Declared a global pandemic, the spread of the novel coronavirus or COVID-19 has had a dramatic impact on financial markets all over the world. To date, there are now over 9 million confirmed cases of the disease worldwide, with more than 400 000 deaths. Governments and central banks globally introduced various measures, including full and partial lockdowns, in an effort to slowdown the spread of the disease itself, as well as cutting interest rates to reduce the long-term impact on economies.
With many economies around the world slowly weaning themselves off the destabilising effects of the pandemic, the question is: What does the normal we are all expecting look like? Welcome the new “new” normal.
a) We are in a global recession – the only question is, how deep and how long?
This is unknown territory. The coronavirus has already triggered the worst global recession in nearly a century. While the magnitude of a second wave of infections is unknown, the agony and discomfort the pandemic has caused, is far from over. Across the globe, hundreds of millions of people have lost their jobs, with the impact being felt the hardest by the poor and young. Here in South Africa, the National Treasury has warned that the country’s unemployment rate could become as high as 40%.
b) Central banks have responded boldly and bravely to the challenge
The combined effect of the coronavirus pandemic and the oil crisis created significant dislocations in the financial system. This resulted in central banks globally implementing policy measures to support liquidity in the market, i.e. quantitative easing (QE) measures (e.g. the US Federal Reserve cut rates by 50 basis points (bps) and then 100 bps again in early and mid-March 2020). Similarly, the South African Reserve Bank (SARB) reduced the repo rate by 100 bps in March, and again by another 100 bps at an emergency Monetary Policy Committee (MPC) meeting on 14 April. The most recent 50 bps cut in May took the repo rate to 3.75% per annum, the lowest in 20 years. While the cuts are in line with fiscal and monetary policy support in response to the COVID-19 economic crisis and QE measures, the decision certainly calmed global financial conditions. Given the low inflationary environment, it is expected that there might be room for further rate cuts.
c.) Real economic conditions will play out over an extended period
As we explore what this new “new” normal means, we have witnessed a significant disconnect (unsustainable) between Wall Street and Main Street in the US in previous months. That said, US equity indexes have recently been ramping up slowly, which has led to a narrowing in the real and perceived divides that grew quite wide since the coronavirus pandemic hit. The improvement in economic indicators from rather depressed levels has made the stock market’s dramatic surge off the March lows seem a bit less disconnected from the economic fundamentals. While there were some concerns that the country is simply moving too fast to reopen, the widely cited “disconnect” between Wall Street and Main Street appears less confounding.
Added to the above, our views are the following:
- While bonds look unattractive on a total return basis in developed markets, they offer a safe haven for investors to hide in;
- Domestic assets appear cheap and priced for risk, but the local economy will be heavily stressed; and
- Investors should brace for continued volatility and low returns. This is a period of simply staying alive.
In summary, gross domestic product (GDP) growth here at home will be severely depressed in 2020 and unlikely to return to 2019 real GDP levels in 2021. We will see an increase in the number of businesses collapsing and witness increased unemployment. On the other end of the spectrum, while a successful vaccine coming to the market is the game-changer, this is possibly about 18-24 months out. Our current reality is that the coronavirus is here to stay and we need to find new ways of living with it and doing business around that fact.
Absa Absolute Return Franchise
The Absa Absolute Fund aims to provide investors with stable real returns, while avoiding losing money over any one-year period. It aims to build flexible portfolios that consistently yield significant positive real returns with minimum risk. The fund managers typically aim to deliver CPI+4% over rolling three-year periods. The fund invests in a combination of domestic and international assets including cash, bonds, listed property and equities.
Positioning and outlook
The fund’s asset allocation is currently conservatively 15% in growth assets (namely equities and property, chosen for quality, high yield and value) with the balance being cash, floating rate notes, bonds, and inflation-linked bonds.
The fund is tactically conservatively positioned to achieve 4%. Over time, one would typically hold more growth assets. The domestic economy, however, faces many challenges amid increased coronavirus infections and growth concerns.
Over a rolling 12-month period, the Absa Absolute Fund has provided slightly lower returns. However, based on our current positioning and despite the prevailing health and economic circumstances, we remain confident in meeting our investment promise. Our asset allocation process has stood the test of time – we are confident about our ability to select the most appropriate risk-adjusted investments to include in selected asset classes. Our selection of fixed-income assets provides the basis for stable real returns and the current positioning is favourable. Our stock selection aims to provide participation in a diversified range of economic themes. We place specific emphasis on risk management to ensure appropriate diversification and the maximum possibility of attaining our investment objectives.