[responsivevoice_button rate=”1.4″ pitch=”1.2″ volume=”0.8″ voice=”US English Female” buttontext=”Play”]The first quarter of 2020 was a traumatic quarter for markets as the coronavirus, oil war and Moody’s downgrade rattled the South African economy. The worldwide lockdown of multiple economies due to Covid-19 is well known by now. In response to a looming deep global recession, central banks across the developed and developing world have cut interest rates dramatically and announced a cocktail of financial stimulus. US unemployment has spiked to levels not seen in decades and despite all the emergency measures, large businesses are battling to pay staff wages, suppliers and creditors. Equity, bond and property markets have taken a substantial blow and there is currently a significant amount of risk built into current valuations.
In this economic review, we discuss the events of the first quarter of 2020. We explain what happened and what you can do.
The year 2020 started with conflict between the US and Iran and rising oil prices, which were subsequently – and suddenly – reversed in March as Saudi Arabia and Russia failed to reach an agreement on oil production cuts, causing oil prices to collapse.
Oil Events that moved the market in 2020:
3 January 2020: US kills top Iranian general
President Trump orders the killing of General Qasem Soleimani, spearhead of Iranian military operations in the Middle East, along with other Iran-backed militia at Baghdad airport. Iran’s Supreme Leader Ayatollah Ali Khamenei warns that “severe revenge awaits the criminals” behind the attack. Source: BBC News
8 January 2020: Oil price up as Iran attacks US base
Shortly after the US killing of General Soleimani, Iran launches a missile attack on bases at Ain al-Asad and Arbil in Iraq, housing US and coalition forces. Source: AFP
8 March 2020: Oil wars launched
Saudi Arabia cuts its oil prices by the biggest margin in 20 years after a failed agreement with Russia over oil production. Brent crude is down to $32 a barrel. Source: AFP
9 March 2020: Sasol down on oil price drop
Sasol loses 45% of its share price value in the first few minutes of trading on the oil price collapse. Source: fin24
30 March 2020: Oil falls further
Oil slumps to a 17-year low as coronavirus lockdowns cascade through the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning surplus of crude. Futures in London fell as much as 7.6% to the lowest since November 2002. Source: Bloomberg News
Downgrade & Exchange Rate
Why is the downgrade important:
- Sovereign credit ratings are a key element of a country’s borrowing costs in international markets.
- These ratings set the ceiling for the ratings that are given to banks and companies, and in turn impact the cost of private financing within the country.
- Most institutional investors are legally required to maintain a lower risk exposure, which would mean they would not be able to hold bonds with a junk status.
What it means for South Africa:
- The market will re-price yields on government debt to reflect the increased risk of a default. This would increase the rates payable on all private debt.
- It would be bad for business confidence. Businesses would be reluctant to invest in their businesses until future growth prospects improved.
- It would be bad for investor confidence externally. South Africa’s ability to repay its debt would be diminished and investments into the country would dry up as a result.
What it means for Investors:
Your buying power
- The SA rand will depreciate in value.
- Travelling abroad and buying imported products will be more costly.
- Your global buying power will be eroded.
If you have investments offshore
- A depreciating rand will mean more capital in rand terms.
- At the very least, your global buying power will be maintained.
SOEs (SAA, Eskom, etc) rely on external funding
- If bond yields increase further, this will lead to increased borrowing.
- An increase in SOE borrowing costs will be passed on to consumers (e.g. increase in electricity costs).
Higher import costs lead to higher inflation
- This could mean tighter monetary policy and higher interest rates.
- This is good for interest earned on bank savings (if the interest rates your bank offers beat inflation).
- But bad for those of us who have debt!
- Higher interest rates could stunt the growth of your property’s value, as buyers become discouraged.
- BUT, a weaker rand could encourage foreigners to buy SA property.
