This week Gita Gopinath, the IMF’s chief economist, announced that the decline in GDP for 2020 would be worse than forecast a few months ago, and that the Fund has lowered its expectations for an economic rebound next year. Meanwhile in South Africa, our economy is forecast to contract by around 7% for the current fiscal year, with only modest growth predicted for each of the ensuing two years.
Yet equity markets in June have continued to power ahead, with the MSCI and FTSE/JSE indices up by 38% in dollars and 42% in rand, respectively since their trough on 23 March. As communicated in previous articles, these equity market rebounds have been largely driven by expectations of a V-shaped economic recovery, fuelled by the infusion of massive stimulus by central banks across the globe.
Dynasty’s prevailing view – and for the past month in particular – is that market rebounds have overreached and are overdue for a correction. Yet compelling investment alternatives are largely absent, with cash (at historically low interest rates), and listed property (likely to remain under severe distress for the foreseeable future), being obvious examples. Given this landscape, our Investment Committee formulated two key questions that demanded innovative responses: How do our clients seeking long-term capital growth remain invested in equities in an environment of economic contraction; and how can we reduce client vulnerability should a sharp market pullback reoccur over the next year. This is further complicated by the need to pursue cash-beating returns, thereby alleviating the necessity for investors to time exiting and re-entering the markets when behavioural biases tend to come to the fore.
As a solution to this conundrum, the Dynasty Investment Committee developed a dual performance protection strategy for our equity investors: On the one hand, we will retain exposure to our active, quality-style managers whose portfolios have proven to be much more resilient during market downturns, but in addition, we are introducing instruments into our proprietary funds that provide significant protection against market pullbacks, without forgoing material upside participation should equities continue to perform over the next twelve months.
Comprehensive material on our protection strategies will be made available to clients in the near future.
Global News
- For the second week in a row, a higher-than-expected number of Americans applied for unemployment benefits, signalling a slowdown in the US’s labour market improvement.
- Even though there is an awareness that the strength of the global market is not reflecting the health of global economies, stocks may move even higher as more government stimulus is expected in the US and Europe.
- This week tension grew between the US and the EU over the following issues: The US considering more tariffs on European goods namely, $3.1 billion tariffs on exports from France, Germany, Spain and the UK; the EU may bar US travellers from entering the region, citing the US’s failure to control the Covid-19 pandemic; and additionally, the US withdrew troops from Germany, leaving Germany wondering if a key NATO spending metric was behind the US decision.
- Another ‘Markus’ is in deep trouble: Markus Braun, the previous CEO of Wirecard who resigned on Friday, 19 June 2020, has been arrested following an accounting scandal where $2.1 billion went missing from the company’s balance sheet. The company has since withdrawn its fiscal 2019 and first-quarter 2020 financial results after admitting that the funds reflected on its balance sheet did not exist.
Local News
- The remedial plan outlined in Wednesday’s Supplementary Budget presented by Tito Mboweni, the Minister of Finance, could have been far worse. Indeed, the fear-mongering by certain analysts and economists had predicted a toxic cocktail of increased tax rates, the introduction of a wealth tax, and a tightening of foreign exchange controls including the forced repatriation of foreign assets. As posed by ourselves last week in the aftermath of the contentious easing of lockdown regulations… do the hard, politically unpopular choices presented in the Budget, perhaps suggest increased influenced by the President and the Minister of Finance in economic policy formulation?
- For a concise analysis of the Supplementary Budget, follow this link to a Ninety One Asset Management scorecard broken up into three components: The current fiscal situation; the quality of the plan as outlined; and thirdly, the executability of the plan.
- For a more detailed analysis of the Supplementary Budget, follow this link to a Webinar presented by Nicky Weimar, Chief Economist at Nedbank.
- The BRICs Bank has loaned South Africa $1billion to support the government in its efforts to contain the spread of the Covid-19 pandemic and to reduce the human, social, and economic losses caused by the outbreak.
- Ex-President Zuma’s fraud and corruption trial has been met with further delays after Tuesday’s pre-trial proceeding failed to set a trial date. While it is uncertain who is to blame for the continued delays, the matter has been postponed to 8 September 2020.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc
