Global equities rallied close to 40% from March lows to post one of the strongest quarters in a decade. The rally was led by the United States (US), perversely the country with the most Coronavirus (COVID-19) cases globally, with healthcare and tech stocks up a combined 23%. The AAA FM (Apple, Alphabet, Amazon Facebook and Microsoft) now account for a record 22% of the market cap of the S&P 500 and are clear beneficiaries of the social distancing and work from home trends. Even commodity markets recovered from the COVID-19 induced seizure which saw West Texas Oil futures plunge to an unprecedented -$38 a barrel (no this is not a typo). Demand just stopped during lockdown and there was insufficient container capacity to store oil, so buyers were effectively being paid to take crude oil. This anomaly did not last as oil staged its strongest rally since 1990, up 91% this quarter as economies re-opened. Gold also continued to surge nearing 2011 highs. A more obscure commodity also benefitted from the DIY explosion caused by those staying at home, US lumber futures spiked some 85% since the beginning of April as those locked indoors use the opportunity to improve their homes.
South African equities also recovered most of the ground lost in the first quarter, with the Johannesburg Stock Exchange (JSE) being the second strongest performer in the emerging market universe behind Argentina. We saw resources stocks up over 40% this quarter as combination of a weak currency and stronger precious metals led to a strong rebound in gold and other commodity producers. Naspers and its European listed next of kin, Prosus, also performed strongly on the back of a rebound in technology shares with Chinese internet stocks also benefitting. On the downside, the local property index is still down by almost 40% year-to-date as the transition from the physical to the digital world accelerates. All in all, South Africa’s attraction as a global investment destination is waning. The JSE’s weight in the global emerging market index has dropped to under 4% and our sovereign bonds are not part of the major global government bond index. The All Bond Index is flat for the year after suffering the worst month in its history in March.
The most eye-popping figure must be the $3 trillion expansion of the Fed balance sheet which in five months did the equivalent of five years of quantitative easing witnessed during the Global Financial Crisis. Our own gross domestic product (GDP) is expected to contract the most since the 1930s Great Depression and our budget deficit is expected to widen to close to 16% of GDP – the most since World War 1. Despite efforts to stimulate the economy by government and the Reserve Bank slashing rates to half a century lows, the economic strain is likely to be severe. A Stats SA survey recently showed that 40% of small and medium enterprises may not survive this crisis and already a number of previously buzzing businesses and restaurants have closed their doors.
The South African Economy is reminiscent of the book “the diving bell and the butterfly” which is the autobiography of the former editor of Elle magazine Jean Dominique Bauby. Bauby suffered a stroke and went into a coma. He dictated the book by blinking only his left eye due to him being almost completely paralysed. The Coronavirus has pushed our economy into a deep coma and with limited resources to revive the patient, policy makers will have to force feed some bitter medicine to get us back to good health.
Financial markets have shrugged the impact of COVID-19 and looked through the current slump and the health crisis. Both global and local markets have remained resilient, but the impact of the real economy is still to be seen in the financial results of companies over the coming months. While there will be some clear beneficiaries, many businesses will have to shrink and restructure to come to grips with the post-covid world. This adjustment is likely to be painful and take longer than currently discounted by financial markets.