. In the current Coronavirus Crisis, and in the face of massive stimulus by the US, the $ has thus far retained its safe-haven status, having appreciated by 2.6% against a trade-weighted basket of developed market currencies from 12 February to 19 March (Source- Hedgeable).
- In South Africa, the number of reported infections is above 200 today with no deaths thus far. We expect these SA numbers to increase markedly based on statistical analysis. A logistic outline of a viral outbreak is herewith described by Jeffrey Dinham, Senior Economist, at Econometrix.
- The South African Reserve Bank yesterday reduced the repo rate by one percentage point to 5.25%. This move was widely welcomed by analysts and the business community, as it shows a realisation by the bank of the devastating impact that the Coronavirus will have on the domestic economy.
- Indiscriminate Selling – Kokkie Kooyman, one of South Africa’s top investment specialists, has remarked that in all of his years of investing he has never seen such opportunities in the market. We concur that decisions made in the current times are likely to have a major impact on investors’ long-term returns. Dynasty’s bias on the equity side has consistently been towards unleveraged quality companies typically positioned in defensive sectors, which are much more resilient in times of crisis.
- In South Africa, travel restrictions, school closures, the prohibition of gatherings of over a hundred people, as well as limitations placed on bars and restaurants, are just some of the measures put in place in an attempt to combat the spread of the virus. Follow this link for more on this.
- SA Express has suspended its operations until further notice “to review its current network and streamline operations for improved efficiency”. Non-critical staff have had to go on compulsory leave and customers have been redirected to alternative flights.
- Sasha Planting, from the Business Maverick, has written a piece on investing in the time of the Coronavirus or in general dips in the market – for her analysis follow this link.