Monthly Market Commentary – October 2020

 

News headlines covered a delayed US election result which has tilted in favour of risk asset prices in the short term. The most likely outcome is that the Democrats retain control of the House with Republicans retaining the Senate. This is likely to mean that Biden’s proposed tax hikes won’t pass the Senate, but that there will be some form of extra fiscal stimulus and trade wars will be toned down. Emerging market risk assets have reacted positively to these events and probably deserve investor attention in lieu of a large discount relative to developed market assets in terms of valuations.

SA bonds caught a bid from foreign investors last week, while the SA equity market also recovered well – but without foreign investor support. We have started to add to our risk budget during last week and are considering a higher risk score for our SA and global portfolios in the next day or two. We certainly think that at least sentiment has changed positively but do worry about the ongoing effect of COVID-19 infections and its economic impact.

SA Drivers

Medium-Term Budget Policy Statement (MTBPS) | Importance High

After first postponing the MTBPS to the end of October finance minister, Tito Mboweni, presented the MTBPS with the economy under tremendous pressure. Broadly speaking the budget was well received even though debt-to-GDP ratios were revised upwards. The economy is forecast to contract by 7.8% in 2020, recovering to 3.3% in 2021, 1.7% in 2022, 1.5% in 2023. South African Airways (SAA) will receive a R10.5 billion bailout. The Land Bank will receive R7 billion “over the medium term”.

SA Economic and Reconstruction & Recovery Plan | Importance Medium

President Ramaphosa presented the plan to the nation and was very quickly criticized for being light on detail and deadlines. One positive is that the plan comes directly from the Presidency and not Government departments or National Treasury, from which many of the previous plans had originated. President Ramaphosa dispelled rumours of a hard lockdown in South Africa. This while infection levels in Europe forced governments to reimpose lockdown measures in various forms.

The Rand and Eskom Maintenance Bears Fruit | Importance Medium

The currency has strengthened materially on the back of general US dollar weakness, high real rates and Emerging Markets sentiment turning favourable as China’s economy powers on, supporting commodity exporters such as South Africa. Eskom CEO Andre de Ruyter says that by December this year Eskom will have performed adequate reliability maintenance to reduce (but not eliminate) load-shedding going forward.

Asset Class Total Returns – ZAR

Global Drivers


US Elections | Importance Medium

The US elections were held on the 3rd of November with Biden coming out victorious after a gruelling electioneering campaign. Despite this, Trump has not accepted defeat and has taken to the courts to challenge results. These attempts look frivolous and we look forward to a Biden presidency to start in January 2021.

Brexit missteps and Europe lockdowns| Importance High

Lack of progress in Brexit negotiations weighed on UK assets during the month; the UK called off talks with the EU at one point but has since restarted them again. Only 2 months remain to agree upon a deal, so there is now a great deal of urgency. A second wave of Covid-19 has resulted in lockdowns across much of Europe. Lockdown measures differ slightly to those implemented in March but market behaviour was reasonably consistent as European markets were punished on the news.

China Growth| Importance High

China quarter-on-quarter GDP growth for Q3 was 2.7%, following-on from the 11.7% expansion in Q2. Unemployment also continues to head in the right direction falling to 5.4% in September and composite PMI for September fell slightly but is still around the expansionary 55 level that it has been for the last 5 months.

World’s Biggest IPO Thwarted | Importance Medium

Ant Group was set to break records with their anticipated $37bn IPO on the Shanghai Stock Exchange, however, China introduced new lending rules that threw a wrench in the company’s listing and financial authorities suspended the offering.

 

Asset Class Total Returns – USD

All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.

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