October 2020 economic review
During October the US elections dominated the news headlines and dictated much of the movement in the market. As it stands now, Joe Biden has been declared president-elect and Kamala Harris his vice president-elect. Donald Trump has, however, launched legal challenges in several states and many other states will be subject to recounts. It is therefore likely that this will cast a shadow over the result until legal matters are resolved and recounts are finalised. It should be noted that the extent of Biden’s win (284 electoral votes vs Trump’s 214) makes it highly improbable that the result will be reversed. At present, on the back of the Biden victory, sentiment has positively shifted and markets are surging.
Coronavirus second wave
It seems fears of a second wave have come to fruition with England, France, Germany, Italy, Spain, the Netherlands, Belgium, Wales and Israel going back into lockdown. In Wales particularly, the country is entering what they call a ‘firebreak’ lockdown which will last two weeks and where schools, pubs, shops and hotels will close. In Asia, Japan, China and South Korea have avoided major second waves of infection and their success is partly attributed to them experiencing SARS, which better prepared them to deal with the current pandemic. In South Africa daily new cases are just under the 2 000 mark and concerns start to rise. However, it is unlikely that the country will enter another level-5 type lockdown given the impact it had on the economy the first time.
Ramaphosa’s recovery plan
President Ramaphosa unveiled his economic reconstruction and recovery plan in which he outlined the government’s approach to resuscitate the economy and create jobs. In the speech, the president highlighted the five key priorities to focus recovery efforts, namely infrastructure investment, employment stimulus, energy security, promotion of localisation and improving the capacity of the state. Job creation is the immediate focus and given that the private sector is the biggest driver of jobs, impediments to investment such as energy challenges, transportation and telecommunications will be removed according to the president. In order to improve the capacity of the state in terms of local production, there is a firm commitment from all social partners to use both public and private procurement to promote localisation and the development of industry. R100 billion is committed over the next three years through the Presidential Employment Stimulus for the creation of jobs, but existing programmes such as the Expanded Public Works Programme and Community Work Programme will also be boosted. 700 000 Hectares of state-owned land will be made available to South Africans to fulfil the promise of land redistribution and for agricultural production. Sentiment, however, was subdued following the announcement, with global ratings agency S&P stating that the plan lacked detail on the necessary reforms to aid a proper recovery.
Medium Term Budget Policy Statement
Minister Tito Mboweni delivered his Medium Term Budget Policy Statement. He highlighted that our economy is now expected to contract by 7.8% this year and that we can expect only a 3.3% recovery in 2021, 1.7% in 2022 and 1.5% in 2023, which is an average of 2.16% over the next three years. He stated that reductions to the wage bill will narrow the Budget deficit from 15.7% of GDP in 2020/2021 to 7.3% by 2023/2024 and stabilise gross national debt at 95.3% of GDP by 2025/2026.
The figure below highlights the outlook for the next couple of years.
The minister cautioned against increased borrowing as the government currently borrows at a rate of R2.1 billion per day and that we need to be careful not to end up like Argentina and Ecuador, countries that defaulted on their debt this year. Further support was given to the Land Bank and SAA in the form of R7 billion and R10.5 billion respectively, which according to Tito is still in line with the fiscal framework.
In more encouraging news, manufacturing PMI rose to 60.9 in October, pointing to a third consecutive month of expansion in factory activity and the fastest pace on record. Retail sales, meanwhile, increased 4.0% in August, above market expectations of 3.5% and well above the 0.6% posted in July.
Most major indices were in the red in the month of October as COVID-19 infection rates surged across Europe and the US. Prospects of new lockdowns clearly flustered markets as the MSCI World Index returned -3.07% (USD terms) and -1.42% YTD. The story is more positive on the emerging market (EM) front as the MSCI Emerging Markets Index returned 2.08% (USD terms) and 1.03% YTD. This positive performance was mainly buoyed by Asian EMs, particularly China, where the surge in COVID-19 cases has been kept under control. The Chinese economy has also been aided by the People’s Bank of China, which gave support to exporters with currency interventions to moderate recent renminbi strength. As more countries in Europe go back into lockdown, European stocks were amongst the worst performers, with the indices reflecting this sentiment. The EuroStoxx 50 and the DAX returned -7.3% (euro terms) and -9.44% (USD terms) respectively. The S&P 500 returned -2.66% (USD terms) and 2.76% YTD as the US presidential election approached.
Local markets and currency
During October local markets were also affected by the global risk-off sentiment, with the FTSE/JSE All Share Index (ALSI) returning -4.73% (rand terms) and -7.12% YTD. The FTSE/JSE Capped SWIX All Share Index returned -4.2%. The only positive return came from Industrials, which delivered 0.37%. Meanwhile, Listed Property (SAPY index) returned -8.5%, Financials -6.08% and Resources -11.36%. SA bonds delivered 0.89% (as measured by the FTSE/JSE All Bond Index), while SA inflation-linked bonds returned 0.75% and cash (as measured by the STeFI Composite) delivered 0.34%.
Finally, the rand appreciated against the major currencies, gaining 2.65% against US dollar, 2.64% against the pound sterling and 3.34% versus the euro. For the month, South Africans invested offshore would have experienced lower market returns from their global investments in rand terms due to the strengthening of the currency, but on a year-to-date basis would have had their offshore returns bolstered by the weaker currency as the rand was down 13.94% versus the US dollar.