Intellidex Reviews March 2020: in the news

Each month, the investment gurus at Intellidex give us insights on the markets as well as the Exchange Traded Funds they like in a bid to help investors make the right investments in their portfolios. We've updated and divided our Intellidex insights format into two separate notes. Namely: market commentary and news, and then another note to highlight their preferred ETFs/choices. In this month's market insights, the Intellidex team cover the coronavirus and it's global markets effects, the budget speech, and more!

Risk assets, which make up the bulk of the underlying investments in ETFs, were hammered in February, with most of the damage coming in the final week of the month. Investors were compelled to reconfigure expectations on the impact of the coronavirus, with the contagion accelerating outside China. The virus has now hit all continents, and more recently SA, with most authorities raising the risk level to high alert.

The MSCI World Index, which tracks the dollar performance of developed market equities, fell 8.6%, while the MSCI Emerging & Frontier Index tanked 12.1%.

With safe-haven assets becoming more attractive, gold and global bonds closed February 6.7% and 0.7% stronger respectively. Interestingly, rhodium and palladium, which are not considered safe havens, were the only risk assets holding onto gains by month-end as demand continues to outstrip supply.

The local view

Locally, the equities rally induced by the 2020 budget announcement fizzled out as soon as it started. The JSE tracked global equities lower and the all share index closed the month down 9%. SA government bonds were flat.

Against this backdrop, average returns for JSE-listed local and foreign asset ETFs were negative, though losses of the latter were curbed by the weakening rand. A basket of all local ETFs fell 8.3% while the basket of all JSE-listed international ETFs declined 4%.

In contrast, the basket of commodity ETFs rose 8.8%. Consequently, Intellidex’s equally weighted ETF portfolio, which is built from these three broad JSE ETF categories, declined 1.41% while its benchmark of all JSE-listed ETFs was worse, down 4.8%.

The local economy remains under tremendous pressure, growing a meagre 0.2% in 2019, the worst since the financial crisis over a decade ago. Officially, we are in a technical recession as the economy shrank in the last two quarters of last year. While challenges at home seem insurmountable, the coronavirus is taking centre stage globally, which serves to expose SA further.

Image source: Shutterstock

The much anticipated 2020 budget was not short on surprises, but as expected government’s debt trajectory deteriorated further. National Treasury now expects the economy to grow just 0.9% this year, but with downside risks high, that seems a generous estimate. Specifically, Eskom and other SOEs have become a perennial drag on the fiscus, worsened by the fact that government has struggled to implement the actions needed to reverse the decay.  

The budget provided a little relief to consumers with no major tax hikes but an adjustment to account for bracket creep. The ambition to save R160bn by cutting the government wage bill over the next three years was a major highlight. However, Intellidex reckons it's a hard ask, given union opposition, and is unlikely to materialise. Moody's didn't buy it either, issuing a statement that was highly sceptical of the plan being implemented, which raises the probability of a sovereign credit downgrade to junk status.

The rand, which is intricately linked to the South African economy and politics, is also bound to continue being volatile.

The obvious casualties of the coronavirus are companies linked to travel and consumer spending, while it is also disrupting global supply chains. The OECD was quick to slash its 2020 global GDP growth forecasts by half to 1.5% from 3%, the worst forecast cut since the 2008 financial crisis.

We have summarised how the virus has or is going to affect economic activity:

• Millions in China are under lockdown
• The International Air Transport Association forecast that airlines would lose between $63bn to $113bn in revenue this year.
• The trillion-dollar companies Apple and Microsoft have issued sales warnings, citing supply chain challenges
• In SA, big retailers Shoprite and Woolworths warned that their supply chains could be affected. Shoprite says initial estimates show a loss of R100m in sales.
• Global tech behemoths including Google, Facebook and Amazon have cancelled events and conferences and have asked employees to work from home.
• Italy has closed schools and universities and restricted public gatherings, including sporting events.

While this list is not exhaustive it does paint a picture of risks and potential losses. However, global central banks and governments are taking steps to reduce the coronavirus impact. Measures already taken or that might be taken include:

• China was first to implement expansionary fiscal and monetary measures.
• That was followed by interest rate cuts from the US Federal Reserve, Bank of Canada, the Hong Kong Monetary Authority and the Reserve Bank of Australia. The central banks of the EU, England and Japan have expressed their readiness to follow suit. With this latest round of cuts, we have hit the lowest average interest rate on record globally.
• Additionally, the South Korean government has unveiled $9.8bn to help businesses, while US lawmakers agreed on a $7.8 bn emergency package to respond to the outbreak.
• Opec and other oil-producing countries will discuss oil production cuts.

These steps could help reduce the blow on the global economy, but it is difficult to predict how things will play out.

Overall, local equities are showing value, based on their historical averages of various ratios. However, most companies are experiencing flat or declining earnings and if the local economy does not improve, the low valuations will persist.

While there are risks to both the upside and downside, downside risks are more pronounced given SA’s current trajectory. However, in the short term, SA’s fixed-income assets might attract foreign flows given their relatively stronger yields.