VIEW OF THE MONTH NEWSLETTERMAY 2020
South African born Elon Musk, showed us that dreams can come true after the successful launch of two NASA astronauts into space in the SpaceX Falcon 9 rocket from Kennedy Space Center in Florida over the weekend. The astronauts are on their way to the International Space Station (ISS) in a rocket and capsule built in collaboration between Musk’s SpaceX and NASA. It was the first time in nearly a decade that astronauts were sent to space in an American rocket from American soil, and a first for a private company. The ISS was previously only accessible to NASA astronauts through the purchase of seats on Russian capsules launched from Kazakhstan.
Post the successful launch, an emotional Musk indicated that it’s been 18 years working towards this goal. It shows us that through hard work and collaboration between private (SpaceX) and public (NASA) sectors, extraordinary things are possible. It shows a shared dream could become a nation’s proud moment despite difficult times like Covid-19.
Unfortunately collaboration between government and private sector is not on the cards for South Africa soon. As reported by the Sunday Times over the weekend, ANC leaders who have been pushing for the state to have more control over the economy, have been using the Covid-19 pandemic to push for radical policy implementation. Their radical ideas have found its way into an ANC recovery plan document that was sanctioned by the ANC NEC at their last meeting in May. SACP leader Solly Mapaila, who has sat in these meetings, said the Covid-19 crisis provided an opportunity for the state to be “empowered” and to “discipline capital and the private sector”, which was its weakest.
1. SA economy and exchange rate update
Investec’s chief economist Anabel Bishop recently published their outlook for South Africa including forecasts for the Rand:
- The rand is expected to strengthen as a result of low interest rates (at or near zero) in developed markets which will drive the carry trade in the rand,
- Rising global market confidence that the recovery in the global economy is indeed in sight, and growing optimism that the worst may be over, has driven yield seeking into riskier assets, with the rand a key beneficiary against other emerging market currencies.
- The rand is still below its pre-crisis level of R16.26/USD, R17.83/EUR and R19.82/GBP in mid-March, but it is making steady gains now, and could test the R17.00/USD mark this month. The domestic currency is still prone to sharp foreign disinvestment however should global market risk sentiment turn negative.
- SA’s government finance projections will likely deteriorate in the special Budget (24th June 2020), which is a risk for market sentiment on SA, particularly on the carry trade. SA’s borrowings projections are expected to elevate beyond the figures given in February, at 65.6% of GDP for gross debt for 2020/21, and above 71% of GDP for 2021/22
- Given the recession this year, expected sharp declines in employment and disposable income there is no scope for meaningful tax increases, other than potentially on sin taxes. The reported sharp price hikes in illegal tobacco products during the ongoing ban shows scope for large tax hikes on tobacco products when they can be sold legally again.
- SA risks seeing business failures escalate, and fewer jobs to return to once lockdown is over, weakening the anticipated recovery in Q3.20.
- South Africa’s weak economic prospects, even prior to Covid-19, has a limiting impact on market sentiment. Foreigners sold -R14.1bn worth of South African equities net of purchases in the past week, with the domestic economy likely to contract by around -2.0% y/y in Q1.20
- South Africa’s fundamentals remain weak, and material strengthening in the domestic currency this year back to levels reached in January is unlikely. The rand remains in the company of the currencies of Brazil, Turkey, Russia, Argentina and Indonesia, instead of those of China, Singapore, India, Poland and South Korea.
- The rand is likely to see further strength this month and reach R16.00/USD before the end of the year providing the trajectory in Covid-19 does not deteriorate, or any other marked risk averse events occur. The large scale of QE in developed markets is likely to continue to drive yield seeking, provided market sentiment does not turn risk averse.
- The table below indicates Investec’s exchange rate forecasts:
2. US/China trade wars update
US President Donald Trump’s widely anticipated press conference on Friday 29 May’20 produced fresh sanctions on China as expected but proved to be less aggressive than anticipated. Mr Trump said he would ban some Chinese nationals from entering the US and keep a closer eye on the practices of Chinese firms. The President’s announcement also included a pledge to revoke special trade privileges for Hong Kong. In other news from China, PMI data showed the world’s largest economy continued on its road to recovery, but at a steady pace. The official manufacturing PMI tapered to 50.6 in May from 50.8 in April, while the non-manufacturing edged up 0.2pts to 52.3. Meanwhile, the private Caixin manufacturing PMI returned to expansionary territory at 50.7, from 49.4 in April.
3. Vista portfolios and investment update
Our strategy for remaining invested during these unprecedented times has paid off with the SA market just positive (0.3%) for the month of May 2020. We are however concerned as more and more SA companies are warning of big declines to earnings as the impact of the coronavirus pandemic and lockdown hits the economy. Our preferred asset allocation for compulsory money is now 35% SA Bonds, 35% Income funds and 30% Offshore equities. For discretionary money we’re recommending as much as possible offshore exposure.
