market update - grayswan investment · r470. in a week of stocks crashing across the world, sasol...

DUNCAN THERON MARCH 2020

www.grayswan.co.za l 021 852 9092 (CT) l 011 431 0141 (JHB)

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MARKET UPDATE

INVESTMENT CONSULTING I WEALTH MANAGEMENT I TREASURY SOLUTIONS

CHIEF INVESTMENT OFFICER

Just like our clients, we are also concerned about this downturn. But it is important to stay calm during these times. We are monitoring the markets 24/7 to ensure we manage and advise you as best as we can.

This summary overview is simply to keep you posted on recent market events. If you wish to obtain more information, please do not hesitate to contact one of our advisors at your earliest convenience.

MARCH 2020 The month of March 2020 will most certainly go down in the history books for marking the end of the longest-running bull market in US history. According to CNBC, the Bull market began on March 9, 2009, and became the longest ever in August 2018. The Dow Jones Index closed yesterday at 23,553.22, down 20.3% from recent highs on February 12, 2020, and it does not seem to stop there as at the time of writing this update the futures in the US is down another 5%. Trading has had to be halted on Wall Street on several days because the market fell too far, too fast.

COVID-19 as well as the “oil war” has been the two major black swan events which collectively triggered the material market corrections we have seen across global markets.

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A French ballet term describing a dance step requiring dancers to move forward and onwards.

We entered 2020 with optimism supported by signs of stabilising global growth and progress on the trade war between the US and China. Equity markets were

poised for potentially a last leg up and further gains. Then it all changed – two black swans hit the market.

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On March 11, the World Health Organisation (WHO) characterised COVID-19 as a pandemic. Countries like Italy has widened its lockdown, banning all non-essential travel and public gatherings until April 3, halting sports events and extending a shutdown of schools. The US suddenly / finally woke up to the threat and imposed a travel ban of Europe, after blaming them for not stopping the “foreign virus”. This ban affects 26 European countries: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland. The ban includes goods and cargo but excludes the United Kingdom for now.

A second “black swan” event, an oil production war simply compounded market fears. Saudi Arabia and Russia could not agree on setting oil production levels, and finally, oil prices tanked. Saudi Arabia started such by offering discounts to buyers and a promise to pump more crude. Shortly after that, it said it would provide customers with about 25% more oil than it supplied the previous month. Russia then also noted it would raise output too. The price of Brent crude plunged by 24%, to $34 a barrel, on March 9—its steepest one-day drop in nearly 30 years.

Sasol stocks have now lost almost 95% of its value over the last 11 months. In April last year, Sasol stocks were worth R470. In a week of stocks crashing across the world, Sasol has been the worst-performing share in all emerging markets. There are now major concerns that the company will be left in breach of its loan conditions. While the market now only values it at around R23 billion - its debt burden is R121 billion.

“To invest with success, you must be a long-term investor.” - Johan Clifton Bogle

The coronavirus is highly infectious and yes it is more deadly than the common flu. That, and the speed at which it has spread, has made investors very worried. At this stage most analysts are suggesting the disruption can last anywhere between three months and a year. It should however be emphasized that getting sick with the virus is manageable, and the good news is that 99% of people will recover.

BlackSwan Events

“... we can’t protect against that which we don’t know.”

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MARKET UPDATE


THE JSE ALL SHARE INDEX South Africa has been caught in the crossfire of the correction in global markets. The JSE’s All share index has just experienced the three worse days in the past forty years. This comes at an unfortunate time when SA investors are already reeling from poor local equity and property performance over the last five years.

The current market correction may not be the worst yet in recent history but was the fastest market correction over six days to lose more than 10% from its peak. The table below indicates the current losses experienced by some of the indices worldwide:

The chart below indicates the subsequent average performance of the JSE All Share Index over certain periods going as far back as 1960 when the market drops 20% or more. It has happened 9 times in history, with an average recovery rate of 23 months.

