It was with some sense of relief that we heard the unsustainable hard lockdown would be phased out on a risk-adjusted basis starting on the first of May. The economic impact of this pandemic has been severe and looking at the investment returns year-to-date we see the following:
- JSE All Share Index -13% (was -34% mid-March)
- S&P500 -13% (was -31% mid-March)
- Eurostoxx -25% (was -35% mid-March)
- Shanghai -7% (was -13% mid-March)
- Rand/$ -35% (above R19/$)
Those fund managers and other investors who had cash available at the start of February, as well as the courage to start buying quality companies when the markets were sold off indiscriminately, benefitted from a once-a-decade opportunity. The last time we saw such a deeply discounted share market was at the end of 2008. Equity markets tend to be the first responders in an environment where the future becomes uncertain and they usually overreact. A lot of the uncertainties causing the initial collapse of the markets still exist, but now it is not so much the shock of an untreatable pandemic that might cause another wave of selling, but rather the economic impact the pandemic will have on companies and people’s lives.
This new uncertainty, however, is something we are used to and there are various in-depth studies advising governments on how to deal with it, and the silver bullet is a massive financial stimulus. That is why we see governments all over the world releasing up to 10% of their annual GDP into the market. In South Africa the government announced a R500 billion economic stimulus package, with some funds coming from a restructuring of the existing budget; some from UIF surpluses; some from a bank loan guarantee scheme and deferred taxes; and some, surprisingly, from a loan from the IMF and the BRICS new development bank totalling R60 billion at a 1% interest rate and no other conditions.
What we have to understand, though, is that such an exceptional financial stimulus is a short-term emergency measure, which will be successful only if it results in sustainable long-term productivity growth. Our president has alluded to the fact that this crisis has provided our country with an opportunity to restructure our economy going forward. The crisis has silenced the trade unions in their demands for unsustainable wage increases; it has closed the taps on SAA bailouts; it has forced the Minister of Finance to address the inflated public sector wage bill; and Eskom is being kicked into shape. All we can hope for now is that the prevention of corruption will remain a number one priority and that those who stole from our country will get what they deserve.
