By David Crosoer and Prieur du Plessis
THE year 2020 has been one full of surprises for investors, and it’s not over yet! While many of us may simply be hanging in to start afresh in January, the trends that have gained prominence this year might well persist into 2021 and beyond.
And despite the challenges, things might already be turning out better than we expected. So what stood out in the year and what could remain pivotal in the years to come?
For many of us the coronavirus has been the defining challenge of the year. It was actually here before the year started (hence Covid-19) and unfortunately is likely to be here for much of next year, but its economic impact was especially felt in the second quarter of 2020 when lockdowns were implemented globally to try to contain the pandemic and protect the health system.
At the time of writing, more than 1.5 million people have died from the disease and many parts of the world, including South Africa, are entering a second wave of the pandemic that threatens not only another health crisis, but the prospect of an additional shutting down of the economy.
Fortunately, significant progress has been made on the development of vaccines, and it is highly unlikely economies will be shut down again as comprehensively as they were earlier this year.
In fact, few economies can afford another lockdown to the extent implemented earlier this year – according to Statistics SA, the South African economy collapsed by an annualised rate of – 51percent in the second quarter alone.
Second time round, governments are likely to be far less blunt in their interventions, and there are already indications that the global economy is recovering faster than initially anticipated, despite Europe and the US both grappling with accelerating new infections.
Consequently, the International Monetary Fund revised its expectation for 2020 upwards from -5.2 percent to -4.4 percent for the global economy, while the Organisation for Economic Co-operation and Development now sees global growth to recover at 4.2 percent in 2021 after contracting by -4.2 percent this year.
While many countries will regain pre-Covid levels quite soon (and China is on track to end 2021 as if Covid19 had never happened), South Africa, unfortunately, has been severely disrupted, with the economy contracting by as much as 8.1 percent in 2020 and not expected to regain its 2019 GDP levels any time soon.
The challenge for South Africa remains the slow pace of the restructuring of the economy to restore business and consumer confidence. Here we continue to move at a glacial pace, with few outside National Treasury and the South African Reserve Bank appreciating the need for urgency despite the steep premium for holding longer-dated debt as the government’s fiscal position continues to deteriorate.
South African short-term interest rates have also been cut to levels not seen in decades, and further cuts are still possible, while for the first time since inflation targeting was adopted consumer inflation in the country has remained significantly below the midpoint of the 3 to 6 percent target band, and was expected to remain there for the foreseeable future.
While this has yet to restore confidence, it does lay the foundation for a stronger recovery, and seeing the government in court over the public sector wage bill, and the prosecution of highly placed individuals in the governming party, are steps in the right direction.
At the same time the global transition to a greener economy, and the widespread adoption of Environmental, Social and Governance (ESG) initiatives, will have significant implications for the future allocation of capital.
The announcement of the US Federal Reserve in August that short-term interest rates would be kept at extremely low levels for several years, and inflation could overshoot its 2 percent target, has encouraged a structural shift to risk-on trades, with the JSE/FTSE All Share Index in early December now back at the level at which it started the year.
More generally, financial markets and the global economy have clearly responded to massive monetary and fiscal support from central banks and governments, which has dwarfed by orders of magnitude their previously unprecented response to the 2008/9 global financial crisis.
This stimulus initially meant markets recovered from their lows far more quickly than in 2009, and is now also impacting on the speed of the economic recovery.
More recently, announcements of multiple potential vaccines are clearly a significant breakthrough, and it is not surprising that financial markets in general and more cyclical shares in particular have responded positively post November.
What then stands out for us in 2020? We have briefly discussed the coronavirus, collapse, corruption, confidence, and climate.
Meaningful progress has arguably been made with addressing all five.
So, at the end of a difficult year, let’s acknowledge the progress made with regard to vaccines, and measures implemented to mitigate collapse and corruption, and help restore confidence.
Investors might just look back on 2020 as not only the year of the coronavirus but also the year of change in which we all reimagined a more inclusive society and put definite steps in place to transition to a greener economy, thereby creating a more sustainable and investor-friendly planet.
David Crosoer and Prof Prieur du Plessis are Chief Investment Officer of PPS Investments and chairperson of PPS Multi-Managers respectively; email: [email protected]
BUSINESS REPORT