Global markets test positive for Coronavirus

February saw the worst daily fall (-4.5%) in the FTSE / JSE All Share Index since 2008, amidst concerns that the Covid-19 virus will not be contained and may result in a global recession. Economists were forecasting a V-shaped recovery in global growth as the China infection rate continues to drop.

Markets are preparing for a global pandemic

However, the rapid increase in cases in the rest of world, particularly in Italy, Iran, South Korea and Japan, has spooked markets. Gold reached a seven-year high as concern over the economic impact of the coronavirus boosted demand for safe haven assets. However, the yen, a traditional safe haven destination, has collapsed due to Japan’s reported escalating Covid-19 cases, and there is now talk of the Tokyo Olympics being cancelled.

Global growth to slow

The most pressing question is about growth and to what extent global businesses will be forced to shut down, as happened in China, to quarantine the virus. The crisis is not the
most lethal of the past 20 years (Covid-19’s mortality rate is about 2% – compared to 90%
for Ebola, 30% for MERS and 10% for SARS), but it could prove the most economically
disruptive.

The good news is that new cases are at a month low in China and recoveries continue to accelerate. President Xi Jinping has also urged businesses to get back to work and factories to re-open. The World Health Organization has stated on more than one occasion that it is too early to declare Covid-19 a pandemic, although it has the potential to become one and this is the time to prepare. A global recession is defined by the IMF as growth lower than 2.5%, not zero; growth was 3% last year and was forecast at 3.4% this year, but given Covid-19’s impact, global growth is likely to be back to 3.0% – or lower.

How Sygnia funds are positioned

The Sygnia funds are positioned well for the breakout. We are overweight global assets and hence benefit from the weak rand, which acts as a shock absorber in these times of volatility. In addition, despite the near-term risk of the 2020 budget speech, we are neutral domestic bonds, which are being supported as global yields drop. Our local real yields also remain amongst the highest in the world, despite the risk of a ratings downgrade to junk by Moody’s later this year.

On 27 January, we diversified our portfolios by halving our overweight emerging market position and moving into European equities. EU markets had already fallen on the back of weak German growth numbers, and this allowed us to reduce the exposure to the virus epicentre. Given the strong performance of US tech, seen as the last growth safe haven, we also reduced our exposure to FAANG stocks and increased US dollar cash as a buffer for when markets settle. Besides USD cash, other safe havens include gold and the yen, which we have little exposure to.

Our funds do have the benefit of exposure to Tencent (Naspers’ Chinese Internet investment), which has acted like a safe haven, as it benefits tremendously from people staying at home in China (ordering food, using social media and playing games online). Thus, our FTSE/JSE Swix benchmark gives us a natural relative protection. Our funds also have a natural buffer in our offshore ESG Portfolio, which is GBP-based and exhibits little volatility.

Volatility is here to stay

Markets never go up in a straight line and they hate uncertainty, but they do like to climb a wall of worry. The Sygnia funds are positioned to harness volatility and continue to do so.
There is no way of picking market bottoms, and panicking at the wrong time can destroy long-term performance. So, while we have increased protection at the margins, the fund is
well-diversified, and we believe the best decision is to stay the course and be positioned for a recovery.matically – through both bear and bull markets – in order to achieve the best overall, long-term outcome. And isn’t that, ultimately, what both advisors and the client want?