Economic and Market Overview: Quarter 3, 2020

Economic and Market Overview: Quarter 3, 2020

For the period ended September 2020

The following market review looks at the performance over the past quarter of local and global asset classes and currencies and puts this into perspective relative to longer-term performance. The purpose of this review is to provide a context in which the performance of the investment solutions in which you are invested can be assessed.

Note: All quarterly data is quoted in US dollar terms unless otherwise stated.



The world is on tender hooks once again as coronavirus cases increase across Europe, US and the UK. Although localised lockdowns in towns and regions remain the primary response, there has been a reintroduction of broader measures in countries like the UK to limit the movement and interaction of people. Many argue that the ability to test is greater during this resurgence and hence the increases reflect better data. For others it merely highlights the fact that the world may need to learn to live with COVID-19 until widespread immunisation has been achieved and potentially beyond.

Markets were less sanguine about such uncertainty and remained vulnerable to news such as a temporary halt in the phase three vaccine trials of AstraZeneca and Oxford University, continued tensions between the US and China on a multitude of topics and the lack of progress on further fiscal stimulus in the US (CARES 2). Over and above that, valuations of technology companies had arguably run ahead of a still tentative economic backdrop. Risk off sentiment reverberated across key markets in a meaningful way for the first time in months.

The S&P 500 declined -3,8% over the month, with the selloff in technology stocks driving a decline in the Nasdaq of -5,7%. Despite the lapse in momentum, the S&P 500 delivered +8,9% over the quarter while technology heavy index Nasdaq returned an astounding 48,7% over the last 12 months. Despite the end of summer volatility, most of the major equity markets delivered positive returns over the third quarter with emerging markets beating many developed market peers, compliments of a weaker US dollar.

In good faith

Brexit negotiations came to a head when the UK put forward the Internal Market Bill, which removes the requirement for a new customs arrangement with Northern Ireland and essentially overrides a crucial part of the previously agreed withdrawal agreement. The draft bill has been criticised for undermining international law and has been opposed by Scottish and Welsh leaders.

The UK may have been emboldened by the other big announcement in September, its first major post-Brexit trade deal with Japan, which would increase trade by an estimated £15bn a year. Nevertheless, the UK ignored the end of September deadline from the EU to remove the controversial changes. Brussels has now launched legal action, arguing that the UK draft bill is “a breach of the obligation of good faith laid down in the withdrawal agreement”. Prime Minister Boris Johnson has stated that the UK would walk away from trade negotiations come 15 October, casting further doubt over a ratified deal by end of the year.

The US election season kicked off with a presidential debate that devolved into a chaotic exchange of insults, interruptions and very few hard facts. With the regretful passing of justice Ruth Bader Ginsburg, one of the topics debated her replacement on the Supreme Court. President Trump has nominated Amy Coney Barrett for the position, which if approved, would leave the US with a largely conservative Supreme Court. But given that this is an election year, many argue that the appointment should be left to the newly elected US president. In fact, Republicans blocked the confirmation of a judge on these grounds in 2016, just before President Trump took office. Others have suggested expanding the number of seats. The Supreme Court is often the final arbiter of contentious laws and disputes and judges serve a lifetime appointment – much longer than a presidential term. With so much at stake and a noisy election in the pipeline, US citizens can only hope for leaders that will act in good faith.


Care and maintenance

The devastating impact of the COVID lockdowns echoed in key data releases in September. Unemployment data showed 2,2m people lost their jobs, while second quarter GDP declined by -16,4% over the quarter (-51,0% q-o-q, annualised). A dire state of affairs and one which has focused the mind of stakeholders across different spheres of the economy. Under the auspices of NEDLAC, business, labour and government came together on an economic recovery plan for the country. Data for the third quarter already shows improvement from this low base and will be further supported by the country moving to level 1 restrictions. But more intervention is required, and the country now waits for cabinet approval (and implementation) of the economic recovery plan.

With this backdrop, many investors struggle to see why SAA should remain a priority and warrant a further R10,4bn to support rescue efforts. While government has committed to the monies, finding this in a fiscally neutral manner has proven difficult and has resulted in the entity being placed under “care and maintenance” by business rescue practitioners.

After delivering 300bps of interest rate cuts over 2020, the SA Reserve Bank opted to keep rates on hold at the September meeting with a vote of 3:2. Fiscal concerns weighed on local nominal bonds in September, with the All Bond Index returning -0.05%. Bonds still outperformed other asset classes over the quarter, returning +1,5%.

Property companies are reporting an improvement in footfall as lockdowns have eased. The sector, however, continued to trade under duress, with the property index losing a further -3,0% over the month and -14,1% over the quarter.

With the prominence of technology company Naspers/Prosus in local indices, the FTSE/JSE All Share traded down -1,6% over the month in line with global markets and technology counters, bringing the quarterly return to a modest +0,7%. The headline figures, however, hide a multitude of trends. Domestic retailer Shoprite and bank Capitec delivered +25,7% and +24,2% respectively over the month, despite the tough backdrop and financial results, highlighting the weak expectations that were priced in. Small and mid-size companies continued to stage a recovery, gaining +3,5% and +1,3% respectively. Despite losing some ground in September, resources added +5,7% over the quarter and with 12 month returns at +27,4% has been one of the big drivers of the recovery in the local equity markets.

The tables below provide a review of key local and international investment indicators for the past quarter, as well as over longer periods.

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