This week was once again positive for equity markets with returns for April now at staggering levels as quantified below. This has been caused by massive central bank stimulus programs across the globe, as well as by optimism that a vaccine against Covid-19 may be brought to market sooner than originally anticipated. Balance this positivity against other realities highlighted in today’s newsletter, for example: Six weeks of jobless claims in the US now totalling over 30 million workers, and US Fed Chairman Jerome Powell’s statement that the country’s economy is at an ‘abrupt halt’. Meanwhile, in South Africa, S&P downgraded us by another notch on Wednesday, and today we exit the World Government Bond Index following the downgrade announcement by Moody’s last month. In our view, this recent widening of a disconnect between stock market prices on the one hand, and economic reality on the other, is unsustainable. We therefore anticipate a correction in equity market prices in the near future and would consider this as a buying opportunity for investors who have been waiting sceptically on the sidelines.
Global News
- Uncertainty in global markets has persisted over the week. This has caused safe haven assets to soar, for instance, gold is heading towards its biggest monthly gain since 2016. As central banks have increased stimulus to repair the economic damage caused by the coronavirus pandemic, gold has become appealing as a store of value once again. Dynasty would at most incorporate a small holding of gold ETF’s in our portfolio construction, purely as an alternative asset class in defence against the massive global stimulus that has taken place this year.
- There has been a lot of conflicting news being released on the effects of Gilead’s antiviral drug, remdesivir. A Chinese trial found the drug ineffective in treating Covid-19. Gilead responded to this by stating that the trial conducted in China was terminated early due to a lack of enrolment, meaning that their results were inconclusive. Markets have been responding to these highs and lows, responding positively when the treatment is affirmed and negatively when this is disputed – this being evidence of how desperate the global community is to find a solution to Covid-19.
- In Germany, a company working with US pharmaceutical giant Pfizer has begun human trials of a potential Covid-19 vaccine that could supply millions of units by the end of the year.
- Researchers in Switzerland have managed to detect Covid-19 in small concentrations in sewage wastewater. Although the method needs some testing and improving, the scientists are hopeful that this new way of tracing the virus will act as an early warning system for a resurgence in countries which are lifting lockdown restrictions. They predict that this test will help officials to detect flare-ups earlier than with diagnostic tests, perhaps by a week.
- In the US, the number of people confirmed to have Covid-19 has surpassed one million. This number is just under a third of the world’s reported cases.
- 8 million U.S. workers filed jobless claims last week for a six-week total of over 30 million, despite trillions of dollars in stimulus spending.
- Nasdaq 100 futures clung to their advance following results from Microsoft Corp., Facebook Inc., and Tesla Inc. after the Wednesday close.
- Fed Chairman Jerome Powell announced that the coronavirus has brought the US economy to an “abrupt halt”. He has said that, “economic activity will likely drop at an unprecedented rate in the second quarter,” and that the central bank is uncertain how long the recession would last. He assured that the Federal Open Market Committee unanimously committed to deploying its “full range of tools” to support the economy, including keeping rates down and doling out aid.
- Sweden has been able to handle the coronavirus without an economically devastating lockdown. The reason given for this is a high level of trust in the government, institutions, and fellow citizens to socially distance from one another – something public health officials have used to justify not imposing mandatory orders.
- US oil prices had another perilous week, as companies continue to deal with excess supply and not enough demand. On Tuesday, Texas oil prices fell below $11 a barrel. Additionally, another oil company, Diamond Offshore, filed for bankruptcy.
- President Putin is experiencing challenges to his leadership for the first time in a long while. The reasons for this are the oil price war and the lacklustre response of the Russian Government to the coronavirus crisis.
- Global equity markets have been incredibly positive for April, with the S&P up 13.7% and the MSCI World up 11.9% in US dollar terms as at the 29th.
Local News
- Inflation for March came in at 4.1%, after posting 4.6% in February. This was surprisingly low, with the biggest influence being the dramatic fall in the dollar price of oil, which more than offset the import cost impact of rand weakness.
- Edcon has raised the white flag. After struggling for years, the company has decided to apply for voluntary business rescue. The biggest losers are the landlords, lenders and once again, the PIC.
- The Land Bank is another state-owned entity which has fallen on hard times and is seeking financial assistance from the government. The bank says it has asked for further government guarantees to support its ongoing fund-raising efforts. The Land Bank defaulted on about R738m of obligations to lenders.
- Following the Moody’s downgrade of SA to sub-investment grade last month, rand-denominated bonds will be excluded from the FTSE World Government Bond Index when it is reweighted at the end of trade today. Such an event would normally place pressure on a country’s currency, but rand strength this week is clear evidence that global investor sentiment is currently outweighing local risks!
- S&P Ratings Agency cut South Africa deeper into junk territory on Wednesday. The country’s long-term foreign-currency rating is now at BB – three notches below investment grade. The decision was based on the prospects of a sharp economic downturn.
- The ALSI has also been incredibly positive for the month of April, having gained 14.3% in rand terms as at the 29th.
