In this economic review, we focus on events that moved the market in Q3 2020. For the last five months, global markets surged almost uninterruptedly. However, during the latter part of September amid second wave fears, we saw global equities lose ground. The increased political uncertainty in the US, the end of the tech stock rally that drove the index in August, increased COVID-19 infection rates across Europe, and the general staggering of stimulus measures are all contributing factors to the September declines and increased volatility in the market.
Going into the final stretch of 2020, these same factors could continue to have wide-ranging implications for markets. However, positive COVID-19 vaccine developments, dovish central banks and an ongoing economic recovery do provide us with glimmers of hope and the possibility that equity markets could push higher as the year closes.
Global Economic Developments
- Lockdown risks remain high, but a vaccine expected in Q1 2021
- US federal emergency unemployment benefits to end in October.
- Polls predicts Biden to be the next US president. Corporate taxes expected to rise under Biden.
- S&P 500 equity multiples rise as US TIPS yields decline. The bond market expects low real interest rates for years to come.
- Commodities and materials should benefit as the $ weakens alongside improving global growth.
Local Economic Developments
- The economy contracted by an annualized 51% Quarter on Quarter in 2Q reflecting the impact of the draconian measures taken to curb the spread of COVID-19.
- Structural constraints hinder the economic recovery. SARB revises 2020 growth lower to -8.2% (-7.3%). For 2021 and 2022 growth estimates are 3.9% (3.7%) and 2.6% (2.8%). In contrast, the Organisation for Economic Co-operation and Development (OECD) forecasts growth of -11.5% in 2020 and only 1.4% in 2021.
- The Medium-term Budget Policy Statement (MTBPS) is an important milestone for bonds in that clarity is needed on expenditure cuts, particularly the R160bn public sector wage bill and additional expenditure cuts of R230bn over the next two years.
Asset class valuations and investment opportunities
- Non-US equities tend to outperform their US peers when global growth is improving and the dollar is weakening. Also, commodities and materials rise which are over-represented outside of the US.
- The dollar weakens on declining real interest rate differentials and rising twin deficits, which could give rise to outperformance of value over growth stocks.
Solution: Follow 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 appropriate 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.
It is not wise to make investment decisions based on the latest economic review. If you want to avoid unnecessary risk and rash decisions, create an appropriate investment strategy.
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.
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.
Contact us to set up a meeting.
Read More Here:
Sanlam Economic Review: Events that moved the market l Q3 2020
PPS Economic Review: PPS Talking Points Sep 2020