January 2020 Update
Making the News
The Coronavirus has been the main talking point in January with fears of it turning into a global epidemic weighing on financial markets since late December 2019. This can be closely linked to the SARS (Severe Acute Respiratory Syndrome) virus which took place from late 2002 to the middle of 2003.
Digesting the News
The Coronavirus is a virus transmitted between animals and people and common signs of infection include respiratory symptoms (i.e. affecting your chest and lungs, etc.). This has been associated with the SARS virus, an outbreak in China, which affected more than 5300 people and killed 349 nationwide.
At the moment, it is still too early to draw any firm conclusions of what the current situation’s impact will have on the global economy going forward; therefore we can only comment on the statistics at hand. We discuss this below with a table summarising the relevant facts regarding the disease in China relative to other diseases and then provide commentary to make sense of these statistics.
The table above compares the various viruses (SARS, Swine Flu, Avian Influenza and Coronavirus) on the basis of the number of confirmed deaths as a percentage of the confirmed cases for patients assumed to be affected by a virus (i.e. the mortality rate).
Despite the fact that the mortality rate for the Coronavirus exceeds that of the Swine Flu, it is important to note that the mortality rate for the Coronavirus is about a third of the SARS pandemic and just 6% of the mortality rate for the Avian Influenza.
At the time of writing, no deaths were confirmed globally for countries other than China however 578 cases are being investigated to confirm if these patients have contracted the Coronavirus. An interesting comment made by Johan Els, an economist at Old Mutual, is that each year the common influenza kills up to 11 000 people in SA, up to 61 000 in the USA and 650 000 globally. Thus concluding that the common flu is more dangerous based on historical data.
Markets in the Month
As stated above, the virus has been bad for global markets, particularly Emerging Market (EM) assets and currencies. The Rand, which is an EM currency, started January off well however fell almost 6% against the Dollar to month end as the news of the outbreak made headlines and investors developed a risk off sentiment and moved towards safer assets.
Equity prices were volatile during the month as sentiment around the Coronavirus affected both onshore and offshore markets. Local Equities (measured by the FTSE/JSE All Share Index) ended the month down -1.7% in contrast to Developed and Emerging equities which ended the month up at +6.6% and +2.3% respectively both benefitting from Rand weakness. At this stage, the effects of this event are expected to be short-term in nature. Going forward, research still points to healthy longer-term returns for local and EM equities.
Local bonds were the best performing SA asset class in January, given the weakness of the Rand and the fall in Developed Market bond yields as investor risk appetite declined. A return of +1.2% during the month helped the one year return to +8.5% (or 4.5% real return) for SA Bonds. Listed property [measured by the FTSE/JSE SA Listed Property Index (SAPY)] on the other hand fell during the month by -3.1%. Our readers would know that performance from this asset class has not been pleasing of late however; the yield at an index level for the SAPY is around 11% p.a. This means that property investors will still receive an income of 7% in excess of inflation each year if they held onto the investment into the future, assuming no change in income or underlying prices.
Impact on Our Portfolios
Despite the negative returns from local growth assets, all of the Core Wealth model portfolios were positive during the month. This was a function of the rand weakness benefitting the offshore allocation within the local models as well as the Rand hedge shares [most notably British American Tobacco (+10.3%) and Naspers (+7.4%) which were the best performing Rand hedges in the month].
The CWM Flexible model continued its strong relative performance due to the allocation to 36One and Foord which have substantial offshore exposure. In the month, the model delivered +1.2% outperformance against the local ASISA flexible peer group and showed healthy growth of +11% for the year ending January 2020.
As mentioned above, all the models were positive in January with returns ranging from +0.1% to +1.3%. The CWM Balanced (+0.1%) model was weighed down by the exposure to Bridge and PSG. The funds’ exposure to SA small to mid-cap companies performed poorly on the back of a weak Rand and negative sentiment towards SA Inc. shares.
While the five year numbers on the local side still remain modest, we are confident about prospective returns given current low inflation, coupled with the accommodative monetary policies implemented by Central Banks globally. This globally synchronized loose monetary policy bodes well with our allocation to EM equities across our models. For clients with a shorter-term time horizon, the Core Wealth Income strategy would be recommended as a lower risk strategy that has a 7 year track record of consistently outperforming cash.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
Rand weakness has driven our international houseviews higher in the month and as a result, the five-year performance still remains strongly ahead for the foreign balanced and foreign equity houseviews at +10.3% p.a. and +13.4% p.a. respectively.
To conclude, we expect the Coronavirus outbreak to be a relatively short-term disruption to the Chinese economy as it affects business trade and the tourism sectors currently. As a result the China growth prospects have been revised lower from 6% to 5.7% in 2020, and may be adjusted further still should the Chinese continue to supress the movement of people within (and across) its borders in an all-out-effort to prevent further infections. The longer these restrictions remain in place, the more the impact it will have on the rest of the world. Aside from the conclusions discussed above, a key to watch is the daily count of new Coronavirus cases, these are trending lower with recoveries trending higher.
With regards to our models, we do have a bias towards EM exposure and therefore should do well over the long term given their attractive valuations coupled with structurally higher growth rates. Investors searching for healthy real yields are entering our bond market and other EM markets such as Asia to name a few. Asia should benefit from the fiscal stimulus from China despite the short-term noise around the Coronavirus. Although the growth outlook for the Chinese economy has been revised lower, China’s weighting (i.e. Chinese A Stocks) in the MSCI EM Index has, and will continue to climb as the market becomes increasingly open to all investors. This means that more inflows into the EM index will inject more money into the China economy and could also help lift interest in EM generally.
Going forward, February will be a telling month given the significant upcoming events at hand. The State of the Nation Address (SONA) is scheduled to take place on 13 February 2020 and the Budget Speech on 26 February 2020. The current account deficit along with the systemic risks from Eskom are just two of the country’s (and investors’) main concern in determining how to stimulate domestic growth. As it stands, the expectation is for further tax hikes to cover governments expected revenue shortfall, as well as potential austerity measures (reducing government spending) expected to help balance the books.