I think it is fair to say that the speed of the recovery in global markets has taken most of us by surprise. Several experts have been talking about a V-shaped or U-shaped recovery, with the majority leaning towards a slower, U-shaped climb back up for equity markets. So far though, the recovery has been more rapid than most of us had expect.
Global economies have pumped almost limitless liquidity into their markets to keep their economies from collapsing. The US has led the way with interest rates now being close to zero and so far, it has worked. The financial aid implemented by the US Fed has been bigger compared to the 2008 crises, and they’ve acted much earlier. The US Fed has again shown their willingness to do whatever is necessary to support and keep financial markets functioning normally. There is however a limit to how much this can help, with Goldman Sachs still predicting the US economy will shrink by more than 8% over the next 3 months. Another sobering statistic is that more than 21 million people have filed for initial jobless claims over the last 4 weeks, erasing about 10-years’ worth of job creation.
The measures taken by the US have led the way for several other economies to follow suit. Many countries, like South Africa and most of the Eurozone, were close to a recession even before the Covid 19 outbreak. The strain on these economies will be even more severe with less tools to their disposal to try and counteract the economic damage. Economic growth is driven mostly by Small and Medium-sized Enterprises (SMEs), and unfortunately, they will be the most heavily influenced. A lot of them will not survive the lockdown and economic growth around the world will take a massive hit for the foreseeable future.
South African Market
The Moody’s downgrade came and went, taking a backseat to the panic over Covid 19 and subsequent market sell-off. The Rand did weaken a lot, trading at an all-time low of R19.35/$. The equity market has fared much better, with the weaker Rand and global recovery in markets combining to drive our market higher.
From the below you will see that the Top40 Index has retraced about 55% from its most recent high on the 20th of February. This has been led mostly by Rand-hedges and Resources with local stocks still struggling to find direction. Some of the heavyweights like Naspers (NPN) and British American Tobacco (BTI) are trading at multi-month highs, while Resource shares have recovered most of their losses due to the weaker Rand and restricted supply due to closure of plants.
In our opinion, most of the opportunities at the moment are in some of the local shares and banking shares. We like several of the Rand-hedges and Resources, as communicated in our previous trade ideas, but most of them have reached our profit targets and we will wait for a pullback before getting interested again.
You can access our latest trade ideas on the website under TRADING TOOLS > TRADE IDEAS.
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