Momentum Investments Market and economic outlook | October 2020
The messaging from global fiscal and monetary authorities remained highly accommodative during the third quarter of 2020 and underpinned robust quarterly gains in global equity markets. United States (US) and Asian markets outperformed, while European and Latin American markets trailed behind.
The local equity market ended the quarter broadly flat. The FTSE/JSE Resources Index had the strongest performance in the quarter, while marginal losses were observed in the FTSE/JSE Industrials and Financial Indices.
The JSE Assa All Bond Index climbed 1.5% in the quarter, while the JSE Assa Government Inflation-linked Bond Index traded 1.2% firmer for the same period. Meanwhile, the FTSE/JSE SA Listed Property Index lost 14.1% since the end of June 2020.
Ongoing stimulus is likely necessary to support financial markets and underpin confidence for sustained economic growth. Sentiment and positioning are suggestive of equity complacency and could act as constraints to future global equity returns. In our view, the potential for higher taxes and increased regulation, stemming from the outcome of the upcoming US election, and virus and vaccine developments pose a threat to equity returns going forward. Relative to global bonds, global equity valuations rank as the most attractive since the Second World War.
South African (SA) local shares staged a massive underperformance against SA global shares since the bottom in markets. We remain cautious in the near term on SA equities given short-term global risks, but we are more positive beyond that.
SA government bond yields look attractive relative to those in developed markets (DMs) and emerging markets (EMs), but part of the high real yield differential is due to a fiscal risk premium. Our preference remains for SA nominal bonds over inflation-linked bonds and cash on a one-year basis.
We remain cautious in the interim on SA listed property in view of near-term global market risks, but the return profile is asymmetric to the upside beyond that.
Although COVID-19 infections have been steadily rising in countries which previously had the spread of the disease under control, governments have not re-imposed the most stringent forms of lockdown. The rate of fatalities and hospitalisations have not increased to the same extent as with the first wave of infections, with the rise mostly concentrated among the younger age cohorts or asymptomatic cases.
High-frequency data releases and sentiment indicators nonetheless imply that a strong bounce back in global economic activity in the third quarter of the year may fizzle out prematurely.
The economic recovery has shown signs of being unbalanced. Businesses have become less pessimistic about the outlook for the economy and corporate earnings, whereas consumer sentiment and behaviour appear to continue to reflect the uncertainty of COVID-19.
Fiscal expansions in the DM composite are expected to push the debt-to-gross domestic product (GDP) ratio from 120% in 2019 to 147% in 2020, raising concerns over how governments will service this mountain of debt and how the related surge in bond issuance will affect markets and longer term growth.
With the blurring of fiscal and monetary policy, it is not clear what will force governments to rein in spending. This raises an additional concern of central banks becoming more vulnerable to political interference. Moreover, inflation expectations are also at risk of becoming unanchored.
Even as further restrictions are lifted on the economy, ongoing electricity supply shortages, crippling policy uncertainty, lingering unemployment, an anticipated rise in bankruptcies, a slow implementation of structural reform policies and soaring government debt will continue to hold back spending and investment and underscore weak trend growth, thereby limiting SA’s recovery to a below-consensus 2% in 2021 in our view, from a contraction of around 8% in 2020.
The price of electricity tariffs is the main source of upside risk to the inflation forecast in the near term. We anticipate an average headline inflation rate of just above 3% for 2020, rising mildly to just below 4% in 2021.
We see interest rates remaining unchanged until the second half of 2021 when the SA Reserve Bank (Sarb) begins to unwind negative real interest rates to avoid endangering the savings industry and broader financial stability.
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