The past month has been an exciting time for global markets. The initial risk-off in September quickly gave way to a rebound in equities as investors became more comfortable with the prospect of a “Blue Wave” in the US elections. Although election uncertainty has had a surprisingly muted impact on markets, the rolling second wave of Covid-19 infections has left the developed world green with envy of China’s near-full recovery from its Q1 lockdown. Rather, investors are fretting about renewed restrictions on mobility.
While South Africa’s persistent structural constraints will limit the strength of the local recovery, the Q3 high-frequency data point to a substantial rebound following the 51% annualised slump in Q2. With the move to Lockdown Level 1 in September and the selective reopening of borders for international travel from 1 October, the focus is on the prospect of a resurgence in Covid cases. So far, the numbers are far from flashing red and while ongoing vigilance is required, we should not be like cats on a hot tin roof.
On the monetary policy front, the SARB left the repo rate unchanged at the September MPC meeting, but the vote was a close 3:2. This has left the market discounting further easing, with these expectations receiving further impetus from Discovery’s announcement of a premium freeze for 1H21. Cash rates have plummeted on the back of easing expectations and excess liquidity, with real NCD yields only marginally in the black in real terms.
The SARB must be tickled pink with its success in lowering inflation expectations to 4.5%. This gives the Bank room to manoeuvre if the recovery falls short of expectations, without threatening notably higher inflation. The same cannot be said for the National Treasury. The fiscal position is deep in the red despite serial commitments to consolidation – so far nothing more than white lies – as well as the drain from financial support to a myriad of SOEs and above inflation wage increases. If the Treasury backs away from the active scenario that was presented in the June budget, then there is a high risk that SA will be red-carded by the rating agencies in November. Consolidation relies heavily on wage restraint, and so far, no one has been willing to raise the white flag in the negotiations.
South Africa’s myriad of growth plans over the years have been nothing more than white elephants, but with the rainbow nation always being optimistic, there is hope that this one will be different. President Ramaphosa showed that he is no shrinking violet in the face of this challenge, highlighting the golden opportunity for job-creating infrastructure investment and cutting red tape in his release of the Economic Reconstruction and Recovery Plan.
Despite the persistent policy uncertainty, the silver lining is that we can enjoy the start of summer with green thumbs, golden sunshine and clear blue skies. Level 1 also permits us to board the red-eye to visit our clients, in person, across the country.
Wishing you a pot of gold at the end of the rainbow.
- Level 2 B-BBEE contributor
- Matrix NCIS Fixed Income Retail Hedge Fund 1Y return of 33% till end September.
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- Amplify SCI Defensive Balanced Fund ranks number 3 out of 81 funds in the Multi Asset Low Equity space since inception.
- Matrix NCIS Fixed Income Retail Hedge Fund has returned Cash+10.8% since inception.
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