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October 2020 market review: second wave of Covid-19 hits Europe

Market indicators
| Market Forces

During October, Europe faced the anticipated second wave of Covid-19 infections as the US continued to tackle a high infection rate, which was only slightly overshadowed by the heated run-up to the US presidential elections.

US joblessness remains high
Cathay Pacific joined the long line of embattled aviation companies affected by travel restrictions due to lockdown. It announced that it would need to cut more than 5 000 jobs and close a regional carrier. Although initial jobless claims in regular state programmes totalled 751 000 in the week ended 24 October, down 40 000 from the prior week, continuing claims — the total pool of Americans on ongoing state unemployment benefits – stood at 7.76 million in the week ended 17 October.

Hong Kong prepares for Ant IPO while TenCent share price surges
While Hong Kong and Shanghai were preparing for the listing of digital finance group Ant (expected to be the largest IPO in history), Chinese digital giant WeChat celebrated a small victory during October. After some share price volatility following steps by the Trump administration to prohibit the TenCent-owned WeChat in the US, the prohibition bid was blocked by the US appeals court. In response, Tencent’s share price jumped to an intraday record on the Hong Kong exchange.

World food inflation at 5% y/y
Monetary authorities continue to monitor inflation as the expected handbrake on the loose money policies unleashed during 2020. Although overall consumer inflation remains contained, food inflation is on the up. World food prices rose for a fourth month running in September, led by large increases in cereal and vegetable oil prices, and are up 5% year-on-year. According to Bloomberg, global food prices have jumped nearly 8% since the start of the pandemic. Accelerating inflation has forced policy makers from India to Mexico to tone down monetary stimulus.

SA factory output in decline
South African factory output contracted for a fifteenth month in August even as coronavirus-lockdown measures were eased and more activity resumed in the sector.

Mixed results for SA companies
Cell C reported an interim net loss after tax for the six months to June 2020 of R7.6 billion, but said this was mainly the result of once-off costs and adjustments. Pick n Pay reported a 56.3% drop in first-half profit. African Bank announced that 1 269 employees of its staff total of 3 728 will be affected by restructuring and approximately 25% of the number affected will lose their jobs. But the Clicks Group did well during lockdown and reported a 13.7% increase in annual earnings.

MTBPS: a proposed freeze on the state wage bill
On 28 October Minister Mboweni delivered the Medium Term Budget Policy Statement (MTBPS). Among other expenditure cuts, the minister announced that Treasury plans to slash its wage bill over the next three years, including a proposed pay freeze. The consolidated Budget deficit is projected at 15.7% of gross domestic production (GDP) in the current 2020/21 fiscal year. In the same week, S&P cut its assessment of Zambia’s debt to selective default after Zambia couldn’t meet payments and skipped a coupon on its Eurobonds.

Red October for most major indices
Historically, October is a month in which stock markets across the world tend to turn red. 2020 was no exception, especially as parts of Europe returned to lockdown. The MSCI World index lost 5.6% in rand terms for the month, with the rand becoming 2.6% stronger against the US dollar, contributing to the negative rand return. (A strengthening rand leads to lower global market returns for South Africans and vice versa.) Our local stock market as measured by the FTSE/JSE All Share Index (ALSI) lost 4.7% on a total return basis and listed property (SAPY) had another disappointing month at -8.5%. SA bonds (ALBI) gained 0.89% and cash (STeFI) returned 0.34%. On a sectoral basis, Basic Materials, Industrials and Financials returned -10.9%, -3.2% and -5.8% respectively.

Year-to-date, the weak rand bolstered offshore returns
Year-to-date, the rand has lost more than 16% of its value against the US dollar and more than 20% against the euro. With the tailwind of a weaker rand, the MSCI World Index gave South African investors 14.5% in rand terms and the Bloomberg Barclays Global Aggregate Bond Index returned 23.0% in rand.

The ALSI has lost 7.1% on a total return basis with Basic Materials down 0.2%, Industrials down 35.4% and Financials down 36.7% year-to-date. Listed property has lost a staggering 50.9% in 2020! The ALBI returned 2.72%, and cash returned 4.73%.

The last five years have been a golden era for Basic Materials
Over the past five years to 31 October 2020, the 2.2% annualised return from the ALSI did not manage to beat inflation’s 4.6% annualised. On a sectoral level, Basic Materials returned a positive 14.5% per year over the five years to 31 October. In contrast, Industrials and Financials lost 9.1% and 7.7% per year respectively. Listed property (the SAPY) returned -14.7% annualised over the past five years. The ALBI and cash returned 7.5% and 7.1% respectively.

South Africans investing offshore reaped good rand-based returns. The MSCI World Index (developed market countries) gave an 11.7% p.a. total return and the Bloomberg Barclays Global Aggregate Bond Index 7.3% in rand terms over the past five years. The rand weakened by 3.3% per year against the US dollar over this period.

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