The widespread impact of the COVID-19 pandemic dominated global markets in March. Almost all asset classes sold-off during the month, as negative investor sentiment was amplified by uncertainty over the extent and severity of the virus and its impact on economic growth. The IMF warned of a coming global recession worse than that of the 2008 Global Financial Crisis (GFC), while ratings agency Fitch projected a 1.9% contraction in global growth for 2020. Most countries embarked on stimulus measures to help offset the economic impact of the COVID-19 pandemic, including South Africa. Local markets weren’t spared from the risk-off sentiment, which was further exacerbated by a string of negative data, including the economy slipping into recession and Moody’s downgrading SA’s sovereign credit rating to below investment-grade status.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned –13.4% for the month. Developed markets outperformed emerging markets, with the MSCI World Index delivering and -13.2% and the MSCI Emerging Markets Index returning -15.4%.
Brent crude closed the month 55.0% lower at around US$25 per barrel as concerns over lower demand and the start of a price war between OPEC and Russia, weighed on investor sentiment.
In the US, the US Federal Reserve undertook an emergency 100bp interest rate cut and US$700bn bond buyback programme to counteract the effect of the lockdowns across the country. The government, meanwhile, announced a record US$2.2tn fiscal stimulus package to counter the anticipated surge in unemployment and stress on corporate and individual earnings. These measures, however, were not enough to ease investor anxiety. Markets continued selling-off at record pace as the US overtook China as the country with the highest number of conformed COVID-19 cases.
In economic news, US GDP increased by 2.1% q/q in Q4 2019, the same as in Q3 2019 and in line with market consensus. Analysts expect US GDP growth to contract by around 3.3% for the year, although estimates vary widely. Annual inflation eased to 2.3% in February
US equities saw sharp selling, with the S&P 500 returning -12.4%.
UK and Europe
In response to the economic and financial disruption caused by the impact of the COVID-19 pandemic, the Bank of England lowered its base interest rate from 0.75% to 0.25%, and then again to a record-low 0.1% a week later. Fitch cut the UK’s sovereign credit rating from AA to AA- with a negative outlook, and lowered its GDP growth forecast for the UK to -3.9% for 2020.
In Europe, the ECB launched a new €750bn asset purchase programme to counter the economic threat posed by the COVID-19 outbreak. The programme includes the purchasing of government debt and private securities until the end of the year, to ensure that all sectors of the economy are able to absorb the economic shock. The Eurozone’s largest economies, Germany, Spain, Italy and France all rank among the world’s highest number of reported COVID-19 cases. Eurozone GDP growth increased 0.1% in Q4 2019, the weakest rate in seven years with Fitch lowering its growth forecast for the region to -4.2% for 2020.
For the month, the UK’s FTSE 100 returned -15.9%, the German DAX –16.5% and France’s CAC 40 posted -17.1% (in US$).
Japan and China
In Japan, the economy contracted 1.7% q/q in Q4 2019, its steepest decline since Q2 2014, as private consumption declined 2.8% following the sales tax hike in October 2019. With interest rates already at -0.10%, the Bank of Japan left rates on hold but increased the purchases of bonds and riskier exchange-traded funds to JPY12tn from JPY6tn to shore up the economy and markets. Late in March Prime Minister Shinzo Abe unveiled an unprecedented JPY60tn (US$556bn) stimulus package to help households and small businesses.
In China, the People’s Bank of China (PBoC) kept its one-year loan prime rate unchanged at 4.05%, defying market expectations after the US Federal Reserve dropped its federal funds rate by 100 bps. The PBoC did however lower its seven-day reverse repo interest rate by 20bps to 2.2%, the first cut in nearly five years, and injected CNY50bn (US$7bn) into money markets through seven-day reverse repos. In Wuhan province, the epicentre of the outbreak, and other areas of China, some businesses started to reopen as the worst of the pandemic passed, hopefully pointing to the future of other areas of the globe as well. Analysts estimated Chinese economic growth for 2020 would more than halve to around 2.5% from 5.6% previously.
Japan’s Nikkei 225 delivered -9.8%, the MSCI China -6-6% and Hong Kong’s Hang Seng -9.0% (in US$).
In South Africa, GDP growth contracted 1.4% q/q for Q4 2019, bringing the economy into recession. In a bid to encourage economic recovery the SARB reduced the repo rate by a surprisingly high 100bps to 5.25% (the second rate decrease for the year) and launched a bond-buying programme. Meanwhile the government announced some fiscal tax and spending measures to help individuals and small businesses weather the local shutdown. None of this was enough to prevent Moody’s from downgrading South Africa’s sovereign credit rating to Ba1 from Baa3 (to non-investment grade from investment grade) with a negative outlook, citing persistently weak growth, fast-rising debt and the impact of an unreliable electricity supply as key drivers. The news sent the rand to an all-time low above 18.0 against the US dollar.
The above factors, coupled with an already heightened risk-off environment, saw the JSE return its weakest monthly performance since the start of the GFC in 2008. The FTSE/JSE ALSI declined -12.1% in March. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned -16.7%. Despite the 100bp interest rate cut, SA bonds were also sharply lower, with the BEASSA All Bond Index delivering -9.8% in March, while SA inflation-linked bonds returned -7.1%. Cash (as measured by the STeFI Composite) delivered 0.6%.
Finally, the rand depreciated sharply against all three major currencies amid the coronavirus sell-off, falling 14.1% against the US dollar, 10.3% against the pound sterling and 14.3% versus the euro.
Adapted article by Prudential Investment Managers