The impact of Covid-19 was severe on financial markets, especially in March. The last week of March, fortunately, saw a strong relief rally which softened the blow somewhat, but almost all asset classes locally experienced very poor returns:
Source: Sanlam Investments | i-Net
COVID-19 Events that moved the market in 2020:
23 January 2020: China Ends Year In Panic
The Shanghai Composite Index sinks more than 3%, set for the worst pre-new year drop in its three-decade history, fuelled by panic over the outbreak of a deadly virus that locked down travel to and from the city of Wuhan with 11 million residents. Source – Bloomberg News
3 February 2020: Chinese stocks plummet
Investors erase $393 billion from China’s benchmark stock index on Monday, sell the yuan and dump commodities as fears about the spreading coronavirus and its economic impact drive selling on the first day of trade in China since the Lunar New Year. Source: Reuters
3 February 2020: Coronavirus hits Milan
Italian stocks plummet on more than two hundred confirmed cases of coronavirus. Source – Bloomberg News
3 March 2020: Fed cuts rates by 50bps
The Fed slashes its key interest rate by half a point to a range of 1.0% to 1.25%, a bigger cut than usual. It states that “US economic fundamentals remain strong, but the coronavirus poses evolving risks to economic activity”. Source: AFP
5 March 2020: Chinese shares hit 2-year high
Chinese stocks jump to their highest in two years, erasing the last of the declines fueled by the coronavirus outbreak. Source – Bloomberg
5 March 2020: First SA case of coronavirus
A 38-year-old man, returning from a trip to Italy, tests positive for the (COVID-19) virus in KwaZulu-Natal. Source: fin24
11 March 2020: WHO declares COVID-19 pandemic
The World Health Organization on Wednesday declares the rapidly spreading coronavirus outbreak a pandemic. Source: Statnews
12 March 2020: Trump bans travel from Europe
Global shares plummet after President Trump announces a temporary travel ban from Europe in an effort to curb the spread of the coronavirus. Source: Reuters
12 March 2020: Italy closes shop
Italy, the European country with the deadliest outbreak of Covid-19, imposes a blanket closure of restaurants, bars and almost all shops except food stores and pharmacies. Source: Reuters
12 March 2020: Black Thursday
Wall Street has its worst daily crash since 1987 and some European bourses show the biggest losses on record ever. Source: Reuters
16 March 2020: China joblessness jumps
China’s jobless rate jumps to a record 6.2% due to the coronavirus, with demand for factory workers declining. Source – Bloomberg
17 March 2020: Philippine market shuts down
The Philippine Stock Exchange closes indefinitely and currency and bond trading are suspended – the first market shutdowns worldwide amid the Covid-19 crisis. Source: Reuters
23 March 2020: SA to stay at home
President Ramaphosa announces that the country is about to enter a nationwide lockdown – with the exception of essential services such as food, medical care and fuel – from midnight on Thursday, 26 March to curb the spread of the COVID-19 virus. Source: SABC
26 March 2020: US joblessness off the chart
US weekly jobless claims for the week ending March 21 clock in at an astounding 3 283 000, up from 281,000 in the previous week, which already marked a two-year high. Source: Business Insider
27 March 2020: SA mourns first Covid-19 deaths
The rand weakens as the country reports its first death from the coronavirus and a sharp jump in new infections, just as a three-week national lockdown commences to curb the outbreak. Source: Reuters
27 March 2020: Easier rules for SA banks
South Africa’s banking regulator, the Prudential Authority, proposes that the minimum capital requirements and compulsory reserve funds for lenders are dropped to boost credit to counter the economic risks caused by the coronavirus pandemic. Source: Bloomberg News
COVID-19 Impact On Your Investments
Solution: Goal-Based Investment
“Everyone wants to buy low and sell high, until the time comes to buy low”…
It’s understandable that clients are hesitant to stay invested in the markets when their investment performance is at the mercy of an exogenous, random shock, like Covid-19. The Moody’s ratings downgrade to sub-investment grade on Friday, 27th March, could also not have come at a worse time.
Following an investment strategy
I encourage you to follow a “Goal-based” investment approach.
The purpose of this approach is to ensure that you are invested in the right investment vehicles and funds for your different goals.
A Practical Example of an investment portfolio:
- Emergency Fund: R 20 000 lumpsum investment through an Unit Trust in a Money Market Fund
- Tertiary Education for children: R 1 000pm investment through an Endowment in a Balanced Fund
- Capital Growth: R 50 000 lumpsum investment through a Sinking Fund in an Offshore Fund with a Guarantee.
- Retirement: R 2 000pm investment through a Retirement Annuity in a Moderate/Moderate-Aggressive Wrap Fund.
An appropriate investment strategy will help avoid unnecessary risk and rash decisions.
Steps to creating an investment strategy:
- Determine your investment need
- Choose an appropriate investment vehicle
- Determine your risk profile and required return
- Choose a fund that will provide you with the best chance of achieving your investment goal.
At TVC Wealth & Health Managers, we specialise in independent financial advice in all financial needs.
This enables us to provide the best solutions and look at your entire financial portfolio.
Click here to learn more about us.
Before investing for capital growth, ensure you have the following in place:
- Medical Aid & Gap Cover
- Sufficient Risk Cover (Life, Disability & Severe Illness Insurance)
- Sufficient Short Term Insurance (House, Household Content, All Risk & Car)
- Emergency Fund (3-6 months’ salary in a low-risk fund)
- Tax-Free Investment (R 36 000 for the 2020/21 tax year)
If you still need to address any of these financial needs, let’s set up a virtual meeting to address these needs.
Keep emotions out of investing
The best advice that I can leave you with at this difficult juncture is to remain calm. It is not going to be pleasant opening up your investment statements and seeing the impact of the market returns on your finances in March. However, I would encourage you all to not allow emotions to take over decision making.
Pessimism is like Velcro, optimism is like Teflon. You can choose which material or view you want to hold onto.
Keep it safe and feel free to contact me regarding any of your investment needs.
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