Have the markets underestimated the global epidemic?
The uncertainty around the numbers of deaths and infections were acknowledged as Chinese officials declared that their methods of confining and reporting infection numbers had led to mistrust. Adjusted numbers now suggest that new deaths had increased by 1109 on Friday, sharply up from the 349 new cases reported on Thursday.
This after China’s Consulate General in Pakistan had said that “the peak of the epidemic (had) already arrived”.
As more cases are also reported in other countries such as Italy, Lebanon and Japan, Bloomberg reported that US and other emerging market stocks started to contract strongly, while treasury yields had tumbled and gold surged to new two-year highs. Gold bullion traded on Friday on levels higher than $1 644 (R24 644), an increase of more than $25 alone on Friday.
The Dow Jones industrial index had lost more than 300 points last Thursday and Friday, whereas the S&P 500 was down by more than 1 percent and the Nasdaq by -1.4 percent. Domestically, market sentiment continued to be nervous, not only on the coronavirus uncertainty, but all more so on negative perceptions around the Budget speech on Wednesday. More and more economists are of the opinion that VAT will be increased by at least 1 percent.
Business insiders on Friday reported that Johan Els of Old Mutual is of the opinion that an extra once-off tax on income for individuals and companies like the “transition levy” that taxpayers had to pay in 1995 may be levied.
One can also expect that tax increases on the Fuel Tax and Road Accident Fund will be levied. Especially given the much lower international oil price so that consumers will not feel the burden as much. Surprisingly, bond rates surged on Friday as the R186 came down below 8 percent and traded on 7.91 percent. This is well down from the 8.2 percent a month ago. Investors may already have discounted a difficult Budget speech and a possible downgrade to junk by rating agency Moody's during March.
On the JSE most equity indices took a turn for the worst during the latter part of last week. The Alsi lost 457 points alone on Friday and was down since last Monday by 851 points or 1.5 percent. The Industrial 25 index lost 1.9 percent, the Financial 10 traded down sharply by 3.5 percent and the listed Property index dwindled by 2.4 percent.
Given the weaker rand exchange rate and higher commodity prices, the Resources 10 index had surged by 2.4 percent. On the foreign exchange market, the rand started to recover sharply on Friday after it had depreciated strongly during the middle of last week.
At one stage the currency had traded at R15.12/$, but moved much stronger against the greenback to trade on R14.95 on Friday afternoon, only 5cents weaker than the R14.90/$ close of the previous Friday. Against the pound the rand ended last week stronger on R19.39 against R19.43 a week ago. Against the euro the rand also traded much sideways last week, losing 9c to close Friday on R16.24
Dr Chris Harmse is an economist and chief investment officer at Rebalance Fund Managers.