Around the world, various governments have embarked on quantitative easing (QE), coupled with support programmes to help alleviate the disastrous economic impact of the COVID-19 pandemic. However, QE manifests as support for financial markets, rather than for the ‘real economy’. Notably, QE is a tool whereby the rich get richer – from rising stock prices – in the hopes that the wealth effect will see them spend money that will trickle down into the real economy. As it stands, the real economy is in dire trouble – and business profits are falling – whilst the global financial economy is in an upswing with a stock market recovery that is in full force. Equity prices are moving upward.
Once the health crisis is over, SA will be left with a massive hunger and unemployment problem, coupled with a government that is hopelessly indebted.
On the local front:
Interest Rates: The SARB met twice in Q2. In April the repo rate was cut 100bp to 4.25%. In May it was cut a further 50bp to 3.75%.
Some analysts expect a further 50bp cut this year, which would bring the repo rate to 3.25%.
Having weakened dramatically in Q1, the Rand recovered slightly in Q2. In mid-April, it was trading at USD/ZAR 19.1 and in early June at USD/ZAR 16.5. The Rand is vulnerable to any global re-escalation of infection rates.
Financials rebounded during the quarter as did industrials.
Resources rebounded strongly as the demand outlook for commodities improved due to a resurgent Chinese economy and the easing of restrictions elsewhere.
Markets rebounded strongly in Q2. The stock market recovery was V-shaped, with a gain of 19.2% in Q2 following -21.4% in Q1. This is despite the economic uncertainty and an unclear path to recovery. Nevertheless, this leaves global markets still down 6% for the year.
High-growth technology shares, many of which are seen to be beneficiaries of the COVID-19 crisis, continue their long run of outperformance.
Source: Coronation Fund Managers, Anchor Capital