VIDEO: Market Snapshot February 2020
 

Prudential Investment Managers

Prudential Investment Managers

March 2020

VIDEO: Market Snapshot February 2020

Article Summary

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of February 2020.

Global equity markets sold off in February as concerns over the widespread impact of the coronavirus weighed on investor sentiment. Safe-havens rallied, with long-dated bond yields in the US reaching all time lows. The risk-off sentiment was compounded by reports that the impact of the pandemic would detract up to 0.5% from global growth. In Europe, post-Brexit discussions around the establishment of a free-trade agreement between the UK and EU stalled, while economic growth in the region remained muted. On the local front, SA equites sold off in line with global markets on the back of coronavirus concerns, poor economic data and lower growth forecasts.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned –8.0% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index returning -5.3% and the MSCI World Index delivering -8.4%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.7%, while the EPRA/NAREIT Global Property REIT Index (US$) produced -8.5%.

Brent crude closed the month 13.1% lower at around US$51 per barrel as investors worried about lower demand on the back of slower global growth. Precious metals were mixed, with silver returning -4.1%, palladium 21.4%, platinum -7.6% and gold 3.0%.

US

US equity markets posted negative returns for the month as concerns over the spread of the coronavirus continued to overshadow solid economic data. The Dow declined nearly 1,200 points during intra-day trading, its biggest daily decline on record, while the S&P 500 and the Nasdaq posted their biggest percentage falls in over eight years. US safe havens rallied as risk-off sentiment dominated markets, with the 10- and 30-year US Treasury yields reaching multiple all-time lows.

Investors received some reprieve after the US Federal Reserve announced that it would implement measures to support the economy and offset the effects of the coronavirus, resulting in the market pricing in a 50bp rate cut for March. Meanwhile, President Donald Trump said the government would be ready to spend whatever was appropriate to contain the outbreak, emphasising that the threat to the county was low. Earlier in the month the US government sought approval from Congress to spend US$2.5 billion in emergency coronavirus funding.

In economic news, US GDP increased 2.1% q/q for Q4 2019, in line with the previous quarter. Unemployment edged up to 3.6% for January from 3.5% in December, while annual inflation increased to 2.5% from 2.3% over the same period. Manufacturing PMI fell to 50.8 in February from 51.5 in January, Meanwhile, retail sales increased 0.3% m/m in January, marginally above the downwardly revised 0.2% increase in December.

US equities saw sharp selling, with the S&P 500 returning -8.2%, the Dow Jones Industrial 30 returning -9.8%, while the technology-heavy Nasdaq 100 posted -5.8% (all in US$).

UK and Europe

UK equities followed global markets lower as more cases of the coronavirus began to surface. The FTSE 100 fell to its lowest level in almost four years as the pandemic sent travel firms, airlines, retailers and banks stocks plunging.

In post-Brexit news, PM Boris Johnson threatened to walk away from trade talks with the EU as discussions around the establishment of a free-trade agreement stalled. Both parties have fundamentally different views on how a free-trade agreement should be overseen and what constitutes fair competition between the two economies.

In economic news, UK GDP for Q4 2019 was flat at 0% q/q. Unemployment remained steady at 3.8% while inflation increased to 1.8%. Retail sales rose 0.9% m/m in January, rebounding from a downwardly revised 0.5% decline for the previous month. Eurozone GDP expanded 0.1% q/q in Q4 2019, its lowest level in seven years. Among the Eurozone’s largest economies, German GDP stalled at 0% q/q, France and Italy contracted 0.1% q/q and 0.4% q/q respectively, while Spain's economy grew 0.5% q/q.

Meanwhile, ECB President Christine Lagarde called for fiscal stimulus measures in the Eurozone, warning against easier monetary policies and the potential long-term risks of extended accommodative measures. Lagarde also pointed to the proposed introduction of a digital currency as a means to support the ECB's objectives.

For the month, the UK’s FTSE 100 returned -11.8%, the German DAX -9.2% and France’s CAC 40 posted -9.4% (in US$).

ASIA

Equity markets across Asia closed lower as the number of coronavirus cases reported outside of China continued to escalate, particularly in Italy, South Korea and Iran. The International Air Transport Association estimated that the outbreak would cost Chinese airlines US$12.8 billion in revenue, while the IMF warned that the epidemic would most likely drag China's GDP 0.4% lower to 5.6% in 2020 and detract up to 0.4% from global growth. The PBoC announced that it would lower its benchmark interest rate by 10bps and inject money into the economy in an attempt to lessen the financial impact of the virus.

In Japan, equity markets sold off in line with the rest of Asia. Further detracting from investor sentiment were concerns that the impact of the coronavirus could push the country into a recession, after GDP growth for Q4 2019 was confirmed at -1.6% q/q, the largest contraction since 2014. Japan’s Prime Minister Shinzo Abe, meanwhile, announced a US$2.5 billion emergency economic package to help fight the effects of the coronavirus.

In other economic news, China's annual inflation increased to 5.4% in January from 4.5% in December, its highest rate in over eight years. Manufacturing PMI contracted to 40.3 in February 2020, the lowest level since April 2004, while non-Manufacturing PMI tumbled to a record low of 29.6 in February, down from 54.1 in the previous month. In Japan, annualised inflation edged down to 0.7% in January.

Japan’s Nikkei 225 delivered -8.4%, the MSCI China 1.0% and Hong Kong’s Hang Seng -0.7% (in US$).

South Africa

The contagion effect of the coronavirus saw South African equities sell off in February. Adding to negative sentiment was the continuation of Eskom’s load shedding and a string of poor economic data. Moody's downgraded its 2020 growth forecast for SA to 0.7% from 1%, increasing the likelihood of a possible sovereign rating downgrade. The ratings agency cited lacklustre domestic demand and the adverse effects of load shedding as reasons behind the downward revision. Markets received some reprieve in the form of Finance Minister Tito Mboweni’s 2020 National Budget Speech, which proposed personal income tax relief, the cutting of financial support for cash-strapped state-owned enterprises and the reduction of government expenditure by R156.1bn over the next three years. However, he also unveiled a downward revision to SA’s 2020 growth outlook to 0.9% from 1.2% previously.

In economic news, annual inflation remained subdued at the mid-point of the SARB’s inflation target range in January, increasing to 4.5% from 4% in the previous month.

The FTSE/JSE ALSI declined 9.0% in February. Industrials retuned -7%, Financials -9.5%, Resources -11.6%, while Listed property (SAPY index) was the worst performer generating -15.7% for the month. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned -9.5%.

SA bonds were flat, with the BEASSA All Bond Index delivering 0% in February, while SA inflation-linked bonds returned 0.6%. Cash (as measured by the STeFI Composite) delivered 0.5%.

Finally, the rand sold off against all three major currencies in February along with most other emerging market currencies. It depreciated 4.7% against the US dollar, 2.2% against the pound sterling and 3.8% versus the euro.

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