Fear before the wave hits
The end of October typically marks the annual activity of adorning masks with the hope of possibly scaring some poor folk. This year however, the fear struck from the sight of masks was altogether different. A fresh wave of COVID-19 cases ghosting their way across Europe at an alarming rate led German, French, British, Irish, Austrian and Belgium governments to implement economic shutdowns across their respective regions. Socialising will be curtailed significantly as bars and restaurants will be shut. Fearful of the economic fallout that will ensue these nationwide lockdowns, markets sold-off with European markets the hardest hit. The two major European indices, the FTSE 100 Index and the STOXX Europe 50 index declined by 5% and 8% respectively ending the month in negative territory.
The US has also experienced a rise in COVID-19 cases but fear of this new wave is not the only thing that has spooked the markets into action. Talks of additional stimulus being passed by the US congress continue to fail and the 3rd of the November marks the US presidential election which brings its own set of anxiety and fearmongering. The culmination of these fears saw the US benchmark index, the S&P500, end the month down by 3%.
Even Big Tech was unable to stop fear and uncertainty growing inside the psyche of market participants. Despite releasing stellar results for the quarter, be it blockbuster e-commerce sales by Amazon, a return to growth in advertising revenue by Alphabet or double-digit growth in cloud revenue from Amazon, Alphabet and Microsoft, Big Tech shares still sold-off as the tech-heavy Nasdaq ended the month 2% lower.
On an overall basis, results reported by US companies for the third quarter were better than Wall Street analysts had expected. According to FactSet, a financial data provider, to date almost two-thirds of S&P500 companies had reported results for the third quarter with sales and earnings coming in better than expected at 3% and 19% respectively. Despite results exceeding expectations, when compared to the previous period in 2019, on a blended basis, the reported sales were actually down 2% and earnings were even lower, down 10%. Though the pandemic continues to negatively impact the results of companies, not all sectors experienced year-on-year declines with the Healthcare, Consumer Staples and Information Technology sectors experiencing positive sales and earnings growth.
South African equities could not escape the global sell-off as the JSE All Share Index ended the month down 5%. Resources in particular, which have had strong gains over recent months, were down sharply as the JSE Resources Index declined 11% during month. South African Finance Minister Tito Mboweni delivered South’s Africa’s Medium-Term Budget Policy Statement during the month of October. Creating cause for concern over the South African economy would be the projection of low economic growth over the medium term, South Africa’s public debt levels as a percentage of its gross domestic product rising from 58% to over 90% and rising off-balance sheet government liabilities with support continuing to be offered for ailing state owned entities.
The sell-off in equities did not however translate into gains for gold which remained relatively flat during the month closing at $1,877/ozt. This in spite of the consistent inflation fears that surround the US dollar following the record stimulus packages which saw the US Federal Reserve’s balance nearly double in size in the space of a few months to exceed the $7 trillion level. It is possible that many investors are instead turning to Bitcoin as a potential inflation hedge. The digital currency has surged by nearly 90% in 2020 and has even traded close to the $14,000 level but it is still well below its near $20,000 high that it reached in late-2017.
The renewal of lockdowns sent the oil price tumbling to $38 a barrel as the price of Brent crude fell 6% during the month. Traders and analysts will once again be scratching their heads as they attempt to calculate the impact of the lockdowns on the demand for oil. It has been a year to forget for big European oil and gas companies having lost over $400 billion in value, more than 50% of their market capitalisation.
It is only natural for investors to feel anxious before an election, especially this particular event. The question that will be lingering in the back of their minds is what the implications will be under a “blue wave” as opposed to a “red wave”. In no particular order of preference, under a blue wave, Joe Biden would attempt to introduce massive stimulus in the form of infrastructure spend and clean energy. This could be interpreted as a positive for equities but perhaps less so for US treasury bonds. There would of course be an offset for investors in the form of higher corporate taxes but the investment stimulus provided should far exceed additional taxes. Should we see a blue wave, the stimulus package that the market has been craving is unlikely to arrive until next year. With little incentive to do so, it would be quite unlikely for President Trump to push through another package during his remaining months as president. Under a red wave it can be assumed that Trump would push for further deregulation and tax cuts which would be bullish for equities but US treasury bonds would likely stay supressed below the 1% level, possibly for an even longer period of time. Whether we see a blue or red wave there is also the likelihood that regardless of who sits in office for another term, the House of representatives and the Senate remain divided post-election. This would continue the trend of political gridlock which from a historical perspective is bullish for equities in the sense that it allows markets to continue as is without political interference.
While lockdowns and presidential elections have heightened fear and anxiety among investors, one event that has drawn a lot of attention and created a lot excitement was the proposed listing of the Ant Group. For those outside of China, the Ant Group would not be a household name. The Ant Group is the parent company of Alipay, a lifestyle and payments app which has more than one billion users in mainland China. Alipay was initially created in 2004 as an escrow service for Chinese online retailer Alibaba Group to facilitate transactions in a manner similar to eBay. The app has come a long way since its beginnings and now handles an annual transaction volume close to $18 trillion, more than Visa ($11 trillion) and Mastercard ($6 trillion). Besides facilitating payments, people use the app to shop online, purchase insurance, monitor utility bills, lend money and purchase investment products. The proposed $34 billion listing of the Chinese-based fintech company was set to be the largest in history surpassing that of Saudi Arabian oil giant Saudi Aramco. In a sign of changing times, this listing was set to bypass the US and instead it would have been a combined dual-listing on the Hong Kong and Shanghai stock exchanges. The excitement has however turned into frustration following a shocking twist of events which saw the listing suspended after a closed-door meeting between the Ant Group’s controlling shareholder, Jack Ma, its top executives and various Chinese regulatory agencies. Chinese authorities identified a “significant change” in the regulatory environment without going into too much detail as the reason behind the suspension. Perhaps the actions of the Chinese regulators have less to do with the “issues” identified and more to do with Jack Ma’s criticisms of China’s state-owned banks.