With lockdown in South Africa, the scenes in cities could resemble the start of a horror movie with empty streets the opening scene and one expecting some eerie music to start playing in the background at any moment. We are, however, in a time that handbooks will be written about in a few years, an unprecedented time with little in the way of certainty anywhere to be seen.

That is the place where I want to spend a few moments on certainty.  With certainty comes comfort, and in such a scenario, one tends to be riskier and might do things that one would not normally do. That is the case where the market was before the coronavirus; EM currencies and stock markets where the flavour of the month and things were looking rosy.

Fast forward a couple of weeks, and a majority of countries are under lockdown to flatten the curve of the coronavirus declared a pandemic across the world. In the past few weeks, we have seen what happens when fear runs the markets. We have seen limit down on stock markets; the Fed announced open-ended QE, other central banks cutting interest rates to stabilise markets. We have also seen the elevated corporate credit bubble that was out there starting to deflate and numerous companies across the globe screaming for help. The coronavirus was only the prick that was needed for the whole financial system to start the crash. Then followed the oil price war, and there seems no end insight even as demand is dropping daily. Looking at the chart below, one can see the dramatic decline in oil for 2020, down 67% from its Jan highs.

Even in South Africa, the central bank has cut interest rates by 100  basis points as well as announcing their QE programme. And despite all these interventions, the markets are still very skittish, and we have seen no matter of relief by central banks have done enough to appease markets. Truly interesting times we are living in.

On top of the chaos in the market, we had a downgrade by Moody’s of the South African credit rating. The outlook for South Africa was also placed on negative and undoubtedly not being helped by the corona epidemic, but much of the faults have been South Africa’s doing. It will be interesting to see what significant casualties will be there once the corona tide subsides and life as we know it returns to our normal past.

What has been the effect of the past couple of weeks? Well, it was record-breaking, with the Rand currently trading around the R18.00 level which is the highest the Rand has ever traded against the US dollar. The story does not look rosier in the short term as the volatility we have seen in the past couple of months will surely continue and we could be in for some dire days, but also an opportunity for strong pullbacks. We have seen the ZAR and other emerging market currencies suffer tremendously in the last couple of months, with ZAR losing 26% of its value so far in 2020.

South Africa formed part of the World Government Bond Index (WGBI) but has now fallen out due to the Moody’s downgrade, and now no rating agency having an investment grade for South Africa. One saving grace at the moment is that South Africa will not automatically fall out of the WGBI-bond index as that will only happen at the end of April, which could soften the immediate blow of the Rand. We have seen from the chart below that there have been significant outflows out of the bond market by foreigners in March already. Some R51bio or $3bio has already left our shores. With the potential outflow being in the region of $10bio, we can perhaps say that a 30% rebalancing has already taken place.

 

 

Looking at the week ahead, we will keep a close eye on the Rand, and the movement of the Rand as the downgrade will filter through the market, and we expect the Rand to remain vulnerable to any new Corona as well as economic news. Speaking of which, we have the US non-farm payroll numbers out on Friday, which will make for interesting reading after the US jobless claims printed above the 2 million mark last week. The downturn in the Us employment number will signal the real threat of the country going into recession and the world economy coming to a standstill. Our advice in times like these are not to run the risk as market moves will be swift, and if you are caught on the wrong side losses could run up very quickly.