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Caution should be exercised as to the outlook for equities

June 2020

Share markets, exchange rates, commodities, international developments, domestic economic indicators

  • Internationally the strong recovery in financial markets during April continued in May and June, but at more moderate rates. However, caution should be exercised as to the outlook for equities.

  • On the economic front, Q2 2020 is predicted by analysts to be the bottom of the trough in the economic cycle – following which a recovery is assumed to commence.

  • The International Monetary Fund now expects the international economy to contract by 4.9% in 2020 (previously -3%). But it estimates a recovery of 5.4% in 2021. However, such strong recovery assumes that risks such as the Covid-19 pandemic, US-China trade war and even Brexit are resolved, which at this stage is not certain at all.

  • Based on among others this strong growth outlook, international share markets are steaming ahead. The MSCI Developed Markets Index gained another 2.5% in June, while the MSCI Emerging Markets Index increased by 7.%. However, they are still down year to date (Ytd).

  • The continuing sharp recovery seems to be stronger related to central bank and fiscal stimulus than with the profit outlook. However, if the recovery is indeed related to the profit outlook, markets are looking far ahead, focusing on the latter part of 2021 and 2022.

  • In South Africa, the JSE ALSI increased by 7.7% in June. However, unlike the US and other countries, a strong economic recovery in 2021 is not predicted – which means that the gains in the ALSI must be treated with caution. In this respect, the National treasury expects the economy to contract by around 7% in 2020, but that the economy will grow by only 2% in 2021 and less than 2% in 2022. This means that the ALSI is now driven by dual listed and resources shares; and a “risk-on” stance.

  • Contrastingly, the ALBI declined by 1.2% in June, but is still up 0.4% Ytd, while the outlook is positive.

  • Gold is strengthening due to concerns about a second Covid-19 wave and oil prices gained further.

  • As for the current state of the economy, Stats SA announced that the economy contracted by 2% in Q2 from Q1. This was mostly due to the ongoing recession - and not so much the lockdown. Mining contracted by 21.5%, manufacturing by 8.5% and electricity by 5.6% (while agriculture grew by about 28% from a low base). On the expenditure side, gross fixed capital formation contracted 20.5%.

  • The impact of the lockdown will be felt in Q2. Indeed, the wreckage caused by both the virus and subsequent Stage 5 lockdown is visible from month on month seasonally adjusted (SA) numbers for April - showing mining contracted 34.1% and electricity generation by 16.6%.

  • The revised budget announced by minister Tito Mboweni is not a confidence booster. In fact, it showed that the national treasury is very uncertain as to what to expect. The deficit may well be larger than predicted – and as the rating agencies stated, there is no chance that government debt will stabilize as the minister proposed. For that to happen, serious changes are needed.

Courtesy: Multivest Economic Division

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