June 2020 - Manager View Summary
Updated: Jul 3
by James Twidale
June saw a continuation of the recovery from the COVID-19 market induced lows of March and April. Global equity markets have recovered almost all their losses. Amazingly the NASDAQ which contains US Tech stocks is up almost 16% YTD in USD.
The local market is no different and has made back almost all its losses at the time of writing. This has been aided by some Rand weakness but nonetheless we are where we are.
The global economic backdrop remains very concerning and the data around earnings, unemployment and growth expectations remain well below the expectations we had at the beginning of the year. As a result, there still seems to be a material disconnect between asset prices and their fundamental drivers.
The South African Supplemental Budget was delivered toward the end of June and it’s no surprise to see a deterioration in the financial position because of COVID-19.
Unfortunately, the fiscus was in an ominous position prior to the COVID Crisis and what this means is we do not have the firepower needed to successfully stimulate the economy back to life.
Debt levels are likely to reach dangerously high levels and the ability to repay these debts will come into question in future if material action is not taken quickly.
Many of the decisions needed will require a strong political will which leaves a few question marks about the ability to reign in debt and stimulate growth and employment over the next 12-48 months. We simply do not have the luxury of kicking the proverbial can down the road any longer.
Globally the world is still grappling with COVID-19 and although overshadowed by unrest in the US and the feeling that the worst is past us market volatility remains very elevated. The COVID focus has shifted from developed countries to emerging countries as case counts rise in Brazil, Russia and India to concerning levels. On the home front we are facing a similar spike in cases and deaths which is likely to continue in the short run as the economy opens and chances for transmission increase.
Our view is that a “V-Shaped” recovery is unlikely if the possibility has not already passed and the staggered impact of the virus and associated lockdowns will manifest in market prices when the extent of the impact is fully priced in.
Although some data points have improved from their lows they are still nowhere near previous levels and may not get there for years to come. Even if a vaccine is found at some point during 2020, we expect that the damage done will need to be more fairly reflected which on aggregate it is not.
At the least volatility or uncertainty is likely to remain elevated and in most above average volatile environments you are not rewarded for taking risk. The below chart shows the CBOE VIX index often called the “Fear Index” as it shows the implied risk being priced-in via US equity options.
Higher values mean that the market fears higher amounts of asset price movement in the coming months. Although down from the peak of the COVID-19 panic this is extremely elevated and is higher than almost any point in the last 5 years.
Enjoy the read and take care.
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