THE EXTRAORDINARY MARKET EVENTS OF 2020
Oil price falls
The recent market correction has had a long run-up. It started with the trade war between China and the US, and was followed by other countries increasingly acting in self-interest. Worldwide, economic growth had already been slowing after a long period of growth following the Global Financial Crisis of 2008. With several economies struggling, further conflict was inevitable. For example, Saudi Arabia and Russia depend on the income from oil for their economies. Earlier this month, Russia refused to cut oil production. In response, the Saudis then decided to step up production, which had a dramatic impact on the oil price, sending it below US$37 per barrel. Should oil stay at this level it will really hurt oil producing countries.
COVID-19 (aka coronavirus) spreads
The oil price collapse has not been the only reason for the extraordinary market movements in the past month. Equity markets worldwide have responded negatively to the spread of the coronavirus, and the reduced output as factories and schools in the affected areas closed down and travel plans were cancelled. Banks across the globe have already started cutting interest rates to side-step a recession. Most stock markets had their worst decline of the past decade and the rand weakened to nearly R17 to the US dollar on 9 March (with some recovery since then). Markets fell further when the World Health Organisation classified the outbreak as a pandemic and US president Trump imposed travel restrictions from Europe.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
The dramatic drop in the oil price has been a shock for the share price of Sasol, a company among the top 40 stocks on the Johannesburg Stock Exchange. Sasol can endure an oil price of US$40 per barrel for a long time, but should the oil price remain below US$35 per barrel this could create issues for the company. As long as the company remains among the top 40, it will be included in the Satrix Top 40 unit trust and Satrix 40 ETF. It is currently also included in the following indices which Satrix tracks:
- FTSE/JSE All Share | SWIX All Share | Capped SWIX
- FTSE/JSE Capped RESI 10
- FTSE/JSE RAFI 40
- Satrix Low Equity Balanced
With regard to the rest of the equity market, global economic weakness may weigh on the market for a while. Companies with high debt levels are more exposed to low economic growth. Banks are unlikely to provide loans for business expansion in this environment; growth will be slow and companies’ business models will be tested.
The impact of the oil price and global equity market collapse will also be felt by multi-asset (balanced) funds, such as the Satrix Balanced Index Fund and the Satrix Low Equity Balanced Index Fund. Fortunately, the negative impact is limited thanks to the diversification within the funds.
The local fixed income (bond) market underperformed the emerging market (EM) rally in 2019 mainly due to the risk of SA being downgraded and our government’s budget worsening. It’s likely that the large central banks of the world are going to continue to cut interest rates to support their economies, with some countries potentially turning at near-zero rates. As soon as the volatility calms down the hunt for yield could support South African bonds.
Markets are taking the view that developing countries like South Africa will be harder hit by this potential economic slowdown than, for example, the US. As a result, our rand has weakened substantially against the US dollar. This is normally good news for rand investors. A weaker rand means more rands for every dollar bought by your fund before the currency weakened. However, much of this good news has been cancelled out by the significant fall in international market prices. The Satrix Global ETFs are rand-denominated funds with global equity exposure.
WHEN WILL THINGS BE BACK TO NORMAL?
In short, no-one knows. Part of investing is facing the markets’ ups and downs. In a kneejerk reaction to negative events, such as the spread of the coronavirus and the oil price collapse, share prices often fall rapidly shortly after the event, but return to their true value in the medium to long term.
For example, in the Global Financial Crisis of 2008, financial markets across the world were hard hit by the subprime crisis. The South African stock market (All Share) reacted and experienced a severe downturn. However, by mid-November 2009 (14 months later), the All Share index was fully recovered from its lows.
WHAT SHOULD INVESTORS DO?
It’s easier said than done, but it’s important to not sell investments shortly after prices have fallen. It’s been proven that more money has been lost by investors switching out of funds than by the markets themselves when prices fall. This is because more often than not investors sell out of a fund at the wrong time and then miss out on the subsequent recovery in prices. The most important aspect of investing is sticking to your own long-term financial plan and to keep on investing.
POSTED : 12 MARCH 2020