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November 2020 market review: A vaccine and a Biden win boost markets

| Market Forces

The markets found themselves oscillating between the bad news of a second wave of the pandemic at the start of November and the promising results of a vaccine to contain the spread of Covid-19 later in the month.

Oil drops to 5-month low

Early in the month oil plunged to a five-month low as Libya upped its production despite the slowdown in demand amid a wave of new lockdown measures in Europe and elsewhere. On 2 November the West Texas Intermediate for December delivery fell as much as $2.15 before trading below $35 a barrel.

Several sectors supported by vaccine news

A week later, news broke that the vaccine developed by Pfizer and BioNTech was more than 90% effective in preventing Covid-19 infections. Cruise operator and airline stocks responded positively, while the traditional safe havens, such as US T-Bills, gold and the yen, lost some steam.

In addition, later in the month better-than-expected US economic data and the market-friendly selection of Janet Yellen as Treasury secretary sent the MSCI World to a record high.

Both Amazon and Ant feel the regulatory noose tighten

Early in the month China abruptly pulled the plug on Ant’s $35 billion share sale in Shanghai and Hong Kong, bringing to a screeching halt what would have been the world’s biggest initial public offering (IPO). The Shanghai stock exchange suspended the listing after the CEO, Jack Ma, was called in for ‘supervisory interviews’. The Hong Kong listing was also suspended.

Also during November, Amazon faced an investigation from the EU regulators into how the e-commerce business handles data from rival sellers on its online retail platform. The investigation escalates a case into Amazon’s role as both direct retailer and a host to other online stores.

SA’s economic contraction at a turning point

Data released during the month showed that South African factory output contracted at the slowest pace in seven months in September on the increased production of food and beverages. Output contracted by 2.6% compared with a revised 11.1% decline in August.

South African private sector activity, as measured by the IHS Markit’s Purchasing Managers’ Index (PMI), expanded for the first time in 18 months in October. It rose to 51.0 in October from 49.4 in September, back above the 50 level that separates expansion from contraction.

Fitch and Moody’s negative on SA

Following on government debt moving to non-investment grade (‘junk’) in March this year, during November Fitch downgraded South Africa’s long-term foreign and local currency debt ratings further to BB- and Moody’s downgraded South Africa’s long-term foreign and local currency debt ratings to Ba2. Both agencies maintain a negative outlook. Bond markets showed little response, as the risk of a government debt default is already priced into bond yields.

Berkshire shows confidence in African continent

Teraco Data Environments, a data centre provider backed by Berkshire Partners, announced that it is investing $250 million to build Africa’s largest facility on a single site, in Johannesburg, as it prepares to capitalise on the growing demand for internet and cloud-based services on the continent.

SA telecoms and tech companies helped by the shift to online

During November, Telkom announced that it expects its headline earnings per share (heps) to rise by as much as a quarter in the six months to 30 September 2020. Another benefactor of the shift to online in 2020 was Vodacom. Its heps rose by 15.7%, helped by a once-off deferred tax rate adjustment. During the Covid-19 pandemic, in South Africa data usage surged 86%. In the six months to the end of September, Naspers’s earnings rose by nearly 30%. Its Takealot division in South Africa saw revenue growth of 41%.

Perennial performer Mr Price hit hard by lockdown

Mr Price reported its half-year headline earnings during the month, which showed the impact of coronavirus lockdown restrictions. Its headline earnings declined by 24.8% for the half-year on the back of R1.8 billion lost in sales in April alone.

November – a bumper month for most indices

SA equities as measured by the FTSE/JSE All Share Index (ALSI) experienced a sudden growth spurt of 10.5% and listed property (SAPY) recovered some of previous months’ losses by giving a positive 17.5% in November. SA bonds (ALBI) gained 3.25% and cash (STeFI) returned 0.31%. On a sectoral basis, Basic Materials, Industrials and Financials returned 10.9%, 20.5% and 17.1% respectively.

The MSCI World index gained 7.4% in rand terms for the month, despite the rand strengthening 4.8% against the US dollar. (A strengthening rand leads to lower global market returns for South Africans and vice versa.) The MSCI Emerging Markets index gave 4.1% and the Bloomberg Barclays Global Aggregate Bond index returned -3.0% for the month.

Year-to-date, rand weakness buoyed offshore asset returns

Year-to-date, the rand has lost 10.7% of its value against the US dollar and nearly 18% against the euro. With the tailwind of a weaker rand, the MSCI World Index gave South African investors 23.1% in rand terms and the Bloomberg Barclays Global Aggregate Bond Index returned 19.25% in rand.

The ALSI has eked out 2.7% on a total return basis with Basic Materials up 10.8%, Industrials down 22.2% and Financials down 25.9% year-to-date. Listed property at -42.4% is the uncontested loser of 2020. The ALBI has returned 6.07% for the year so far, and cash 5.06%.

Over the past five years Basic Materials is the star performer

Over the past five years to 30 November 2020, the ALSI returned 5.1% p.a., just beating inflation. On a sectoral level, Basic Materials returned a positive 20.6% per year over the five years to 30 November. In contrast, Industrials and Financials lost 4.7% and 4.1% per year respectively. Listed property (the SAPY) returned -11.9% annualised over the past five years. The ALBI and cash returned 8.4% and 7.0% respectively.

South Africans investing offshore saw good rand-based returns. The MSCI World Index (developed market countries) gave a 12.45% p.a. total return and the Bloomberg Barclays Global Aggregate Bond Index 6.1% in rand terms over the past five years. The rand weakened by 1.4% per year against the US dollar and by 4.0% per year against the euro.

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