President Donald Trump arrives on stage to speak at a campaign rally at the BOK Center, Saturday, June 20, 2020. Photo: Evan Vucci/AP
President Donald Trump arrives on stage to speak at a campaign rally at the BOK Center, Saturday, June 20, 2020. Photo: Evan Vucci/AP

Global markets correctly anticipated the recovery

By Ryk de Klerk Time of article published Jun 22, 2020

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CAPE TOWN – When global equity markets bottomed at the height of the Covid-19 pandemic and rallied strongly doomsayers questioned the apparent disconnect between Wall Street and Main Street. 

Yes, the massive intervention by central banks contributed to the surge in developed market equities which saw the MSCI World Index in terms of dollars move within nine percent of the record levels in February this year, while the tech-laden Nasdaq index is within a few points from its record highs. 

The positives of the opening of major developed economies and economic zones are increasingly evident by the day. The employment situation in the US is improving dramatically, US retail sales recovered strongly and US consumer confidence got another boost with existing house prices recovering. 

It is also apparent that global trade is recovering fast. The Baltic Dry Index, that measures the changes in raw materials transportation costs, jumped to a five-month high of 1 527 points from a low of 407 last month. The Economist’s metal-price index, which excludes precious metals, is revisiting the 12-month highs recorded in January after the low in March. 

All in all, the Flash Markit PMI numbers, due this week, are likely to show significant improvements in global economic activity, especially in the services sector.

We are therefore in the stage in the investment cycle where economically cyclical stocks and risk assets should outperform less risky assets such as gold bullion and consumer staple stocks. 

My biggest concern is that the markets will be stuck with above-average volatility for the foreseeable future; investors and especially the central banks will remain anxious and jittery. Fears of a second wave of infection and the impact thereof will remain until an effective vaccine can be found. Furthermore, with the US elections just a few months away, President Donald Trump is the elephant in the room and his actions may increase geopolitical risk.

The biggest risk is therefore the sustainability of the current recovery as it will determine the shape of the recovery from the coronavirus-induced recession.

It is little wonder that my risk indicators remain elevated. The CBOE VIX is at 35 while the ratio of the gold price and the MSCI Emerging Markets Index in terms of dollars remains near historical highs.

Investors began fading market risk as iShares Global Consumer Staples ETF as proxy for consumer staple stocks found favour at the cost of the market in general from June last year as the former’s 12-month trailing dividend yield dropped from more than 1.35 times to match the iShares MSCI World ETF (as proxy for the MSCI World Index) trailing yield. The Covid-19 pandemic added fuel to the fire as investors grew even more risk averse. 

It is virtually impossible to estimate the half-year and full-year dividends of the iShares Global Consumer Staples ETF and the market in general as measured by the iShares MSCI World ETF for this year. All I know is that the 12-month trailing dividend yield of the iShares Global Consumer Staples ETF relative to the iShares MSCI World ETF is at the lowest level since the end of 2015 and most of the bad news of non-staples is probably already priced in.

It is also evident that investors do not trust risk markets and specifically equity markets yet. According to a recent article in The Wall Street Journal, citing data from Refinitiv Lipper going back to 1992, “investors are sitting on the biggest pile of cash ever” with assets in money market funds surpassing the previous highest level in 2008. In the past when record levels coincided with bottoms in the market, the thawing of investors’ liquidity led investors to dash for income yields, especially in light of earning near-zero interest on cash. Yes, they had to take on more risk to eke out returns.

At some stage investor confidence in risk assets will, therefore, return to euphoric levels and is likely to take the shine off consumer staples and gold and favour higher-risk assets.

Covid-19 taught us costly and undeniable lessons. Perhaps the biggest lesson of it all is that by chasing market returns without due respect of counter-cyclicals such as global consumer staples, gold and other measures to guard against unexpected market volatilities and especially massive drawdowns can have disastrous ripple effects on not only your hard-earned savings but also your health. Yes, think of how your finances will be affected by chaos and how to reduce the impact thereof. 

Review and rebalance your assets and savings according to your future needs as your perceived risk appetite may differ materially from the risk you can afford, the risk required to achieve your financial goals and needs and the current risk assumed in your overall savings and assets. Keep on questioning your financial adviser because when the proverbial hits the fan, it’s your assets and well-being that are at risk. 

You can invest in physical gold on the JSE through the listed gold Exchange Traded Fund (ETFGLD). In regard to global consumer staple stocks you can get access to British American Tobacco or more commonly known among South African investors as British American Tobacco (BATS), the world’s biggest listed tobacco company, also listed on the JSE. BATS’ 12-month trailing dividend yield is about two-and-a-half times the dividend yield of the consumer staples index iShares Global Consumer Staples ETF and the BATS price-to-net asset value metric is 1.15 times.

Yes, the markets correctly anticipated the recovery post the Covid-19 recession. Was it too much too soon, though?

Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has a direct interest in the listed Gold ETF. You should consult your broker and/or investment adviser for advice.


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