May 2020 Update

Making the News

Countries around the world have tentatively begun easing their COVID-19 lockdown restrictions. The US, Europe and UK have made headway in this regard following on the prior easing of restrictions in China.

In SA, the economy is gradually beginning to re-open. Although the month of May ended with SA moving into level 3 lockdown with substantially less restrictions on activity, this is being done with COVID-19 cases still rising. Against this challenging backdrop, the Reserve Bank cut interest rates by an extra 50 basis points during May to provide more relief for borrowers.

Other news in the month revolved around the on-going tensions between the US and China as well as the racial tensions in the US which are expected to be a key factor in the forthcoming US presidential election taking place later this year.

Markets in the Month

The Rand strengthened in May as the gradual re-opening of the economy got underway and the global risk appetite shifted away from the world’s reserve currency, the US dollar.

The All Share Index ended the month +0.3% up, which was 3.6% ahead of their emerging market counterparts when measured in Rands. At a sector level, resources led the way returning +5.8% while Industrial and Financial shares trended downward delivering -1.8% and -4.7% respectively.

The biggest drag in the SA equity market in 2020 so far has been the financial sector as it is -35.4% down year-to-date, on the back of lower expected earnings from the large banks.

COVID-19 has led the banks to provide relief packages to its clients as the pandemic prohibits majority of the population from working and effectively not earn an income to service their debts (i.e. home loans, motor vehicle financing, etc.). This in turn is expected to increase bad debts ratios which decreases earnings. While the sector is under pressure, the large banks are well capitalised and are expected to weather the storm.

The All Bond Index outperformed all asset classes in the return table above during May, with a return of +7.1%. The majority of the performance in May came as a result of the low level the index traded following the Moody’s downgrade and subsequent removal from the World Government Bond Index in April. Global investors searching for yield provided inflows into the market and drove up bond prices.

Impact on Our Portfolios

As seen in the table above, SA equities or listed property were marginally positive and negative in May. On the bright side, investors with more exposure to income assets, predominantly SA bonds, would have participated in the upside from this asset class in May.

The Core Wealth pure income and defensive strategies were our best performing strategies during the month with CWM Income delivering +1.4% followed by CWM Defensive at +1.3%. CWM strategies with more exposure to growth assets have lagged during the month but continue to show green shoots going forward as value emerges from these current levels.

5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies

As a result of the strong recovery in local bonds, the 5 year returns for our income and defensive strategies have increased. Returns from the strategies more exposed to SA equities and listed property remains well below our long-term expectations, although as some consolation, have outperformed when measured against their ASISA peer group. In contrast, our offshore strategies continue to dominate over the last 5 years despite delivering negative returns in May on the back of Rand weakness.

Looking Forward

The next few months will continue to challenge markets as we keep an eye on the spread of COVID-19 as the global economy begins to open up, and the relationship between the US and China evolves. Hopes of a vaccine being developed still remain as many scientists predict the process should take at least another 6 months before a thoroughly tested cure or vaccine is developed.

In terms of the portfolios we manage at Core Wealth, fund switches have occurred during the month. Our advisors will inform our clients on the changes made. Overall, our model portfolios continue to remain well diversified with a core focus to achieve robust returns over the long-term for our clients.