While 2020 has been a year unlike any other and we certainly hope that we are through the worst of it – the infection rates, the lockdowns, the economic impact, the fear and the uncertainty – perhaps we need to realise that this is potentially the new normal and not just an isolated bump in the road.
This week the US Federal Reserve confirmed that interest rates are likely to be held at zero or near-zero levels, at least until 2023. Similarly, in SA, interest rates have never been this low and the Reserve Bank came close to lowering them even further this week. Economists are forecasting that rates are likely to remain low for “quite a long period.” This impacts the relative attractiveness of cash and bonds and how we see equities performing in a protracted low-interest-rate environment.
Larry Page, the co-founder of Google, is reported to have said in 2015 that he felt that property prices in major global cities would fall, due to working remotely becoming a real option for many as a result of technological innovation. It has taken a global pandemic that few ever contemplated to get us across that line, but for many, this is now a reality. Commercial property and residential property in major cities will most likely remain under pressure.
In SA, the president announced the relaxation of lockdown to level one – likely the best we’re going to see for the foreseeable future, where the wearing of masks, social distancing, travel restrictions and other behavioural adjustments are likely to become a new way of life.
On 3 November the US is scheduled to host their presidential election. If Trump once again defies the polls and odds, the uncertainty that has accompanied his tenure is likely to persist for another four years – it certainly will not be new or normal, but it may be our new normal.
- Unwavering Fed – US Fed officials have announced that interest rates will be held near zero and should be maintained there for at least three years. Tightening will be delayed until the US gets back to maximum employment and 2% inflation. Fed Chair Jerome Powell’s doubts about a US recovery sent stocks lower on Wednesday.
- Growth revision – The Fed, however, improved its estimated US GDP contraction for this year to 3.7% from its June outlook for a contraction of 6.5%. The OECD also revised its forecast for global growth, to recede by 4.5% from its June estimate of 6%, showing that the retraction may not be as sharp as previously feared. This was based on improvements in US unemployment numbers and a better than expected Chinese recovery. The report did say that the improvements would still need the support of governments and central banks for some time to come.
- Trade wars –The World Trade Organisation (WTO) has examined the Trump administration’s tariffs on Chinese goods saying that the tariffs violate international rules. While the ruling bolsters Beijing’s claims, Washington can effectively veto the decision by lodging an appeal at any point in the next 60 days. That is because the White House has already paralyzed the WTO’s appellate body, a tactic that has rendered toothless the world’s foremost arbiter of trade. The Economist has written an interesting article entitled, The Trump administration wants a US-China commercial split, which measures what the decoupling of relations between the US and China would mean for their respective industries and economies.
- The end of the oil age – As Covid-19 struck the global economy, demand for oil dropped by more than a fifth and prices collapsed. Since then there has been a jittery recovery, but a return to the old world is unlikely. Fossil-fuel producers are being forced to confront their vulnerabilities. ExxonMobil has been ejected from the Dow Jones Industrial Average, having been a member since 1928. Petrostates such as Saudi Arabia need an oil price of $70-80 a barrel to balance their budgets. Today it is scraping along at just $40. The switch to green renewable energy, which suits China, a net fossil fuel importer, over the fossil fuel focused US, is the new normal. For more on this see The Economist article, Is it the end of the oil age?
- A peace treaty between Israel, the United Arab Emirates (UAE), and Bahrain – The Abraham Accords peace treaty was signed in Washington this week, hosted by President Trump. The treaty normalises relations between Israel and the two Arab nations. For Bahrain and the UAE, peace efforts with Israel could pave the way for a stronger relationship with the US, including better access to military equipment.
- Japan has a new Prime Minister – Yoshihide Suga was named Japan’s new leader after a parliamentary vote. Suga was the second in command during Former Prime Minister Shinzo Abe’s reign and is now in charge of the world’s third largest economy.
- Prime Minister Johnson flipped sides – Boris Johnson has had talks with the opposition in an attempt to gain their favour to rewrite part of the Brexit deal he agreed upon with the European Union last year. He did not receive support from his party, the Tories, who do not back the Prime Ministers plan to break international law. According to the publication The Economist, Former Prime Minister David Cameron feels that a deal could still be salvaged and that Johnson’s strategy is part of a “negotiating tactic.” With Brexit having been around for four years now this constant ebb and flow definitely feels like the new normal.
- Covid-19 vaccine – The University of Oxford and AstraZeneca Plc have restarted their UK human trials for a Covid-19 vaccine after a forced pause last week over an unexplained illness in a participant. The released statement did not mention other trials taking place outside of the UK. Tests were underway in the US, Brazil, South Africa, and India before they were halted over the safety concerns.
- Political involvement in business procurement – Tencent, the key holding of the JSE-listed Naspers and Prosus, has come into the Trump administration’s focus as the company is questioned over their data-security protocols, this is after Chinese companies, Huawei Technologies Co. and TikTok were in the spotlight.
- Level one – President Ramaphosa announced that the country will be moving to level one Covid-19 restrictions. This means that, among other things, international travel will be cautiously opening from 1 October. “Travel may be restricted to and from certain countries that have high infection rates,” the President said. “A list of those countries will be published and it will be based on the latest scientific data that we will be able to get.” All travellers will be screened on arrival.
- Rate cuts held steady – The South African Reverse Bank kept the repo rate unchanged at 3.5% while suggesting that it could be maintained at these levels for some time to come. The Bank also stated that it expects the GDP contraction to be larger than it previously anticipated for 2020. It now sees the economy shrinking by 8.2% in 2020, compared with the 7.3% it estimated in July. Relative to other estimates, this remains optimistic.
- Rand strength –The rand gained 2.8% against the dollar this week to trade at the strongest levels (below R16.10 at one stage on Friday) against the greenback since prior to the first signs of lockdown in early March. Traders note that we outperformed our emerging market peers significantly in the process, as SA looks closer to emerging from the Covid-19 crisis than our counterparts, whilst still providing attractive yields in an exceptionally low global interest rate environment.
- Woolies’ earnings slump – Woolworths reported a 65% drop-off in earnings for the 52 weeks to end June 2020 on Thursday morning, yet by lunchtime the share price had edged up almost 3% to R34.77 and by close of trade, it was up 6.57% to R36.
- SAA liquidation – The airline faces liquidation again as R10.4 billion in urgent funding for the state-owned airline’s business rescue process has failed to materialise from treasury.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc