May 2020 economic review

Amid the continued lockdown, it’s no surprise that reports of increasing joblessness and pending retrenchments dominated the news during May 2020. Local market indices are showing little to no returns for the year to date.

Business rescue and retrenchments the theme of 2020
With airlines hit hard by the Covid-19 flight ban, Comair, the owner of the kulula brand, implemented a business rescue plan in an attempt to sustain the longevity of the company. The company reported a half-year loss of R564 million. Fleet manager Barloworld announced group-wide retrenchments as its automotive and logistics division could only offer essential services during lockdown. Its Avis Budget Rent-a-Car business was particularly impacted and its fleet utilisation declined from over 75% before the pandemic to below 30% at the end of May.

On the SOE front the Passenger Rail Agency of South Africa (Prasa) discussed voluntary severance packages with union members as its financial position worsened during the Covid-19 pandemic.

Data providers see demand surge during lockdown
There were a select few companies that benefited from the lockdown, notably data providers. MTN reported that data was one of the main drivers of its revenue growth in the first quarter of 2020. It recorded a 26.4 % jump in data revenue during the quarter. Revenue from voice was down 6.3%, while fintech grew 26%.

PMI at record low
One of the most important leading indicators of where the economy is heading is a country’s Purchasing Managers’ Index (PMI). Markit’s PMI for South Africa plunged from 44.5 in March to 35.1 in April, its lowest level since the survey began in 2011. The figure was below the 50 level that separates expansion from contraction for the twelfth month in a row. It is becoming clear that the country may remain in recession for the remainder of 2020. To provide some relief, on 24 May President Ramaphosa announced the implementation of alert level 3 from 1 June, allowing most sectors of the economy to re-open, subject to strict health protocols.

SARB cuts rates by another 50bps
At its scheduled May meeting the SA Reserve Bank’s monetary policy committee voted to reduce the repo rate for the fourth time this year, from 4.25% to 3.75%. As a result of the cut, the prime lending rate fell from 7.75% to 7.25%. The bank now expects SA’s GDP to shrink by 7% this year, down from the -6.1% forecast in April.

US joblessness tops 40 million
South Africa is not the only country facing record unemployment levels. US unemployment continues to move off the chart. According to the last US Labor Department report released, the ten-week total initial jobless claims now total more than 40 million.

Chinese exports pick up
Early in May the global market mood stabilised as Beijing reported a 3.5% rise in April exports, confounding market expectations of a sharp fall, as factories restarted output after the Covid-19 pandemic, raising hopes of an economic recovery. But towards the end of May US-China tensions picked up again after the US said it will be ceasing the preferential treatment of Hong Kong.

Bonds bounce back in May
Bond investors are living through an unusually volatile year. Still recovering from a near 10% decline in March in the wake of the Moody’s downgrade, SA bonds delivered a major bounce-back of 7.1% during May, following a strong April return of nearly 4%. After April’s partial recovery, the FTSE/JSE All Share Index (ALSI) eked out only 0.3% on a total return basis in May. The battered listed property index (SAPY) returned -0.8% for the month. Cash (STeFI) returned 0.50% in May.

Year-to-date returns show the result of 2020’s blows
Year-to-date, all local indices are nurturing injuries, with the ALSI standing at -10.1% on a total return basis. The listed property index returned -44.9% over the last five months. The ALBI returned 1.6%, and cash returned 2.73%. Year-to-date the rand has weakened by 26.1% against the dollar and by 24.9% against the euro. The MSCI World Index is also standing at a negative dollar return year-to-date, but in rand terms, because of rand weakness, South Africans would have received a total return of 15.7% over the first five months of 2020.

Over five years, investing offshore has paid off
For the five years to 31 May 2020, the ALSI returned 2.5% annualised and listed property (the SAPY) -11.4% annualised. The ALBI and cash returned 7.7% and 7.2% respectively. In contrast with poor to pedestrian local returns, the decision of those South Africans taking part of their portfolio offshore paid off. The MSCI World Index gave South African investors a 14.0% p.a. total return in rand terms; the Bloomberg Barclays Global Aggregate Bond Index returned 11.3% p.a. in rand. Consumer inflation in South Africa over the past five years averaged 4.7% per year.