Riding on generous fiscal and monetary stimulus packages and the reopening of economies, markets were positive in June but hit a snag in July as second waves of Covid-19 infections took hold in many countries. Global coronavirus cases are now adding a million infections every four days.
Against this backdrop it is not surprising that the IMF recently warned that the pandemic will have an even bigger impact on the global economy than initially thought. The IMF sees the global economy shrinking 4.9% this year, recovering strongly to grow 5.4% next year.
In equity markets, there are clear winners. The ongoing second quarter global earnings reporting season has crystallised investor perceptions: the rally has been dominated by technological stocks benefiting from people working from home and involved in developing Covid-19 vaccines.
Furthermore, the liquidity in global markets and the promise of more stimulus by major economies is likely to see the momentum in equity markets continue, albeit with most of the money flowing into companies positioned to benefit from people working from home, until a substantive vaccine or cure is found.
The EU recently unveiled a €750bn economic stimulus package and the US is on the brink of inking another trillion-dollar plus package into law. South African investors can gain exposure to some of these stocks through JSE-listed international asset ETFs.
Locally, our economy was already fragile prior to Covid-19 due to years of mismanagement and a lack of policy cohesion within the government, exacerbated by corruption. SA is reaching its peak infection rate. While we remain in level three of the lockdown, some aspects of the lockdown have been tightened including the re-banning alcohol sales. As a result, we see the country sinking deeper than peers.
At Intellidex we see the SA economy shrinking 10.4% this year, recovering by 4.5% next year. Even with the recent $4.3bn IMF loan we have limited tools to boost the economy. Also, the loan was largely priced in as part of the R500bn stimulus package announced in May. Without proper reforms we are likely to see economic activity going back pre-Covid levels only after at least three years. This points to better opportunities offshore.
However, the JSE top 40 indirectly provides exposure to the global economy through resource stocks and companies with offshore operations, which are set to benefit from strong commodity prices and the weak rand. Conversely, it is difficult to make a case for South African-facing companies (SA Inc stocks) even at these seemingly beat-down valuations. Worse might still come.
Finally, cracks in international relations are reappearing, particularly involving China, Hong Kong and the US, while Brexit talks are back on the table. In these light investors should be on the lookout given that in the last decade August has on average been the worst month for global risk assets.
Intellidex Reviews
July 2020: ETF Picks
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
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Disclaimer
This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.
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