It is becoming increasingly clear that the world is headed for a deep recession in 2020, driven by the Coronavirus (COVID-19) pandemic. Here at home, the South African economy, which was already vulnerable prior to COVID-19, is also expected to experience a deep recession. This will mean job losses and the closure of many small businesses. Large enterprises too are expected to go through a rough patch. That said, the only silver lining is that the lower oil price will force inflation lower which will give the South African Reserve Bank (SARB) the room to lower interest rates further. Elsewhere, it is currently impossible to estimate how long the effects of COVID-19 will last, given that large economic blocks such as North America and Europe are behind the curve with their containment strategies.
Absa Balanced Franchise:
The Absa Balanced Franchise manages assets across asset classes and is supported by the wider Absa Asset Management team. A fundamental, valuation-based approach to identify mispriced assets across the available asset classes generates superior long-term returns, while still providing a strong element of capital protection.
Absa Balanced Fund and market views:
The Absa Balanced Fund’s volatility has been significantly above average due to extreme volatility in share prices and the Rand/$ exchange rate. While we have relatively low exposure to equities, the volatility of those equities is significantly large, which has meant that the fund volatility too has been extreme. COVID-19 has shocked the market in a unique way. We have witnessed large positons of the world’s economy being sequentially shut down and some of these industries are unlikely to recover. The impact on Gross Domestic Product (GDP) will be negative, however, it is not yet quantifiable and resultantly, this has led to the abnormal levels of uncertainty and volatility.
During this period, it has also become evident that no sector has been spared. Global equity markets are down more than 30%, while emerging market bonds have fallen by 15%. Investors are scrambling for cash to fund withdrawals from global and local investment funds. This is unsurprising, given the uncertainty and fear currently at play. Investors are finding themselves selling at any price, in an effort to escape further losses. This behaviour is likely to continue for some time. This means that volatility will also likely persist in the near term until the world is able to stem the spread of the virus and economies are in a position to resume operations on a more normalised basis.
Generated market scenarios:
Best case: A V-shaped recovery where there is a short, deep recession in the first half of 2020. As the virus dies back naturally in the northern hemisphere summer, there will be a sharp recovery in the second half of 2020 leading to a shallow recession for the full year 2020. Risk assets are therefore likely to rebound sharply into the back end of 2020 driven by the large amounts of liquidity injected into the markets by global central banks. Economic recovery will then gain further momentum into 2021.
Base case: A U-shaped recovery where the recession is followed by a long, drawn out bottoming process before recovering well into 2021. This will present further downside to risk assets for the remainder of the year. Markets will need to see meaningful progress on viral containment and even possibly a vaccine before regaining an upward trajectory.
Worst case: A W-shaped recovery where there is a false start before dipping again and then recovering. This would be similar to the 2008 financial crisis where the global economy took several years to recover. Risk assets will perform extremely poorly in this environment.
Given this challenging outlook, we remain very cautiously positioned with relatively low exposure to risk assets and above average cash holdings.
As always, we encourage our clients to remain patient and calm during this period. On our part, we remain committed to delivering excess risk-adjusted returns through the investment cycle using a pragmatic value-driven philosophy.