Download Performance Update South Africa has been in lockdown for 25 days with 10 more to come and we all hope that it will not be extended again. Perversely, the more effective the lockdown is in curbing the rate of infections, the larger the pain inflicted on the economy. As we noted last week, South Africa’s GDP is set to contract by 5% – 10% in 2020, and if the lockdown were to be extended much further, then it would be even worse. This could force the SARB to become even more aggressive in loosening monetary policy.
Right now, inflation is not a worry. If anything, we have to be concerned about deflation. WTI oil in the US is trading in negative territory for physical delivery in May – you now have to pay someone to take your barrel of oil! In South Africa, the slump in the economy will cap pricing power. A case in point is the payment of rent. Retailers have peppered the headlines with an unwillingness to pay rent in the absence of access to store, but anecdotes extend to the household sector. Mounting pressures on the residential housing sector could result in rental deflation, which at 17% of the CPI basket could have a substantial impact on target inflation, over and above the pressure from the falling oil price.
Therefore, while we think cash is king in uncertain times, we cannot rule out short-term interest rates turning negative in real terms as the SARB catches up to the deflation shock. This leaves bonds as a very attractive asset classes, yielding 6% plus on a real basis. In the short term, there are risks of further foreign disinvestment related to the WGBI exclusion, but fundamentally, the known risks are in the price. The outlook for the equity market is not clear-cut, as the recent bounce has more to do with unprecedented stimulus than with a guaranteed V-shaped recovery. The rand is another potential wild card, reflecting a combination of a strong dollar, weak local fundamentals, and large capital outflows. With so much in the price, we should be cautious that peak pessimism drives us offshore at the USD/ZAR peak. Volatile markets require ongoing nimbleness.
Yet structural change has its upside. The serial lockdowns have resulted in significantly lower pollution levels and interference with nature; anecdotes abound of seeing the Himalayan peaks from India, the dolphins in the Venetian canals, and the antelope on the streets of Potchefstroom. Companies are set to become more cost effective with positive direct ESG implications resulting from reduced business travel. We hope the world will become more humane in continuing with the random acts of kindness seen in recent weeks, while a more eco-friendly society has potentially taken a great step forward with the ban on wildlife trade in China.
We work in the financial sector, which has experienced a tough time with falling and volatile markets. Yet, if you are reading this email, then you are part of the privileged group that is able to work remotely with relative ease. While uncertainty remains elevated, we can all agree that things will never be the same again.
What is normal?
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- Matrix NCIS Fixed Income Retail Hedge Fund return for March 2020 of 14%.
- Matrix NCIS Equity Fund ranks number 12 out of 118 funds in the General Equity space since inception.
- Amplify SCI Defensive Balanced Fund ranks number 9 out of 90 funds in the Multi Asset Low Equity space since inception.
- Matrix NCIS Fixed Income Retail Hedge Fund has returned Cash+10% since inception.
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