The potential threats to the global economy from the corona virus outbreak are continually being processed by the markets, and with a particular vengeance.
The recent sell-off in global equity markets has been the most severe since the global financial crisis. All forecasting houses we follow are clear that the impact of the virus will do quite material damage to the global economy. As we write, Italy is in total lock-down, and whereas the situ- ation in China appears to be coming under control, globally the number of new cases as well as deaths continue to rise. South Africa has recorded thirteen cases thus far, with a school in Sandton in lock-down. We’ve just been informed by RMB that their Global Macro Conference in Cape Town, showcasing top international speakers, scheduled for the 18th of March, has just been cancelled because of the virus.
GDP growth estimates have been revised downwards for the global economy. Scenarios are difficult to set out, given the paucity of precedents in this regard, especially in modern times. Complicating matters are issues like global supply chains and just-in-time management systems that could be severely disrupted by stoppages at any point in the production chain. However, modern medicine has a much better understanding of viruses, and are better equipped to contain pandemics today; the hope is that the global health system will successfully negate the spread the virus, perhaps soon. Governments have also implemented measures to contain the virus, issuing quarantine decrees and disbursing money to mitigate the impact of the virus. The IMF has made 50 billion USD available through its rapid-disbursing emergency financing facilities for low income and emerging market countries that could potentially seek support. Of this, USD 10 billion is available at zero interest for the poorest members through its Rapid Credit Facility.
If the Coronavirus spreads widely beyond China, the latest research we have read estimates the 2020 global GDP impact to be 1.1% lower relative to pre-Coronavirus forecasts, with the impact on China at -1.6% lower than pre-Coronavirus numbers. Standard Bank Research estimated that a 1% growth drop in China’s GDP will affect South Africa’s GDP by – 0.2% to -0.3% this year.
The good news is that the impact on economic growth is expected to be V-shaped in the case of a mild scenario, with growth being back-loaded once the shock of the virus’s impact is out of the way. Note that earnings expectations of companies are being changed to reflect the new investment landscape, mostly downwards revisions, but also upwards in the case of those companies standing to benefit from the potential pandemic, such as some pharmaceutical companies.
Counterpoint AM is currently implementing a response policy to the virus, allowing for staff to self -quarantine in the event of a potential risk. Whilst precautionary at this stage, we are taking the risks seriously and ensuring that staff can work remotely should it be required.
From an investment perspective, our stance in the face of the fall-out from the virus is not be alarmist in the least, but to cautiously assess the situation on a continual basis, looking for opportunities as they present themselves, be they buys or sells.
Our positioning going into the recent sell-off (including yesterday) has enabled our Funds to weather the storm relatively well. As of today, our positioning remains intact
- We have above-average levels of cash, in both the local and global funds
- In domestic bonds, we are moving steadily from underweight towards a more neutral position. We can afford to be selective and we are recalibrating both exposure and duration. There is every reason to be cautious and we remain ever mindful of the upcoming Moody’s review
- Our off-shore exposure remains high. In recent days, we have reduced equity exposure in favour of USD cash (which we are likely to repatriate at appropriate exchange rate levels)
- In domestic equities, we have had the benefit of both a lower allocation and good stock selection. We have NO Sasol exposure and a meaningful allocation to Gold and Tobacco, which have held up very well in the steep correction in SA Equities
- We continue to have very low exposure to SA Listed Property
We are in the process of re-positioning the funds from a position of strength. We have experienced these market cycles before and thus far, the current drawdown is very orderly, despite the dramatic news headlines.
Volatility is expected to be higher and this provides opportunities. We are ready to deploy the cash we have accumulated during the market’s relentless rally since June 2019.
Our clients can rest assured that at CPAM we are being alert to the volatility in the market with a sharper than usual fo- cus. We remind clients to stick with their asset allocation views and avoid selling out of the market in these troughs and locking in the losses.