August 2020 Market Commentary

 

 

August 2020 Market Commentary                                                    

 

SA Market Overview

 

South African capital markets were strained during August, with the standout performance coming from South African bonds with the ALBI returning +0.89% in the month, this while the proportion of international ownership of SA bonds is at an all-time low of 30% of all bonds issued. With the higher yields on offer in SA bonds relative to other emerging market countries it is likely we could see increased international inflows in the future. SA equities remained largely flat over the month with a dismal performance being shown by SA listed property falling a whopping -8.59%.

The South African inflation rate crept up to 3.2% in August from 2.2% in the previous month. While it is the first time in three months that inflation was once again in the reserve bank’s target range, the increase will likely have a muted effect on interest rates, as inflation expectation dropped further to 4.5%, firmly in the middle of the reserve bank’s target range. This means that we are unlikely to see another large rate cut in the near future, but that we are equally unlikely to see any rate increase soon. The South African rand experienced a period of high volatility during August, experiencing a depreciation over the first half of the month followed by a period of strong appreciation into month- end. All-in-all the ZAR remained nearly flat for the month, appreciating only 0.47%.

August was the 5th consecutive month of lockdown restrictions in South Africa, we did however see the country move to lockdown level 2, which resulted in a broad reopening across all economic sectors, most notably the lifting of the alcohol and cigarette ban, as well as the restrictions on interprovincial travel. The lifting of alcohol and cigarette bans not only saved many jobs in their industries and more so indirectly in the hospitality industry, but will also have lifted a large burden on the country’s finances as our analysts estimate that the lost sin-tax collection on cigarette sales alone came to a massive R1.8 billion per month (based on 2018 average cigarette sales and prices). Other estimates put the loss of tax since lockdown at R12bn. Overall tax revenue lost is estimated to be above R300bn and expenditure is directly up R174bn and debt up R500bn.

The personal protective equipment (PPE) government tender process has come under fire recently, as the Auditor-General Kimi Makwetu published his initial findings on how contracts in the R22.4 billion PPE budget had been misappropriated. The Auditor- General found that existing deficiency in the government supply chain management have been amplified by the emergency processing, resulting in some suppliers charging more than two and five times the prescribed prices set for PPE. This has led to the formation of a special investigative unit which is currently probing upwards of a hundred service providers for fraud in Gauteng alone.

President Ramaphosa addressed the aforementioned corruption in an open letter to the ANC on 23 August. His letter details the need to attend to the pledges made to curb corruption in the ANC at the national convention in 2017, as well as details some policies that should be implemented. While this was an internal letter to ANC members and has no legal standing, the points raised are valid and would mean a lot to the public image of the ANC as every effort made to curb corruption in our government is a step forward.

Breakdowns at Eskom generation units at Medupi, Duvha, Majuba, and Lethabo power stations led to the country being plunged into darkness once again. South Africa experienced a week of stage two load shedding before a cold front swept the nation resulting in a wet coal supply that sent the country to stage four. All-in-all the resumption of load shedding reminds us once again that South Africa is not an easy place to do business and a sustainable solution to the power generation issues is needed in order to make a swift and meaningful economic recovery after the decimation caused by the Covid-19 lockdown measures.

 

 

 

Global Market Overview

 

International financial markets remained firmly risk-on during the month, with bonds trading into negative territory as investors sold their bond positions to fund the purchase of riskier equity assets. Global equities traded higher, returning +6.11% in USD, this was mostly driven by the overweight in US equities in the index, as most other regional indices remained muted. Global property also performed well, returning +2.11% in USD. These positive returns can be attributed to the global economic reopening currently underway.

On a global scale the effect of the COVID-19 pandemic has been tapering off recently despite the broad reopening of economic and social activity across the globe. The number of daily new cases has tapered off at around the 300k mark, with daily deaths hovering around 6000 over the last while. While this is still near the maximum number of daily cases, the good news is that there is no longer an exponential growth in infections, but rather a linear one. All-in-all this indicates that businesses can responsibly open once again and that the worst of the economic devastation caused by global lockdown measures is behind us.

