November 2020 economic review
Markets experienced a record month in November, with strong gains across most markets. This was largely driven by the optimism over Democratic candidate and President-elect Joe Biden’s triumph in the US presidential election, the expectation of further central bank stimulus measures, and the prospect of a swift rollout of COVID-19 vaccines. Several promising vaccines are on the way from companies such as Moderna, Pfizer and AstraZeneca.
US presidential election outcome
It is nearly a month since Joe Biden was elected the 46th president of the United States, but the transition into the White House has been anything but smooth. Donald Trump’s claims of voter fraud have been baseless as he suffered multiple defeats in court and Attorney General William Barr delivered the final blow when he made a statement to Associated Press saying, ‘we haven’t seen fraud on a scale that could have affected a different outcome in the election’. Despite all that, President-elect Biden was given access to the President’s Daily Brief, which is a summary of US intelligence and world events, and this suggests that the transition is under way. The contest for the Senate, which is imperative in determining the course of US fiscal stimulus and tax policy, still hangs in the balance with the two Georgia Senate seats being pressed to a run-off. This will take place early in January 2021. The outcome of those run-offs will decide control of the Senate, with the Republicans the slight favourites to win at least one of those seats and maintain control of the Senate.
The US-German collaboration between Pfizer and BioNTech has proved to be fruitful as their vaccine receives its first major approval by the UK. According to preliminary data, the vaccine is 95% effective in preventing the disease and the UK has ordered 40m doses of the two-shot product. The trial of the vaccine involved more than 43 000 people and the US is likely to follow suit in approving the vaccine. Other front-runners of the vaccine include Moderna, University of Oxford-AstraZeneca and Johnson & Johnson as seen in Figure 1 below.
Figure 1: Vaccine frontrunners
Source: Biopharmadive (https://www.biopharmadive.com/news/), 30 November 2020
Markets rallied hard on the news, despite the glaring rise in new COVID-19 infections. In the US and many parts of Europe, infections reached record levels. Markets, however, seem to be focused on the prospects of the return to normal economic activity as early as the first half of 2021 as mass vaccination rolls out.
The deadline for a trade deal is fast approaching and it is still unclear if issues such as a level playing field, governance and, more importantly, fisheries will be resolved. Boris Johnson was demanding that 80% of catches made by EU fishing fleets in UK waters be given back, but this demand has recently been revised down to 60%. Even though there is a possibility of a deal being reached, based on all the concessions the UK had to make, a no-deal scenario may still be on the table.
SA unemployment statistics
Soon after lockdown restrictions began to ease in South Africa, the expectation was that the employment situation would improve for many. However, on the 12th of November, Stats SA released the Quarterly Labour Force Survey for the third quarter of 2020 (Q3) and the findings were disheartening. Although the number of employed persons increased by 3.8% to 14.7 million from Q2 to Q3, the official unemployment rate increased by 7.5% to a rate of 30.8% in the same period. The unemployment rate according to the expanded definition of unemployment increased by 1.1% to 43.1% over the same quarter.
Downgrade and interest rates
Fitch and Moody’s downgraded South Africa’s long-term foreign and local currency debt ratings from BB to BB- and Ba1 to Ba2 respectively. Both agencies maintain a negative outlook with Fitch citing high and rising government debt, the low growth trend and the exceptionally high inequality that exists in the country. The COVID-19 pandemic caused an economic shock that the country is struggling to recover from. However, bond markets showed little response to the news of the downgrade as the risk of a government debt default was already priced into bond yields before the announcement.
In an explanatory note by Treasury in the Medium Term Budget Policy Statement, the cap for South Africans to trade in foreign assets was essentially lifted. More specifically all debt and exchange traded instruments that are inward-listed and settled in rand on South African exchanges would be classified as domestic, according to the note. ASISA in turn sought guidance and more clarity from the FSCA on the new circular. However, in a turn of events, National treasury, the SA Reserve Bank and the FSCA responded by announcing its suspension for the time being.
Global markets had a bumper month in November, with developed markets having the strongest month since the mid-1970s. The MSCI World returned 12.66% month-on-month (m/m) in USD and 7.30% m/m in ZAR. Both US and European equity markets did well over the month (S&P 500 (USD) up 10.95% m/m, FTSE 100 (£) up 12.74% m/m, Euro Stoxx (€) up 18.09% m/m). Overall many formerly out-of-favour assets rallied on the back of this sentiment during November, with many European stocks and emerging market countries among the best performers. In November, the MSCI Emerging Market Index (USD) returned 9.21% m/m and 4.02% m/m in ZAR. Strong performance was largely on the back of the return of global risk appetite for cyclical stocks, driven by the prospect of a COVID-19 vaccine roll-out, as well as the optimism over President-elect Joe Biden’s victory in the US presidential election. Both these factors contributed to the positive outlook that economic conditions will slowly start stabilising.
The South African equity market also benefitted from the positive market sentiment and risk-on outlook, making a strong comeback after three months of being in negative territory. The FTSE/JSE All Share Index closed the month at 10.51%. All major indices were in positive territory for November, with Financials leading the pack at 18.02% m/m, Resources closing at 11.38% m/m and Industrials lagging somewhat at 7.61% m/m. Property also fared particularly well during the month, participating in the risk-on sentiment and closing at 17.47% m/m. The bond market appeared to take Fitch and Moody’s surprise credit rating downgrade somewhat in its stride, with the All Bond Index returning 3.25% m/m for November. Cash had a pedestrian month, as expected in the new low interest rate environment, returning 0.31% m/m.
Our currency closed stronger against most major currencies in November. The ZAR was flat relative to the Japanese yen (-0.25%) but gained as much as 4.99% against the USD, and 2.24% and 1.68% against the sterling and euro respectively.