Investment Summary February 2020

PERFORMANCE FEEDBACK

(Compiled by Nic Spicer and Brendan de Jongh)

February Overview

SA specific events were dominated by the State of the Nation Address (SONA) and the Budget speech. Of the two the budget speech was more important to the market and was well received. Although overall debt levels have risen, these were in line with what was expected. Treasury’s efforts to curb government expenditure (the wage bill in particular) was the first sign of governments attempt to fix the leak in the bucket as opposed to simply pouring more water. However, it did not take long for unions to react negatively feeding scepticism as to the political ability to practically implement the necessary measures.
Economically, South Africa slipped into a technical recession in the fourth quarter of 2019 as the economy contracted 1.4%. Inflation picked up slightly to 4.5% and unemployment remains stubbornly high at 29.1%.
The rand weakened over the month as illustrated in the below table:

UK economic sentiment initially continued to improve in February, with both consumer and business sentiment picking up. Job growth continued its recent upswing with a solid 180,000 increase in Q4 2019 whilst unemployment remained at 3.8%, its lowest level since 1975. It’s unlikely, however, that the UK will remain untouched by the spread of COVID-19, which will almost certainly weaken confidence and activity. The UK government and EU published their negotiating directives for the upcoming post-Brexit trade negotiations to start in March. A certain amount of chest beating and posturing by both sides dampened hopes for a deal, which weighed on the pound and UK assets.
Macro data in the US were mixed in February. Housing data were positive, whilst employment rose by 225,000; well above expectations of 160,000. On the negative front, industrial production showed a second consecutive monthly decline, negatively affected by Boeing’s 737 Max grounding woes which are likely significant enough to weigh on Q1 growth. There was also a decline in job openings and the flash composite purchasing managers’ indices (PMI) fell below 50, likely impacted by COVID-19 fears. By the end of the month, markets were pricing in a further three rate cuts by the US Federal Reserve this year to combat this weakness.
Data released in February for the end of 2019 showed the eurozone ended the year on a weak note, but forward-looking survey data were more positive with the composite eurozone PMI rising 0.3 points to 51.6 in February. This appears to be off the back of multiple headwinds fading including: Brexit worries, the trade war, the emission scandal and the sharp inventory correction. But already there are signs that coronavirus is beginning to bite. This includes a fall in the PMI sub-component for export orders and a sudden lengthening of delivery times. These are likely to worsen as infections in Italy and other countries disrupt production but may be mitigated if eurozone authorities take fiscal action.
Japan’s GDP was expected to fall as a result of a sales tax hike in October last year but saw its economy contract more than expected in Q4 2019, down an annualised rate of 6.3%. The outlook for Q1 is also bleak as COVID-19 is expected to hit Japan’s inbound tourism and trade, and there is speculation around whether the Tokyo Olympics will have to be postponed or cancelled.
China has cracked down significantly on travel and implemented restrictions on production in order to restrict the spread of the virus affecting the Chinese economy (both supply and demand). Policymakers have responded with several supportive measures including cutting rates and taxes and rolling over loans. South Korea, the country with the greatest number of confirmed COVID-19 cases outside of China, saw its month-on-month consumer confidence fall by the greatest amount since June 2015.

Asset Classes

Global markets sold off from mid-February due to the spread of COVID-19 in countries outside of China. Global bonds in rands performed the best over the month demonstrating their ability to act as a “shock absorber” in local portfolios. Local property continued its rout as the economic sensitive asset class fell an astonishing 16% over the month. Local equities also fell sharply with all sectors feeling the effects of the risk off environment.
Below is a summary of performance of the broader asset classes for the month:

GPS Performance Feedback – February 2020

GBP Asset Classes and Currency Performance

All equity markets were down over the month but, somewhat surprisingly, it was emerging markets that fell the least (this was off the back of a tough January for EM and what looks like falling new cases of coronavirus in China this month). UK equities were the worst performer for the month, likely due to the heavy commodity exposure of the index and renewed uncertainty over post Brexit trade with the EU.
Falling global yields as investors sought safety led to higher investment-grade bond prices. Developed global government bonds were the strongest performing bond asset class. Riskier bond performance was weaker, with EM bonds suffering most (although nowhere near as much as equities).

GBP ASSET CLASS PERFORMANCE FOR THE MONTH

GBP CURRENCY PERFORMANCE FOR THE MONTH

USD Asset Classes and Currency Performance

The US dollar strengthened over the month against most developed currencies except the Yen (a traditional safe haven currency). As a result, asset class returns were less attractive when viewed in USD terms. The USD gained the most ground against the South African rand.