Coronavirus panic has sent world equity markets into correction (a correction is a 10 percent drop in stocks from their most recent peak) territory. While the rate of reported cases in China slowed and Chinese companies that were shuttered in February started to reopen, the headlines that the virus is spreading at an increased rate outside of China led to global equity markets suffering their worst weekly decline in over a decade.

The deadly virus, which originated in China, has spread to more than 50 countries and killed at least 2943 people. As the virus spreads (particularly in Iran, Italy and South Korea) it has become even harder for companies and economists to ignore the mounting damage to supply-and-demand conditions on the ground and its impact on global growth.

The yield on the U.S. 10-year Treasury note fell to the lowest level on record at 1.12% (from 1.46% a week ago), reflecting the market’s concern of a sustained blow to global growth and its expectation that the Federal Reserve would resume interest rate cuts to combat an economic slowdown.

On the corporate earnings front Goldman Sachs has estimated that 2020 U.S. earnings are likely to be flat and has also cut its Q1 U.S. GDP forecast to 1.2% from an earlier 1.4% forecast.

In other news U.S. officials and Taliban representatives have signed an agreement after months of negotiations in Qatar’s capital that is aimed at ending the U.S.’s longest war, fought in Afghanistan since 2001. The agreement will pave the way for the U.S. to gradually withdraw its troops. Talks between the Afghan government and the Taliban are due to follow. Under the agreement, the militants also agreed not to allow al-Qaeda or any other extremist group to operate in the areas they control.

For the week, global equity markets were sharply lower. In the U.S., the Dow Jones (-12.36%), S&P 500 (-11.49%) and Nasdaq (-10.54) indices were all negative over the week. Similarly, the Euro Stoxx 50 (-12.39%), FTSE 100 (-11.12%), Nikkei 225 (-9.59%) and the Shanghai Composite Index (-5.24%) were all sharply down on the week.

In the week ahead given the uncertainty of the economic fallout from the virus and its effect on global growth, volatility is likely to remain elevated.

Market Moves of the Week:

The rand extended its losses on Friday afternoon, as financial markets battled with the global sell-off sparked by further outbreaks of coronavirus around the world. The rand was the third-worst performing currency among emerging-market currencies on the day.

The South African Minister of Finance, Tito Mboweni, delivered his second National Budget on Wednesday. The 2020 Budget was presented under challenging economic conditions, aggravated by a very significant tax revenue shortfall. There were no shock tax announcements but rather recognition that government needs to reduce wasteful expenditure and rein in on salary costs. Over the next three years the 2020 Budget proposes total reductions of R261 billion, which includes a R160.2 billion reduction to the wage bill of national & provincial departments, and national public entities. These measures narrow the consolidated deficit from 6.8 % of GDP in 2020/21 to 5.7% in 2022/23, with debt rising to 71.6% of GDP over the same period.

The main budget deficit is now estimated at 6.5% of GDP in FY19/20 and 6.8% in FY20/21. Low growth has led to a R63.3 billion downward revision to tax revenue estimates in 2019/20 relative to the 2019 Budget. Debt-service costs now absorb 15.2% of the main budget revenue.

On Thursday, Moody’s Investors Service, the only agency with an investment-grade rating on SA’s debt, said that the government would find it hard to achieve spending cuts mooted in the budget, which include a reduction in the wage bill that’s opposed by labour unions. Should Moody’s downgrade SA to junk status, SA bonds would fall off international bond indices, which would prompt automatic selling by institutional investors. Analysts have said that a downgrade to junk status is now mostly priced in by the market.

The JSE all share ended the week at its lowest level in 15 months on Friday, with the all share ending the day down 4.5% to 51,038.18 points. All the major sectors were battered over the week.

Chart of the Week:

Historical analysis shows that on average corrections result in a 13% decline and take about four months to recover to prior levels. But there’s one big caveat. This is only if it does not fall into bear market territory, down 20% from a high. The most recent correction occurred from September 2018 to December 2018 (with S&P 500 bouncing in and and out of correction throughout the autumn of 2018).

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In any market environment, we strongly believe that investors should stay properly diversified across a variety of asset classes and that clients financial plan supports their long-term goals, time horizon and tolerance for risk.

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