How the markets are reacting to COVID-19 6 March 2020

We have received many questions about the market moves over the past month and have compiled a short note to help answer them.

Should we panic and what are we doing?

Although it is very difficult to predict when the COVID-19 epidemic will stop or even be contained, we are more inclined to look for opportunities to add to positions rather than to panic and sell out of positions.

In attempt to assist growth, global central banks will cut rates. The United States Federal cut rates intra-meeting on Tuesday by 0.5% and the market is pricing in another 50 basis points cut over the next few months. Quantitative Easing will be increased. Global authorities will introduce more fiscal stimulus to boost growth. In the short term, activity will take a knock and many numbers may look bleak; but over the longer term stimulus measures will provide support. This should result in the impact of the virus being transitory.

Within our Balanced South African (SA) Funds, we are underweight equities, overweight bonds, neutral property and slightly overweight offshore. In equities we feel that we have quality stocks and we are defensively positioned. We are comfortable with our overweight position in SA bonds at current levels. The South African Reserve Bank (SARB) is also expected to cut rates by another 50 basis points (or more) over the next 12 months. With markets being so volatile, we would look to add or reduce bonds at appropriate levels. Within property we are overweight offshore exposure within our portfolio. We are neutral on offshore with exposure to equities and fixed income. The fixed income portion has done well, and we would look to reduce bonds and add to equity as opportunities arise.

February 2020


Table_for_COVID-19_emailer

International markets


feb2-international-performance-covid19-mailer-table


Within SA equities

feb-performance-covid19-mailer-table-within-SA-equities


Within SA bonds

feb-performance-covid19-mailer-table-within-SA-bonds
Source: RMB

US 10-year bonds rallied 36 points to 1.15%.
German 10-year rates rallied 17 points to -0.61%.

The VIX Index (fear gauge of the S&P) moved from below 15 to 40 in one week, which is a significant jump.


vix-index
Source: Bloomberg Finance

Clearly the market’s diagnosis of the virus has changed. Initially it was seen as a China story with a one- to three-month impact on supply chain disruptions, and recovering v-shaped after that, and that global growth would hardly change over a 12-month period from the consensus of slightly above 3%. The spread of the virus into other countries has caused the latest bout of panic in markets. Now Goldman Sachs are calling for global growth of just 2% for the year. It’s not so much about the fatality rate as it is about the containment of the virus because it is so contagious (an infected person can spread the virus for 15 days before feeling symptoms).

The virus has spread from China to the rest of the world.

virus-outbreaks-hotspots
Source: Bloomberg reporting, WHO, National Commission of the PRC

The Organisation for Economic Co-operation and Development (OECD) cut its global growth rate from 2.9% to 2.4% for 2020, which would be the weakest since 2009.

downgrades-galore
Source: Organization for Economic Cooperation and Development

ailing-economies
Source: OECD

With all the risks at the moment (Coronavirus, US elections, Brexit) global interest rates have collapsed. The US 10-year rates hit a low of under 1% last night. Even scarier is that the US 30-year inflation-linked bond was negative for the first time.

us-30-year-inflation-linked-bond
Source: Bloomberg Finance

While the budget was seen as a step in the right direction (by not raising taxes further and by cutting expenditure in the form of wages), implementation risk is high. Our growth numbers are also lower than Treasury’s, so there is a big possibility of a revenue miss (thereby increasing budget deficits). Gross domestic product numbers for quarter four of 2019 were released on Tuesday and confirmed that the country is in a technical recession, with only 0.2% growth recorded for the whole of 2019. Our economists are likely to downgrade our current forecasts lower.

gdp-contraction-in-q4-2019
Source: Stats SA, Absa Research