Continued improvement in global financial conditions
By Marcus Rautenbach, Principal Investment Consultant
A key investment theme for the third quarter of 2020 was a continued improvement in the prices of many financial assets globally over this period, building on the recovery that took place in the second quarter of the year. A number of stock markets achieved record-high levels during the quarter, especially markets that are dominated by tech stocks.
Another key theme to note is that the US dollar exchange rate weakened against other currencies. The US dollar has traded weaker since March 2020 because of massive increases in the money supply extended by the US Federal Reserve to stabilise the global financial system.
From August 2020, the US dollar has stabilised and the prices of financial assets have ebbed somewhat, entering a period of consolidation.
Even though events in the US are half a world away from South Africa, they still have an almost immediate impact on our domestic markets.
For instance, the exchange rate of the rand mirrors the movement of the US dollar. As the US Dollar Index weakened, the rand strengthened. This had an impact on the performance of some rand hedge shares.
Graph 2 – Rand / US Dollar*
Moreover, the FTSE/JSE All Share Index mirrors the movement of the S&P 500 Composite Index, as the JSE followed the S&P 500 Composite Index into a period of consolidation.
Recently, the Chairman of the Federal Reserve’s Board of Governors, Mr Jerome Powell, said on more than one occasion that it is necessary to provide the US economy with further fiscal support. These statements acknowledge that the economic recovery needs fiscal nurturing (e.g. tax relief, infrastructure spending) rather than further monetary intravenous boosters (increasing credit extended by the Federal Reserve even further). This brings into play the election races for the US presidency and, equally importantly, for the US Senate. The differences between those who wish to tax and spend (fiscally negative) and those who wish to employ fiscal stimuli (tax cuts) will become more important going forward.
At the same time, there has been a second wave of COVID-19 infections in Europe and to a lesser extent in the US. The UK seems to be hardest hit. This has created some uncertainty and a selloff in equity markets towards the end of the quarter. It is uncertain how these events will unfold. Many commentators are highlighting how important it now is for a safe vaccine to be rolled out.
We expect that short-term events in financial markets are likely to be driven by macroeconomic developments, and significant further stimulation of economic growth in the US and globally. The recent change of circumstances in financial markets is typical of a consolidation phase. Markets depend on the release of new data for direction. This is characteristic of softer conditions unfolding in financial markets and waning momentum.
This will have an impact on the global economic environment and on South Africa.
Following the global economic contraction in 2020 (“the COVID-contraction”), South African Gross Domestic Product (GDP) contracted by 17.1% year on year by June 2020. The GDP contraction for the second quarter was 16.4% from the first quarter of 2020. (The contraction of 51% quoted in the press is an annualised number) Most economists still expect South Africa’s economy to contract by between 8% and 10% during 2020, with a muted rebound of around 3% to 5% in 2021, unless Government is able to provide some form of stimulus to the economy. At this stage, it appears that the infrastructure spending programme is Government’s key initiative to boost economic growth, but they will need funding from the private sector. We all eagerly anticipate concrete implementation plans that can be trusted by the private sector.
The economic sectors that suffered most were mining (-33.4%), construction (-33.4%) and manufacturing (-32.4%), while personal services (-9.0%), government (+0.6) and agriculture (+8.9%) were least affected. We expect a lively recovery in the mining, manufacturing, trade, transport and communication sectors towards year-end.
This is confirmed by both the business and consumer confidence indices that showed some recovery recently. We expect the recovery to continue through to year-end.
Somewhat sobering thoughts are three fragile aspects of the domestic economy:
The first aspect is the job losses experienced in South Africa. According to StatsSA, South Africa shed 2.2 million jobs in the second quarter of 2020. Strangely, the number of unemployed persons also shrank by 2.8 million people in the second quarter and the number of discouraged job seekers fell by 447 000 people in the same period. South Africa’s unemployment rate therefore improved from 30.1% in March 2020 to 23.3% by June 2020. The number of economically inactive people in South Africa therefore increased by 5.5 million people.
Secondly, the Gross Fixed Capital Formation (GFCF) that is used to expand productive capacity in the economy is brittle, as it decreased by 20.4% in the second quarter of 2020 from the first quarter of 2020.
The third concern is the instability of electricity supply in South Africa. We estimate that the rolling blackouts (load shedding) reduce South Africa’s possible economic growth by between 1% and 2%.
As shown in the table below, domestic financial markets followed the softer conditions that have prevailed globally since August 2020 in South Africa.
| To 30 September 2020 | Most recent quarter % | Calendar YTD % | 1 year
% p.a. |
3 years
% p.a. |
5 years
% p.a. |
| All Share Index | 0.7% | -2.5% | 2.0% | 2.4% | 4.8% |
| Listed Property | -14.1% | -46.4% | -46.1% | -23.8% | -12.9% |
| STeFI Composite | 1.2% | 4.4% | 6.2% | 6.9% | 7.1% |
| BEASSA ALBI | 1.5% | 1.8% | 3.6% | 7.3% | 7.6% |
| MSCI All Country World ZAR | 4.5% | 21.8% | 22.9% | 15.6% | 11.7% |
| Barclays Global Aggregate ZAR | -0.9% | 26.5% | 17.6% | 11.7% | 8.0% |
| Rand (+ strengthening, – weakening) | 3.6% | -16.4% | -9.7% | -6.4% | -3.5% |
| Inflation (to August 2020) | 2.0% | 2.5% | 3.1% | 4.3% | 5.0% |
In summary:
- Underlying economic conditions globally continue to improve.
- Global financial markets have recovered strongly since the COVID-related crash in March 2020, but are looking for direction that may result from further fiscal or monetary stimuli.
- A second wave of COVID-19 infections has emerged, mostly in Europe, but so far this has had a muted impact on investment markets.
- Of particular interest at present are the US elections, both the presidential election and the Senate elections.
- South Africa is likely to experience some economic recovery, but perhaps not to the same extent as other economies around the world.
- Financial markets in South Africa are likely to follow global markets.
- South Africa’s economy is desperately looking to our government for help – with corruption-free government initiatives (for example infrastructure spending) backed by market-friendly policies that can be trusted to boost our economy.
Retirement fund members should persevere with their long-term financial plans despite some risks that are unique to South Africa. The investment outlook for retirement funds is healthier than the domestic economic outlook.
*Source: IRESS