Markets rallied in April as global central banks continued their unprecedented expansion of monetary stimulus to mitigate the economic impact of the COVID-19 pandemic. Sentiment was largely on the ascendency as more countries announced plans to gradually ease lockdown restrictions. The IMF warned that the global economy is set to contract by 3% this year, the steepest decline since the Great Depression, while the Asian Development Bank reported that the cost of the pandemic could be as high as US$4.1trn, almost 5% of global GDP. Locally, South Africa’s sovereign credit rating was downgraded by Fitch and S&P, however equities continued to rally in line with global markets and on the back of a further 100bps rate cut by the SARB.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 10.8% for the month. Developed markets outperformed emerging markets, with the MSCI World Index delivering 11.0% and the MSCI Emerging Markets Index returning 9.2%.
Brent crude closed the month 11.1% higher at around US$26 per barrel after Saudi Arabia and Russia reached a truce in the oil-price war, and oil-producing nations agreed to reduce output by 9.7m barrels per day for the next two months. Precious metals were broadly stronger on the prospect of higher global demand, with silver returning 8.6%, platinum 7.2%, gold 6.3% and palladium -12.6%.
The US economy shrank by 4.8% y/y for the first quarter of 2020, ending the longest period of expansion in the country’s history. It was the steepest contraction in GDP since the last quarter of 2008, as measures to contain the coronavirus pandemic continued to weigh on the economy. The number of Americans filing for unemployment benefits increased to over 30 million since the start of the pandemic.
In more positive news, the Dow Jones and S&P 500 booked their best months since 1987 and 1974 respectively in reaction to the prospect that the economy would reopen and a massive US$23trn monetary and fiscal stimulus programme announced by the US Federal Reserve. This includes expanding the scope and eligibility of its Main Street Lending Programme to help small- and medium-sized businesses, as well as a US$500bn bond-purchase programme. In addition, the Fed pledged to do whatever is necessary to support the economy until it recovers.
The S&P 500 returned 12.8%, the Dow Jones Industrial 30 11.2%, and the technology-heavy Nasdaq 100 15.2% (all in US$).
UK and Europe
Brexit talks between the UK and the EU came to an impasse, with both sides unable to compromise on policies relating to fair competition, governance and fisheries. UK Prime Minister Boris Johnson, meanwhile, was released from hospital following three nights in intensive care after testing positive for COVID-19. The Bank of England announced a temporary extension of its short-term liquidity facility. According to the Office for Budget Responsibility, Britain’s economy could contract as much as 35% in the second quarter of 2020, if the nation-wide shutdown lasts for three months, followed by a further three-months of gradual easing.
EU finance ministers announced a near €500 billion package to help offset the economic impact of the Coronavirus, while EU leaders agreed to establish a recovery fund worth at least €1 trillion. The ECB, meanwhile, kept its key interest rates unchanged but lowered the interest rate on the emergency loan programme for banks. Investors, however, were hoping that the central bank would expand its bond-buying programme to include junk-rated bonds. Flash estimates showed that the Eurozone economy shrank by 3.8% q/q in Q1, compared to market expectations of a 3.5% contraction. France, Spain and Italy’s economies contracted the most on record, with France entering a recession.
For the month, the UK’s FTSE 100 returned 5.7%, the German DAX 9.1% and France’s CAC 40 posted 3.9% (in US$).
China and Japan
The Chinese economy contracted 6.8% y/y in Q1 2020, slightly off the market consensus of a 6.5% decline. To help bolster the economy, the People’s Bank of China lowered its benchmark interest rate by 20 bps to a record low of 3.85%, making it the second rate cut this year.
Global sentiment was lifted after data released from China indicated that exports and imports contracted significantly less than expected. For March exports fell 6.6% y/y, compared to market estimates of a 14% drop, while imports declined 0.9% y/y, beating market expectations of 9.5% contraction.
The Bank of Japan (BoJ) kept its key short-term interest rate unchanged at -0.1% and removed a limitation on buying government bonds so that 10-year yields will remain at 0%. The BoJ also joined global central banks in their unprecedented expansion of monetary stimulus by ramping up its purchases of corporate debt to JPY20trn from around JPY7trn.
Japan’s Nikkei 225 delivered 7.8%, the MSCI China 6.3% and Hong Kong’s Hang Seng 4.1% (in US$).
Local markets benefited from the global risk-on appetite in spite of a string of negative data coming out of the country. Fitch downgraded South Africa’s sovereign credit rating to BB from BB+ with a negative outlook, citing the lack of a clear path towards government debt stabilisation and the expected impact of the COVID-19 pandemic on the economy as contributing factors. The downgrade saw the rand hit a new record low of R19.3/US$.
President Ramaphosa announced that the nation-wide lockdown would be extended by a further two weeks until 30 April. This helped the South Africa Reserve Bank (SARB) to unexpectedly cut the repo rate by a further 100bps to 4.25%, after cutting it by 100bps in March. The SARB also bought some R11bn in bonds during the month to support the local market, while forecasting a 2%-4% contraction in GDP for 2020 (previously -0.2%).
Markets reacted positively to the news that the economy would gradually be reopened from 1 May and that the government would implement an unprecedented USD26bn stimulus package, equivalent to 10% of the country’s GDP, to help boost the ailing economy. Around US$5bn of the stimulus package is expected to be funded by loans from the IMF, World Bank, New Development Bank of the BRICS and African Development Bank. The month closed on a negative note after S&P became the second global ratings agency to downgrade South Africa’s sovereign credit rating for the month, this time to BB- from BB with a stable outlook, citing concerns around the country’s already contracting economy.
The FTSE/JSE ALSI returned 14.0% in April. Industrials returned 9.6%, Financials 11.9%, and Resources 23.0%, for the month. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 14.2%.
Despite the 100bp interest rate cut, SA bonds were only marginally higher, with the BEASSA All Bond Index delivering 3.9% in April as the credit rating downgrades and prospects of much higher government debt levels and bond issuance weighed on the market, while SA inflation-linked bonds returned 4.4% and cash (as measured by the STeFI Composite) delivered 0.5%.
Finally, the rand continued to depreciate against all three major currencies in April, falling 2.8% against the US dollar, 4.5% against the pound sterling and 2.5% versus the euro.
Adapted article by Prudential Investment Managers