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Today is the end of the first quarter of 2020. The potential nuclear war in early January feels like a lifetime ago. Bloomberg says that the last three months have been the worst quarter ever for the JSE All-share. This global sell-off has taken our local market back to 2013 levels. Ouch! What makes the number worse is that South Africa has a relatively high level of inflation. Meaning that even though we are break-even for 2013 levels, in real terms we probably have lost over a decade of growth.
This is one reason that we have been pushing our clients to invest offshore. Given that we live in a global village, why would you want to keep all your eggs in the South African basket? South Africa accounts for around 0.4% of global GDP, we are only a very small part of the global asset universe. For most people, their pension, their house, their savings, and their job/ business are all Rand based. It then makes sense to then send your discretionary savings internationally.
Yesterday the JSE All Share closed up 1.09%, the S&P 500 closed up 3.35%, and the Nasdaq closed up 3.62%.
One thing, from Paul
I've been involved in a global forecasting research project for many years, so I have learned that the future is unknowable and sometimes you just have to be open to many possible outcomes and then just wait to see how things turn out.
That's how it is with the global coronavirus outbreak. Jim VandeHei, who is the CEO of online news service Axios, put it well, so I have customised his list in what follows below.
We have to wait and see if life in Wuhan and China returns to normal, and if the virus really is contained. They are the light at the end of the tunnel.
We have to wait and see if the daily death rate in places like northern Italy, Madrid and New York peaks and turns downward. This will tell us how long highly concentrated outbreaks elsewhere might last.
We have to wait and see what happens in the southern hemisphere as temperatures drop. Will infection rates accelerate, especially in densely populated urban centres?
We have to wait and see if widespread testing using fast, affordable devices can help us to determine who is infected, recovered or immune, and to devise new containment strategies.
We have to wait and see what governments around the world decide to do after periods of intense lockdown have ended. Do they side with disease scientists and extend them, or follow the advice of advisers who fear that the negative economic effects of the restrictions are worse?
We have to wait and see how long drug companies working on a vaccine take to roll it out. We also have to wait and see what antiviral medications work on really sick patients.
Finally, we have to wait and see if the economic recovery after this washout is quick and strong, or long, difficult and drawn out. We have to be patient.
Byron's Beats
Last week OfferUp and letgo announced their intention to combine their US businesses. In case you were wondering, these are 2 very large online online classified businesses. If you are still wondering why I am telling you this, Prosus owned OLX Group will own 40% of the combined entity.
As we have seen with online classifieds, the bigger you are, the better the service. Scale is key. That is because people like to go to one site and find anything they are looking for.
I would imagine selling second hand stuff will thrive during an economic downturn. Which is what we are about to face.
The Prosus/Naspers share price has been very resilient compared to other SA listed stocks since the global lockdown. That is because Tencent has held up well and the Rand has weakened. The combined price is close to R3800 a share which is not far off its all time highs. Remember too that online retail, food delivery, gaming and WeChat is thriving.
One last mention of Naspers (JO:NPNJn), did you see last night that they will be donating R1.5bn to Corona Virus relief? As a shareholder, I endorse! Well done.
Michael's Musings
The oil market is set for its worst quarter in history. The price of Brent Crude was at $66 on the 1 January 2020, it is now down 60% at $26 a barrel. On average the globe uses around 100 million barrels of oil a day. Due to the global slowdown, that number has dropped by between 10 million - 25 million barrels a day, creating massive excess supply in the market. IHS, a massive research company, forecasts a drop in demand of 16 million barrels a day on average for the second quarter of the year.
With all the extra oil around, it starts to create a storage problem. It is estimated that suppliers will get to a point where they will sell their oil at basically any price - IHS forecasts oil dropping to $10 a barrel in the coming months. There are many assumptions attached to the price forecast, but it does show how quickly things can change. The good thing for South Africans is that the price of fuel will drop by between R1.76 - R1.94 tonight. Unfortunately, due to the massive amount of taxes attached to fuel and a weaker Rand, even with a 60% drop in oil prices, our petrol price does not drop by a similar amount.
Bright's Banter
Chinese Food delivery company Meituan Dianping is one of the major company's expected to report a big loss for their first quarter after the Coronavirus lockdown. The reason why I am having a look at companies in China is because they will set the tone on what we should expect from the likes of Uber and Booking (NASDAQ:BKNG) Holdings.
Meituan Dianping said that the lockdown led to a big drop in orders and that it was too early to gauge the full impact on its full-year revenues as more uncertainty lies ahead. Uber operates in the transport sector and in the food delivery sector, both of which will also see a sharp drop in orders as all countries go into lockdown due to the Coronavirus.
Meituan Dianping is actually one of Tencent's investments. The company posted $3.97 billion in revenues, a 42.2% increase, beating market expectations. This company listed in September 2018 and the quarter ending in December 2019 was its third consecutive quarter of solid profit growth which was pushed by volume growth in food delivery.
The company also mentioned that supply disruptions and a shortage of drivers/delivery personnel due to the Coronavirus has hurt its business and other businesses in the space. Food delivery orders almost disappeared in the month of February but some of that was netted off by a 400% surge in grocery deliveries.
The good news is that China is now focused on recovery and people are starting to go back to work. The rest of the world is still yet to reach peak infections and businesses are yet to feel the full impact of what is to come. We are confident that the businesses we invest in will see the other side.
Signing off
The Rand has been volatile but this morning it is roughly at the same level as yesterday morning, currently at $/R 17.95. China released production numbers for March this morning, with a figure that beat expectations and was the 3rd best of the decade. Data out today includes unemployment figures from Germany, and then oil production figures from OPEC nations. The JSE All-share is higher this morning.
Sent to you by Team Vestact.
