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June 2020: markets break with economic reality

| Market Forces

During the month of June more data became available to show exactly how hard the COVID-19 pandemic and resultant global lockdown hit various economies.

Nearly 18 years of growth wiped out

The UK figures made for particularly grim reading. The UK economy contracted on a scale never seen before in the country – 20.4% in April. Put differently, nearly 18 years of growth ‘disappeared’ in two months. The number of people claiming unemployment in the United Kingdom doubled over March and April 2020.

Preparing for the biggest recession since WWII

Also during June, the World Bank updated its growth forecast for 2020. The bank now expects a 5.2% contraction, the “deepest global recession since World War II.” It is also expecting the first widespread recession in emerging economies since 1960. In the same Global Economic Prospects report, the bank forecasts that South Africa’s GDP will plunge 7.1% this year. This is close to National Treasury’s projection that the SA economy will shrink by 7.2% in 2020.

ECB surprises with size of bond purchase scheme

On the European continent, the European Central Bank (ECB) ramped up its emergency bond purchase programme by 600 billion euros to 1.35 trillion euros, boosting risk-on assets, among them the South African rand.

Nasdaq hits record high

It’s important for investors to note that stock markets are seldom a good reflection of what’s happening in the real economy. For example, during June – despite the dismal global economic outlook – the Nasdaq Composite index hit a record high, recovering from the Covid-19 slump on the back of better-than-expected US unemployment data (even though the level of unemployment is still at an unprecedented level).

SA re-opens more of economy

Midway through the month, President Ramaphosa announced that the country will remain in lockdown level 3, but that certain sit-down restaurants, accommodation services, and hair and beauty salons will be allowed to operate under strict conditions.

Much of the economic damage of an extended lockdown had been done by then. Other than a battered hospitality and leisure sector, commercial property companies and REITs had also been taking enormous strain. Fortress, for example, reported that it had collected only 51% of rental due for the month of April and would be writing off the majority of the rent due.

Business confidence at record low

In the second quarter of this year, business confidence in South Africa fell to its lowest level ever recorded on the RMB/BER Business Confidence Index, which started in 1975.
Another index reaching a record low, was Markit’s Purchasing Managers’ Index (PMI). It fell to 32.5 in May from an already exceptionally low 35.1 in April. The figure was below the 50 level that separates expansion from contraction for the 13th month in a row. All sub-indexes of the survey slumped to their lowest on record during May, with sharp declines in employment and new orders.

SA recession continues, inflation well contained

Low PMI has always been a good indicator of an economic recession. Not surprisingly then, South Africa recorded its third consecutive quarter of negative economic growth. GDP fell by 2.0% in the first quarter of 2020, following a contraction of -1.4% and -0.8% in the fourth and third quarters of 2019. Loadshedding in the first quarter contributed most to the fall in production. The effect of the lockdown on the local economy will only be visible in the next GDP data release.

SA consumer inflation slowed to 3.0% year-on-year, its lowest in nearly 15 years. On a year-on-year basis, only food prices increased.

SA’s unemployment rate climbed from 29.1% to 30.1% – an 18-year high. The last time the unemployment rate was above 30% was in the third quarter of 2002, when it reached 30.4%.

Listed property runs hard during June

Both listed property and equity delivered strong returns during June. The SAPY index returned 13.4% and the FTSE/JSE All Share Index (ALSI) returned 7.7% for the month. Bonds (ALBI) lost 1.2% and cash (STeFI) returned 0.44% in June. The rand strengthened 1.4% against the US dollar and 0.5% against the euro.

A bloodbath for local indices in 2020

Year-to-date, the ALSI returned -3.2% on a total return basis. The performance has varied substantially across different sectors, though. Basic Materials gave a positive 5.7% over the past six months, but Industrials and Financials are down 33.5% and 31.7% respectively. The listed property index returned -37.6% over the last six months. The ALBI returned 0.4%, and cash returned 3.18%. Year-to-date the rand has weakened by 24.3% against both the dollar and the euro. The MSCI World Index is also standing at a negative dollar return year-to-date, but in rand terms, because of rand weakness, South Africans would have received a total return of 17% over the first six months of 2020. The Bloomberg Barclays Global Aggregate Bond Index returned 28% in rand terms.

Over five years, offshore indices deliver best performance

For the five years to 30 June 2020, the ALSI returned 4.2% annualised and listed property (the SAPY) -9.1% annualised. Basic materials delivered a strong 14.2% per year, while Industrials and Financials lost a disappointing 7.9% and 5.3% per year respectively. The ALBI and cash returned 7.5% and 7.2% respectively. The MSCI World Index gave South African investors a 14.8% p.a. total return in rand terms; the Bloomberg Barclays Global Aggregate Bond Index returned 11.2% p.a. in rand.

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