Macroeconomic review and outlook
The increasing number of Covid-19 cases has caused investor nervousness globally. The number of total deaths has passed the one million mark, with the US averaging 750 deaths a day. The northern hemisphere winter season will put more pressure on the healthcare system as more people are admitted to hospital.
The liquidity that was released by central banks seems to be drying and it is unlikely that the US will provide further stimulus packages before the November election. The House Democrats proposed a new stimulus package of $2.2 trillion, with the Trump administration providing no commentary on it, while still providing clear direction on the attempts to curb the spread of Covid-19, as well as the provision of a stimulus package.
Similarly, in Europe, the European Union’s €1.8-trillion budget and stimulus package could be delayed due to a disagreement between member states over how to enforce adherence to democratic values, and several blockades on the budget negotiations.
In Asia, the Chinese economy is showing strong recovery as good industrial production numbers lifted sentiment. However, the increased trade tensions between China and the US pose great threats to businesses as Trump imposes tariffs on Chinese goods.
More recently, the ban to remove TikTok from US app stores has forced the Chinese owner of TikTok to sell its US operations to Oracle and Walmart, subject to approval by the Trump administration. Both TikTok and WeChat have been labelled national security threats by the Trump administration, which is seeking to stop their use in the US on the grounds that they could allow China’s government to gain access to personal data from millions of Americans.
Locally, the move to level one of lockdown saw the country opening its border as it seeks to drive economic growth through the tourism industry, which has been devastated by the lockdown. This is also indicative of SA slowly moving back into full economic activity.
However, there is a looming fear that we might follow other major economies with a second wave of Covid-19 infections. The unemployment rate has worsened from 27% to 30%. Although unemployment has been on an upward trend for some time now, it has been accelerated with many businesses forced to reduce headcount during lockdown.
The current environment is not conducive for business growth as the consumer continues to experience reduced disposable income. This came through in retail sales numbers for July which fell 9% year on year against consensus forecasts of -5%.
We maintain that it is difficult to make a case for South African equities in the current environment. One can argue, though, that assets are undervalued and stand to benefit from any positive developments in global markets.
For an investor who makes a valuation case for financials, the Satrix FINI 15 is a good vehicle to invest in to reap the fruits of a recovery in the sector.
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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