September 2020 market review: The gap between defensive and cyclical companies widens

Extraordinary times call for extraordinary measures. And that is certainly what we’ve been seeing this year in terms of the macroeconomic support provided by the world’s central banks. Although the economic contraction expected in 2020 is still the worst in decades, various institutions have started revising their GDP growth forecasts during September to arrive at an (only slightly) less gloomy picture for this calendar year. The OECD now expects the world economy to contract by 4.5% in 2020, compared to its June forecast of a contraction of 5%.

Low inflation supports accommodative policies
There are limits, though, to how much support central banks can provide; monetary policy can only remain accommodative while inflation remains under control. And, fortunately, that is still the case for most major economies across the globe. In fact, consumer prices in the euro area are falling for the first time in four years with inflation coming in at -0.2%. In the US, core CPI increased 0.6% in July 2020, although the annual advance remained low at 1.6%. The Fed also indicated that it will tolerate some overshoot of its inflation target by adopting more flexible average inflation targeting, meaning low interest rates may be with the world for longer.

SA GDP shows worst decline this century
Locally, South Africa’s economic output, as measured by GDP, for the second quarter of 2020 shrank by 16.4% non-annualised. This is the deepest decline since the 1990s, taking the recession into a fourth quarter, the longest period of consecutive quarterly contractions since 1992. Amid suppressed demand, South Africa’s headline consumer price inflation is currently well within the 3-6% target zone at 3.1% year-on-year.

Is unemployment up or down?
The employment figures reported for the second quarter of 2020 caused some confusion, with certain media headlines lamenting the steep rise in unemployment and others announcing a sudden drop in joblessness. According to Statistics SA, the country’s official unemployment rate has declined to 23.3% in the second quarter from 30.1% previously, with 4.3 million people unemployed. Under the expanded definition of unemployment, which includes those discouraged and those having other reasons for not searching (such as lockdown), the unemployment rate is an abysmal 42%.

A K-shaped recovery
The divergence in performance among SA businesses and sectors is becoming increasingly evident as more companies release 2020 financial results. Despite the restrictions of lockdown, during September a few South African companies reported surprisingly strong financial results. Impala Platinum’s annual earnings, for example, jumped by nearly 400% after higher metal prices and a weaker rand offset the impact of the pandemic. Shoprite Checkers was another company that showed resilience. Despite its liquor and furniture outlets being closed during the lockdown, its operating profit increased by 8.7% for the year to June 2020.

Thriving companies amidst the pandemic is the exception, though. Most of the results released during September continued to reveal the strain that most brands – big and small – are under this year. Discovery, for example, posted a full-year profit fall of 94%, largely due to a R3.3 billion coronavirus-related provision and an even bigger impact from interest rate changes in key markets. Woolworths Holdings reported a 65.1% slump in earnings for the year ending June. And Momentum posted a headline loss of R251 million in the second half of its financial year, largely as a result of additional provisions of nearly R1 billion for claims that could arise due to the ongoing Covid-19 pandemic and losses relating to policy cancellations.

All major asset classes down in September
Only investors holding cash or cash-like investments would likely have seen an uptick in their portfolio values during September. All other major indices were down. The MSCI World lost 3.5% in dollar terms and 4.9% in rand terms for the month, with the rand’s strengthening by 1.5% against the US dollar contributing to that negative figure. (A strengthening rand leads to lower global market returns for South Africans and vice versa.) Our local stock market as measured by the FTSE/JSE All Share Index (ALSI) fell 1.6% on a total return basis and listed property had another substantially negative month (-3.0%). SA bonds (ALBI) fell 0.05% and cash (STeFI) returned 0.35%. On a sector basis, Industrials and Financials recovered somewhat during September with positive performance of 1.0% and 2.3% respectively. After a strong run for most of the year, Basic Materials gave back 3.4% in September.

Year-to-date, the weak rand supported offshore investments and Resources
Year-to-date, the rand has weakened by more than 19% against the US dollar and by nearly 25% against the euro. Even though major global indices have experienced pedestrian year-to-date returns in dollar terms, with the tailwind of a weaker rand the MSCI World Index delivered 21.3% in rand terms, the MSCI Emerging Market Index gave 17.9% and the Bloomberg Barclays Aggregate Bond Index 26.1% in rand terms.

The ALSI has lost 2.5% on a total return basis with Basic Materials up 12.0%, Industrials down 33.3% and Financials down 32.8% year-to-date. Listed property returned -46.4% over the same period. The ALBI returned 1.82%, and cash returned 4.38%.

Over five years, Basic Materials is the best performer
Over the past five years to 30 September 2020, the returns from the ALSI (4.8% per year) have been disappointing to say the least. When looking at the ALSI’s sectors, though, Basic Materials gave a phenomenal 19.2% per year over the five years to 30 September. In contrast, Industrials and Financials lost 7.3% and 5.4% per year respectively. Listed property (the SAPY) returned -12.9% annualised, meaning that investors in this index would have lost more than half of their investment’s value over the past five years. The ALBI and cash returned 7.6% and 7.1% respectively. Consumer inflation averaged 4.6% per year over the past five years.

South Africans investing offshore would have been pleased with their rand-based returns. The MSCI World Index (developed market countries) gave a 14.7% p.a. total return and the MSCI Emerging Markets Index 13.2% in rand terms over the past five years. The rand weakened by 3.8% per year against the US dollar over this period.