COVID-19: Absolute Returns perspective
- Governments have rallied across the world to support financial markets
- South Africa follows developed markets declaring a state of emergency and introducing travel bans and social distancing.
- The fragility of our economy and especially our fiscal position is being exposed at a time where liquidity and lack of risk appetite is hurting asset prices, irrespective of perceived value.
- SA bonds, arguably our currency and even equities look cheap, however we remain conservatively positioned
There appear to be few places to seek shelter from the storm with this market rivalling the 2008 Global Financial Crisis. While equities have felt the brunt of the headwinds globally, the oil price that sprung a leak last week continues to create a stressed credit environment.
On Friday night President Trump announced a number of measures and initiatives in partnership with the private sector to mitigate the impact of COVID-19. This response provided the necessary sense of urgency and coordination. News flow around the increased shutdown of parts of the U.S and other countries clearly drove further investor fear.
Globally: Governments rally to support world economy
China cut Reserve Ratio Requirements for its banks ahead of equity markets opening, New Zealand cut interest rates and The Federal Reserve cut rates by 100 bps. The Fed also announced another expansion of its balance sheet alongside expansion of currency swap lines in an attempt to alleviate the stress in dollar funding and removed some of the capital buffers that banks have been mandated to hold. As a general statement, Central Banks have now exhausted conventional policy and even attempted some unconventional policy, neither appear to be having the desired effect.
South Africa: Urgent measures to limit impact
The news on Sunday evening from President Cyril Ramaphosa around placing South Africa into a state of disaster is unprecedented for our country. The steps announced in an effort to contain the spread of the virus follow a similar approach to many other countries around the world; limiting visitors from identified high risk countries, suspending large gatherings, discouraging travel and encouraging social distancing. Furthermore, fiscal support was announced (with details to follow) by the President in a further effort to mitigate the impact of this virus on our already fragile economy.
Market shock: Adjusting to a new reality
While the actions show our Government is acting with urgency, the fragility of our economy and especially our fiscal position is being exposed at a time where liquidity and lack of risk appetite is hurting asset prices, irrespective of perceived value. This liquidity shock, in combination with our fiscal position has placed upward pressure on South African fixed income and currency markets. At the start of the year, we had been cautious about our positioning in fixed income (our previously favoured asset class) as this was becoming a crowded trade. Until yesterday, fixed income had held up well, while the rand weakened.
Where to from here?
We said last week in our note, that “things likely become tougher from here”. That certainly remains the case. We believe the sell-off in fixed income and currency yesterday is a continuation of the larger unwind, but this is also being felt in Emerging Markets debt. South Africa’s fiscal position will undoubtably deteriorate as the Government attempts to support business. The call on government support is becoming increasingly difficult to sustain as our longer-term interest rates ratchet higher.
SA bonds, arguably our currency and even equities look cheap, however we remain conservatively positioned and not looking to increase positions in any way in these or any other asset classes right now, except cash.
We remain on very high alert and are managing the developing risks and knock-on effects as best we can.