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FSP No 47661

James Mckeown, director of Domisa Treasury shares weekly market updates, along with his current view on the South African market.

Levels at the time of writing: USD 18.26; EUR 19.98; GBP 21.22.63

  • US markets close down 4.5%, ZAR & EM currencies weaker: ZAR & BRL both posted all time record lows against the USD. USD was bid up along with safe-haven assets as the worst global manufacturing data since 2009 highlighted the deep impact of the shutdown on global GDP. With Donald Trump warning of a “horrific” couple of weeks to come it’s becoming clear to the market that the disruption will be deeper and longer in duration than previously anticipated
  • Risk perception and volatility remain highly elevated: In the absence of firm quantitative data points with respect to the pandemic any estimates of future earnings remain guesswork and efficient price discovery impossible. Volatility will remain high until this meaningful data becomes available. Whilst the markets have shown some sense of consolidation with volatility easing slightly from its extreme highs this needs to be discounted by the end of Q1 window-dressing. Until a degree of stability returns to global markets Emerging Markets and ZAR will continue to suffer exaggerated impact of risk aversion    
  • Fitch downgrades SA Banks: ABSA, FirstRand, Investec, Nedbank and Standard Bank all downgraded to BB negative with a negative outlook – “We believe the South African operating environment is particularly exposed to the pandemic because of its highly dense and vulnerable communities, and heightened macro-economic risk from falling commodity prices, disruption to tourism, mining activity and manufacturing, as well as pressure on the country’s public finances.”
  • ABSA Purchasing Managers’ Index [PMI]: experienced the weakest quarterly performance since 2009. The index tracking expected business conditions in 6 months’ time fell in March 2020 to below the lowest reading recorded during the 2008/09 global financial crisis and, in fact, the lowest level on record. This means that the worst is yet to come for the manufacturing sector
  • SA vehicle sales crash: Naamsa – “New vehicle sales statistics for March 2020 reflects a substantial decline of 14 150 units or 29,7% from the 47 695 vehicles sold in March last year to the aggregate domestic sales of 33 545 units in March 2020. Equally, export sales at 28 883 units also registered a huge fall of 7 905 units or a decline of 21,5% compared to the 36 788 vehicles exported in March last year. The performance of vehicle exports over the course of 2020 is linked to the duration of the Covid-19 pandemic and its impact on the global economy.” To South Africa the vehicle industry represents 30% of manufacturing output, 14% of exports and 450k formal jobs (direct & indirect). April figures will demonstrate the full impact of the virus on the industry
  • ZAR remains deeply oversold, but vulnerable: along with SA assets in general ZAR remains deeply undervalued. Bond yields north of 10% and ZAR at current levels will not last once appetite for risk re-emerges, which will not happen until quantitative data around the extent and duration of the global economic damage is available. Developed markets, and the US markets in particular, need to find a firm footing before significant appetite for Emerging Market carry & yield return. It’s at this point that SA assets & ZAR represent incredible value. Keep a lookout for that / those catalysts. Until then SA & ZAR face further volatility and weakness

 

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