4. Capital guaranteed structures
With new investments we’ve mainly participated in capital guaranteed structures. The logic behind these investments is that we agree markets have been sold off drastically and that history has shown there is a good chance of it recovering in future. The problem is however that it is going to be a very bumpy and volatile recovery. The capital guarantee structures remove this volatility for the investor while guaranteeing their initial capital and often gearing returns.
For the month of June’20 we’re participating in the following local and offshore capital guaranteed structures:
|Capital guaranteed structure
|Payoff: Underlying index flat or negative at end of term
|Payoff: Underlying index is positive at end of term
|Momentum Enhanced Growth Optimiser (MEGO)
|BNP Paribas Multi-Asset Diversified Vol 8 EUR Future Index
|100% Capital protected + 15% minimum return
|Participation rate of 350%: Any growth from the underlying index, more than the minimum secured return, is multiplied by 3.5
|*Investec China Seas Basket (CSBL)
|Euronext® CDP Environment World EW Decrement 5% Index.
|3 Years, 10 Months
|100% Capital protected
|Participation rate of 110%: Any growth from the underlying index is multiplied by 1.1 with no cap
*We’re specifically excited about the China Seas structure and highly recommend this structure to all clients.
5. Oil Trade
As published in our previous newsletter, we’ve been trading Oil in both our local and foreign share portfolios. Below the returns of the two Exchange Trade Products (ETPs) for the last month:
|1 Month performance
|JSE share portfolio
|Offshore share portfolio
SBAOIL is an exchange traded note (ETN) issued by Standard Bank that trades on the JSE and attempts to track the performance of the West Texas Intermediate (WTI) oil Dollar price per barrel converted to Rand. Each ETN is equivalent to 1/50th of a barrel of WTI oil. SBAOIL trades like a normal share on the JSE in your local share portfolio.
The United States Oil Fund (USO) is an exchange traded security designed to track the daily price movements of WTI light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca. The instrument trades like a normal share and is available to our clients through their JP Morgan and Glacier International / DMA offshore trading accounts.
We believe the oil trade still has some legs as we feel the demand for oil will increase as the world economies get going. We however must remind investors that the local SBAOIL ETP is a combination of both the oil price and the Rand/US Dollar exchange rate. A strengthening Rand, which we all hope for, will therefore have a negative effect on the price of SBAOIL.
6. ETF portfolios
An Exchange Traded Fund (ETF) is a security, which represents a basket of shares, that you can buy or sell on a stock exchange. These investment vehicles allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFs offer the convenience of a stock along with the diversification of a unit trust. It is arguably the cheapest and most diversified way to get access to the stock market. ETFs portfolios have in recent years proven to not only be very a very cost-effective underlying investment for our clients, but have also been outperforming active fund managers.
Below our ETF portfolio performances as at 31 May 2020 on a cumulative basis(*Past performance is no guarantee of future performance) :
|1 Year performance
|2 Year performance
|5 Year performance
|Local ETF Portfolio
|Offshore ETF Portfolio
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8. Fuel prices – Fill up before Wednesday 3 June 2020
The Automobile Association (AA) is expecting an increase of at least R1.18 a litre of petrol and 22 cents for diesel on Wednesday 3 June’20. The Association notes that crude oil prices used to calculate South Africa’s fuel prices had fallen in lockstep with the reduction in demand but were now inching up as economic activity begins to ramp up on a global scale. The AA advised “motorists to be pragmatic and anticipate fuel prices slowly returning to their previous levels over the medium to long term. It would be prudent to budget accordingly,” the AA said.
9. Quotes of the month
In line with our view of the month picture and SpaceX introduction, we thought the following quotes to be relevant:
- “If you really look closely, most overnight successes took a long time” Steve Jobs
- “The only impossible journey is the one you never begin” Tony Robbins
10. Market Summary
The red block shows the market stats for the month of May 2020. In short, the JSE All Share Total Return index was just positive up ↑0.3% for the month (still ↓-4.8% for the last 12 months). The Resource sector again performed the best up ↑5.6% for the month. The Financial sector was the worst performing sector down ↓-3.3%. The Industrial sector and Listed Property sector were both down ↓-1.8% and ↓-0.8% respectively.
11. Financial Indicators as at 31 May 2020:
Global indices (Returns are measured in Rand percentage points. For example, the S&P 500 returned -1.11% for the month as measured in Rands):
Currencies (Positive indicates ZAR has weakened for the period, vice versa):