Globally, markets ebbed and flowed as investors reacted to economic news. The US and eurozone posted historic declines (quarterly) in GDP growth of 9.5% and 12.1% respectively, due to Covid-19 related lockdown measures. The main driver of the decline in the US was a reduction in consumer spending which makes up 70% of GDP.
In China, the July Caixin manufacturing purchasing managers’ index (PMI) rose to 52.8 points, its best level since January 2011. This points to a recovery in domestic demand and output. Similar increases in PMI data out of the US and eurozone show that global economic activity has increased broadly – albeit at uneven rates in different regions.
Retail trade sales dampened the pace of the global economic recovery. US retail sales gained 1.2% monthly in July following a revised 8.4% monthly increase in June. However, the increase underwhelmed the market as a resurgence in Covid-19 cases and the end of unemployment benefits possibly lowered demand.
China’s retail sales dipped 1.1% on a yearly basis in July – despite containment of the pandemic. This points to a possible change in consumer behaviour. The eurozone’s retail sales volumes increased 5.7% from the previous month and 1.3% year on year in June as more lockdown restrictions eased.
Finally, the US equity market responded positively to the Federal Reserve’s announcement regarding a change in its monetary policy framework. The change allows for higher inflation (above 2%) to compensate for periods of lower inflation and importantly, continued support to the economy and financial markets. This sent an already strong S&P 500 index to a record 3,508 points – a 7.3% return in August.
Locally, a move to lockdown level two has seen economic activity recover. However, this may have come too late as income derived from the tourism accommodation industry tanked by 95.3% year on year in June. Furthermore, the deadline for the government’s temporary relief scheme (Ters) came to an end in mid-August. Given the already weak state of SA’s economy before Covid-19, we expect the recovery to take three years – following a severe decline in GDP growth of 10.4% in 2020.
This is exacerbated by the return of load-shedding and a dysfunctional political economy. Specifically, alleged corruption in government’s PPE purchases and inaction on implementing urgent structural reforms are severely limiting to SA’s fortunes.
Consequently, we still believe that it is difficult to make a case for South African shares. However, we are mindful of a recovery rally owing to a potential Covid-19 vaccine hitting the market between the fourth quarter of 2020 and first quarter of 2021. This, combined with a further recovery in local economic data, may send SA shares higher.
Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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