On the 4th of August, a fire broke out in a warehouse in Beirut port that stored approximately 2750 tons of confiscated ammonium nitrate. The highly explosive material caught fire and led to what is estimated to be the largest non-atomic explosion in human history. The blast killed 190 people and could be seen as far afield as Cyprus, 234kms away. The economic effect of the blast remains to be seen as Lebanon was already in the midst of a financial crisis, having defaulted on their government debt even before the COVID-19 pandemic.

With the US election fast approaching, campaigning has picked up recently with both the Democratic & Republican national conventions taking place. Joe Biden has officially been named as the Democratic candidate and announced Californian senator Kamala Harris as his running mate. President Donald Trump also officially accepted his candidacy and has stood by his first term

Vice Presidential candidate Mike Pence. These conventions took place alongside much civil unrest in the country, most notably the violent protests in Kenosha Wisconsin following the shooting of Jacob Blake by police.

In a historic event, President Trump helped broker a peace treaty between the UAE and Israel. The countries have been hostile since the UAE became an independent nation in 1971. The UAE became only the third Arab nation to formalize its relationship with Israel and the first Persian Gulf country to do so. An agreement such as this between two of the most powerful nations in the middle east will go a long way in stabilizing the region that harbors much of the world’s oil reserves & production capacity.

Oil had a muted month in August, only experiencing minor price movements throughout the month, the only standout was a minor spike in the oil price as refineries in the Gulf of Mexico closed down in preparation for hurricane Laura, which turned out to be much less devastating than expected and all major oil producers have started production in the Gulf once again. Gold however experienced a highly volatile month as the safe haven asset was whipped around according to global risk sentiment. Gold experienced a new record high in August with an intraday price of $2070 per ounce. One week later however gold was trading at an intraday price of $1866 per ounce.

 

 

 

 

Asset Class Performances in ZAR

As at 31st August 2020

MTD

YTD

1 Year

3 Years*

5 Years*

Global Equity – MSCI ACWI

5.56

26.02

29.43

18.91

15.94

Global Property - FTSE EPRA Nareit DR

1.59

1.28

(2.79)

10.09

9.43

Global Bond - JPM GBI Global Traded

(1.14)

30.11

17.61

13.75

9.36

Global Cash - ICE LIBOR 1 Month

(0.50)

21.73

12.81

11.16

6.39

SA Equity - FTSE/JSE All Share

(0.26)

(0.94)

3.85

2.64

5.29

SA Property - FTSE/JSE SA Listed Prop

(8.59)

(44.74)

(44.25)

(22.73)

(12.18)

SA Bond - Beassa ALBI

0.89

1.87

4.16

7.74

7.56

SA Cash - STeFI Call Deposit

0.30

3.33

5.54

6.27

6.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Class Performances in USD

 

 

As at 31st August 2020

MTD

YTD

1 Year

3 Years*

5 Years*

Global Equity – MSCI ACWI

6.11

4.02

16.00

8.85

10.40

Global Property - FTSE EPRA Nareit DR

2.11

(16.40)

(12.87)

0.78

4.21

Global Bond - JPM GBI Global Traded

(0.63)

7.39

5.41

4.13

4.13

Global Cash - ICE LIBOR 1 Month

0.01

0.48

1.11

1.76

1.31

SA Equity - FTSE/JSE All Share

0.26

(18.23)

(6.92)

(6.04)

0.26

SA Property - FTSE/JSE SA Listed Prop

(8.12)

(54.39)

(50.04)

(29.26)

(16.37)

SA Bond - Beassa ALBI

1.41

(15.92)

(6.65)

(1.37)

2.43

SA Cash - STeFI Call Deposit

0.82

(14.71)

(5.41)

(2.71)

1.37

*1FINPLAN (Pty) Ltd is an Authorised Financial Services Provider in terms of the FAIS Act (License No. FSB 15502 | FSB 34707)

* Disclaimer: Source for data and commentary from Morningstar, BCA Research and STAR Investment Partners. Returns for periods longer than 12 Months are annualized. This documented is intended for use by investment professionals and not to be reproduced or altered.