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July 2020: recession devours jobs and dividends

july market review gold
| Market Forces

A smattering of good news and an upturn in global economic activity are starting to appear, but generally economic data and company announcements point to more pain ahead.

More global giants announce job cuts
According to Bloomberg, so far in 2020, nearly a quarter of all companies in the MSCI Asia Pacific index have scrapped or cut dividends. About half of the Stoxx Europe 600 Index’s members did the same.

It is not only dividends, but also staff numbers that are being cut. Following a 40% decrease in its jet production, Airbus is cutting 15 000 jobs across Europe. Boeing is cutting over 12 000 US jobs. Anglo-Dutch energy company Royal Dutch Shell reported a net loss of $18.1 billion for the second quarter of its financial year and flagged that job cuts are on the way. Even global behemoth Alphabet has been feeling the bite of this recession. Its ad sales in the second quarter were down 8.1% from the same period last year. This is the first-ever decline for Google ad sales.

Some digital titans weather the storm well
Some of the largest digital companies have been performing well this year. Facebook experienced the opposite from its digital advertising rival Google, in that its overall revenue grew 11% in the second quarter. And Amazon.com shares reached $3 000 for the first time ever after a prolonged rally.

During July Apple announced a 4-for-1 stock split after its shares had surged more than 80% in the past year. The previous share split was in 2014, and it paved the way for Apple to be added to the Dow Jones Industrial Average, which tends to exclude high-priced shares.

US GDP worst since 1947 and Euro-area enters recession
During July, the second-quarter economic growth data came in for the US and for the Euro-area. US gross domestic product shrank at a 32.9% annualised pace from the first quarter to the second, the most in quarterly records dating back to 1947. The Euro-area entered a recession, reporting a 12.1% contraction. Spain took the biggest hit, shrinking 18.5% in the second quarter. The drop in economic activity reflects the impact of quarantine measures on businesses and consumer spending, and a slump in tourism in some countries.

Towards the end of July, EU leaders agreed – after protracted negotiations – on a stimulus package worth 750 billion euros to pull their economies out of this recession and tighten the financial ties between member nations.

It’s a good year for gold investors
At least one group of investors will look back at 2020 fondly – the gold bugs. Gold, one of the traditional ‘safe havens’, has been marching higher amid all the economic uncertainty and shows no signs of slowing down. The US dollar has traditionally been another safe haven in times of turmoil, but not so much this time round. As the currency weakened during 2020 it caused gold prices to surge past the previous high set in 2011. Gold is now very close to $2 000/ounce.

SA economic activity slows down
During July, various local indices signalled a slowing down in economic activity and production. Construction, for example, is at a record low. That is according to the Afrimat Construction Index, which plunged below 100 for the first time since compilation of the index began. The reading of 97 is for the first quarter of 2020 and does not yet include the impact of the lockdown. SA’s manufacturing output also dropped 49.4% year-on-year in April.

And local data releases are starting to show the annihilation of sales during lockdown; the country’s retail sales plunged by a record 50.4% in April and 12% in May.

Most SA companies are feeling the pain
Early in the month Naspers announced its plans to retrench around 500 employees and said that it will be closing publications such as the Sunday Sun and several monthly magazines. Diversified miner Anglo American saw its first-half profits fell 39% after lockdown-related production cuts. It halved its dividend in line with its payout policy. Shares in paper manufacturer Sappi plunged almost 13% after it reported a quarterly loss on the back of the pandemic and falling demand for paper.

But, there were companies that benefited from the lockdown. Vodacom Group, for example, reported a 7.6% increase in group service revenue in the second quarter of 2020, on strong demand for voice, data and financial services in SA during lockdown.

Consumer confidence at 35-year low
According to FNB and the Bureau of Economic Research, SA’s consumer confidence index dropped from -9 in the first quarter to -33 during the second quarter of 2020. To boost consumer and business spending, the South African Reserve Bank announced another 25-basis points cut in the repo rate, bringing it to 3.5%. The prime commercial lending rate now stands at 7.0%. Currently inflation is below the Bank’s target range of 3-6%, with headline consumer inflation at 2.2% year-on-year in June.

SA faces severe challenges to ‘balance the books’
The initial phases of the lockdown in South Africa that halted a substantial portion of economic activity led to an under-recovery of R82 billion for the fiscal year to 15 July, according to the South African Revenue Service.

In an attempt to fund its ballooning pandemic-related expenses, South Africa has had to approach the International Monetary Fund (IMF). During July the IMF approved a rapid financing instrument (RFI) to the value of $4.3 billion (about R70 billion) to address needs arising from the Covid-19 pandemic.

Resources are July’s clear winner
During the month of July the FTSE/JSE All Share Index (ALSI) returned 2.6% on a total return basis. Resources were the clear winner with the Basic Materials index delivering 9.1%, Industrials -2.6% and Financial 0.4%. Among the sub-indices, Gold Mining came out top with 23.2% for the month, followed by Platinum Mining’s 20.8%. The various remaining lockdown bans hurt some sub-indices more than others. Tobacco returned -12.5% during the month; Travel and Leisure returned -16.5%. Bonds (ALBI) gained 0.6% and cash (STeFI) returned 0.42% in July. The listed property sector (SAPY) lost another 3.2% during the month. The rand strengthened 2.0% against the US dollar and weakened 3.2% against the euro.

Year-to-date returns show battered Travel and Leisure sector
Year-to-date, the ALSI has lost 0.7% on a total return basis. Returns differ substantially from one sector to another. Basic Materials gave a positive 15.2% over the past seven months, but Industrials and Financials are down 35.3% and 31.4% respectively. On a sub-sector level, the Travel and Leisure index has returned -62.4%. In sharp contrast, Gold Mining has delivered 116.5% over the past seven months. The listed property index returned -39.6%. The ALBI returned 0.97%, and cash returned 3.62%. Year-to-date the rand has weakened by 21.8% against the dollar and 28.3% against the euro. The MSCI World Index has delivered a slightly negative dollar return year-to-date, but in rand terms, because of rand weakness, South Africans have received a total return of 20.2% over the first seven months of 2020.

Over five years, local Basic Materials performed best
For the five years to 31 July 2020, the ALSI returned 4.6% annualised. Among the JSE’s main sectors, Basic Materials delivered 17.4% per year, while Industrials and Financials lost 8.4% and 5.9% per year respectively. Listed property (the SAPY) returned -10.6% annualised, meaning that investors in this index would have lost more than half of their investment’s value over the past five years. The ALBI and cash returned 7.4% and 7.2% respectively. The MSCI World Index gave South African investors a 14.2% p.a. total return in rand terms; the Bloomberg Barclays Global Aggregate Bond Index returned 10.6% p.a. in rand. Consumer inflation averaged 4.6% per year over the past five years to 31 July 2020.

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