Intellidex Reviews May 2020: in the News

The unwinding of both global and local lockdowns is under way, bringing optimism to markets, as shown by various leading indicators – primarily, equities markets which have maintained two months of positive momentum since hitting March lows. However, the carnage of Covid-19 is conspicuous and we summarise some of the consequences below.

Locally, most companies reported severe slumps in sales during April, when the lockdown rules were strictest, followed by modest recovery in May, but still down compared with the base period. Consequently, companies are suspending dividends and trimming capital expenditure, which will likely accelerate the downward spiral.

Others are filing for business rescue while some have permanently closed all or some of their operations. Examples include Edgars, Comair, Caxton, Associated Media Publishing, Flight Centre, and Phumelela. The National Treasury estimates job losses of between 690,000 and 1.79-million.

Internationally, China is ahead of the curve and recovery seem to be firmly on course. Although it recorded a fifth consecutive month of exports decline in May, orders are starting to grow again. Meanwhile the US, which leads in infections and deaths levels, saw unemployment hit a historical high of 14.7% in April. And Australia entered into recession for the first time in three decades.

Outlook

Important themes playing out both locally and globally are the unwinding of lockdowns and economic stimulus packages. Confidence is slowly building as more businesses open and this is feeding the resilience in equity markets. Uncharacteristically though, bond prices have remained high, a possible indication that investors have not fully embraced a risk-on attitude.

In the context of risk of a second wave of infections, finding the right balance between the cost of the virus spreading and the economic benefit of loosening lockdowns will be key.

International Monetary Fund (IMF) economists warn that the risks of an even more severe outcome remain high. The IMF projects a global economic contraction of 3%, which is going to be the worst in in more than half a century. In its baseline scenario – which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound – the global economy is projected to rebound in 2021 with growth of 5.8% as economic activity normalises. But that will require significant policy support. In Europe there is consensus that the worst is behind it, but the same cannot be said for SA.

Locally, we recently moved to level three of the government’s Covid-19 risk-adjusted strategy. The benefit of continuing with a stricter lockdown regime was adjudged to be insignificant, yet accompanying economic costs are crippling. Evidence from other countries shows that while a country can delay and elongate the left tails of its infection and death curves (i.e., the rates before the peak), it is impossible to avoid the inevitable spike in infections. There is also a growing body of evidence showing that social distancing measures and wearing cloth masks have the largest impact on reducing transmissibility.

However, we have not reached peak infection levels and the risk of reverting to stricter lockdowns is high. Furthermore, the recent Constitutional Court ruling on the unconstitutionality of lockdown regulations could mean the economy suddenly going back to full swing in a few weeks if government fails to argue its case. While this might bring much-needed economic activity, it will come with potentially high social costs.

The economic damage is huge and tricky to quantify at the moment. The blow has been softened by government’s R500bn fiscus stimulus package. At Intellidex we now forecast a record GDP decline of -10.6% this year, and we think it will take about three years for SA’s economic activity to go back 2019 levels. This will see the fiscal gap widen to unprecedented levels, with negative implications on government’s finances.

We also see inflation easing further, mainly due to softer demand and low oil prices. Together with low interest rates, this will soften the blow slightly for consumers. While low interest rates are generally stimulatory, very low inflation bodes ill for business as it squeezes profitability.

Our best bet to going back to normal is an effective treatment and/or vaccine. In the meantime, countries that can quickly adapt to the new normal by integrating preventative measures in everyday life while minimising economic disruption will fare better.

Finally, cracks in international relations are reappearing, particularly involving China, Hong Kong and the US, while Brexit talks are back on the table. Civil unrest in the US is also something to watch as a potential downside risk.