“An investment in knowledge pays the best interest.” - Benjamin Franklin

INDEXLOSS FROM RECENT PEAK

(PRICES AS AT 11 MARCH 2020)

ALL SHARE INDEX (SA) -16.29%

DOW JONES INDUSTRIAL AVERAGE (US) -20.30%

FTSE 100 (UK) -25.40%

SHANGHAI COMPOSITE (CHINA) -4.72%

HANG SENG (HONG KONG) -13.16%

NIKKEI 225 (JAPAN) -19.38%

BRENT CRUDE OIL -47.87%

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MARKET UPDATE


While inventories and capital spending are likely to fall during the next few months, governments around the world are already uniting in their response and resolve to resurrect demand, a dynamic that has been associated historically with buoyant equity markets.

The US and UK have already responded aggressively by reducing the rates by 0.50 with the possibility of more rate cuts in the next few weeks.

IS THERE A SILVER LINING?

Low oil prices have a stimulus effect for countries like South Africa, as it is our main import. Lower oil prices will hopefully bring some relief as the petrol price could drop by an estimated R1.50 per liter.

Ark-invest Asset Management notes that during the worst financial crisis, innovation gains traction. Companies offering faster, cheaper, more cost-effective, and creative products and services gain significant share. Thanks to breakthroughs in DNA sequencing and artificial intelligence, researchers sequenced the COVID-19 virus in just two days, compared to five months for the SARS coronavirus in 2003. As a result, the first vaccine could be found in a few months instead of 12-18 months, well ahead of the next flu season.

Investec Asset Management (becoming Ninety One) notes that this entire pandemic has benefits for the planet. NASA released pictures last week showing how much pollution over China has cleared as a result of the slowdown. Further, with air travel significantly curtailed, carbon emissions will reduce substantially. If that somehow induces long-term behavioural changes skewed towards more online meetings and events rather than physical travel, it can only be a good thing.

“Planning is bringing the future into the present so that you can do something about it now. ”

- Alan Lakein

If one further considers the ten worst days on the JSE from February 28, 1997, to February 28, 2020, the biggest daily loss has been -11.9%, and the average loss across these was -7.14%, which is roughly in line with what investors experienced this month. Investing in equities bears the risk and return, and this month is no different from others.

It almost feels as though the planet said: “You humans aren’t going to change your behaviour in time,

let me do it for you.”

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WHAT SHOULD INVESTORS DO?

Given the recent market downturn, it is tempting to cut losses and run, but in our experience, the key is to remain rational and to stay the course as the markets have typically generated significant rewards post such big market reactions. As there are always risks in investing so are there opportunities. When emotional investors overreact, it presents attractive buying opportunities as markets eventually recover, which, as experienced after the Global Financial Crisis, resulted in the longest bull run in history.

Investors are faced with two decisions: either stay invested in the markets or switch to cash. However, this requires investors to time the market, which is an extremely difficult, perhaps, impossible task at this point. We certainly can not predict when the markets will turn and those who think they can are called speculators.

It is important to remain calm and to stick to your long-term investment plan. It is during times of market stress that you should revisit your initial willingness and ability to take on risk, which is currently reflected in your underlying investment portfolio.

RISK IS NOT ALWAYS FULLY UNDERSTOOD UNTIL IT BECOMES TANGIBLE.

“Know what you earn and know why you own it.” - Peter Lynch

From our perspective, we will simply continue to apply our proven investment philosophy and process during these uncertain times. We look at valuation and not at the noise. Most importantly, we know that it is in times like these that long term investment opportunities arise for our clients, and we simply need to stay focused on identifying them and making suitable allocations to such.

GraySwan Events

“... we can protect against that which we may know.”

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MARKET UPDATE


Consult with us to ensure that your investment strategy and risk tolerance remains relevant to your personal needs and your investment time horison.

TANIA THERONCape Town

[email protected]

GREGOIRE THERONJohannesburg

[email protected]

MART-MARIE DE JONGHCape Town

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BRAAM BREDENKAMPJohannesburg

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market update - grayswan investment · r470. in a week of stocks crashing across the world, sasol...

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