July 10, 2020

Can a bull market be manufactured?

By Marcus Rautenbach, Principal Investment Consultant

Yes, apparently it can be done. By the Federal Reserve Bank, that is.

The COVID-19 crash and subsequent recovery in the prices of financial assets represent the most vicious crash and fastest recovery in financial markets to date, a crash that was over in a flash (Flash Crash).

The most important aspect currently remains the fiscal and monetary stimulation measures taken both globally and domestically. Our domestic fiscal measures are firstly aimed at emergency poverty alleviation and, along with monetary measures, the protection of threatened businesses. In addition, global monetary measures such as the US$3.4 trillion that the Federal Reserve has made available not only stabilised the global financial system, but also assisted in a sharp recovery of the prices of financial assets.


In his Supplementary Budget presented to Parliament, South Africa’s Minister of Finance indicated that the global GDP (income produced by the world economy) is expected to contract by 5.7% in 2020. We believe that two very large economies, China and India, will prop up the global economy in 2020. The inference to be drawn is that the GDP numbers from other economies, including South Africa, are expected to be worse than the global aggregate.

If some analysts are to be believed, global GDP growth for 2021 is expected to be much better, projecting a healthy post-COVID-19 recovery. The analysts continue that one should look past the weaker economies of 2020, to the improved conditions from 2021 onwards. Presently, China’s rumoured higher imports of commodities and increased manufacturing of motor vehicles support this thesis.

There are concerns about the aviation industry, which is one of the US’s largest exporting industries; the tourism, leisure and hospitality industries; and the building and construction industries. The prospects of a sharp economic bounceback appears to be less likely in the short term.

With the addition of US$3.4 trillion to the financial system, one expects the US dollar to weaken in the shorter term and other currencies to strengthen. This has been the case to some extent, as the US Dollar Index (against a weighted basket of currencies) weakened by 5.7% from 102.1 to 96.3.

Structurally, the US dollar remains in a bull market, meaning that other currencies could weaken as time passes

The impact of the flash crash on our markets has been dramatic. A review of the quarterly closing values illustrate this point:


Closing value 31 December 2019 31 March 2020 30 June 2020
FTSE/JSE All Share Index TR 55 349 44 490 54 362
Listed property (SAPY TR) 1 877 973 1 172
STeFI Composite Index (yield) 7.29% 7.19% 6.90%
BEASSA ALBI TR Index 9.55% 11.20% 10.11%
Rand R13.9995 R17.8527 R17.3522
MSCI All Country World TR USD 1 181 930 1 110
US 10-yr Gov Bond (yield) USD 1.92% 0.67% 0.66%
Gold USD $1 524 $1 615 $1 773
Oil Brent USD $66 $26 $41


As a result, the investment returns from market segments in which retirement funds invest have been as follows:


Investment return Q1 2020 Q2 2020 YTD 2020 (June)
FTSE/JSE All Share Index TR -21.4% 23.2% -3.2%
Listed property (SAPY TR) -48.2% 20.4% -37.6%
STeFI Composite Index 1.7% 1.5% 3.2%
BEASSA ALBI TR Index -8.7% 9.9% 0.4%
Rand (+ strengthened, – weakened) -21.6% 2.9% -19.3%
MSCI All Country World TR ZAR 0.4% 16.1% 16.5%
Barclays Global Bond Aggregate TR ZAR 27.1% 0.4% 27.7$
Gold ZAR 34.3% 6.7% 43.3%


The question asked by astute retirement fund members is whether the manufactured bull market can and will last long enough for economic recovery to catch up. Those who study the history of financial markets rely on information dating back to 1871, when Standard & Poors first captured the movement of stock prices in an index.

History suggests that the year following a sharp drop in the price of financial assets is usually followed by a lively recovery in financial markets. This is because the share prices of quality assets have fallen to levels that are just too low and become attractive to investors; and also because investors anticipate that fiscal and monetary steps taken by authorities (e.g. the reduction of interest rates and increased money supply) will have a lasting positive effect on markets.

At some stage though, the economic reality of lower growth and reduced earnings begins to bite and the prices of financial assets fall back to a long, slow grind for some years.

So, what is different this time?

In South Africa

Very few investment managers managed to escape the full brunt of the Flash Crash, but most shared in the fast-tracked recovery. What became clear is that the portfolios produced by some investment managers were much more robust than others, who evidently rely on a market trend to generate investment returns.

We should be careful to immediately afford investment managers who produced super results during the crash exalted status. Without a doubt, the results produced by some of these investment managers are attributable to luck rather than skill or foresight. Other investment managers did not show superior results at any one point during 1H2020, but consistently outperformed peers. The investment managers who consistently outperform peers rather than the ‘one-hit wonders’ should be trusted with our savings. It is all the more important for retirement funds to have access to investment manager research of high quality.

The fall in the prices of financial assets spread through financial markets rapidly in March 2020. The prices of shares, bonds and listed property were all negatively affected at the same time, reducing the benefits of diversification of risk. We believe it is necessary for investment managers to consider more uncorrelated assets (including private equity and unlisted securities) in investment portfolios to increase long-term investment returns and reduce risk in times of severe stress in financial markets.

One such avenue of investment is infrastructure investment projects, which are being introduced at present. In terms of this initiative, Government identifies and screens suitable infrastructure development projects to be funded by the private sector (including retirement funds) and from which a market-related investment return could be earned.

Supplementary Budget 2020

The Supplementary Budget presented to Parliament in South Africa by Finance Minister Mboweni should be considered in a positive light. As expected, the Minister addressed issues such as a lower economic growth forecast (-5.7% globally and -7.3% domestically), the primary budget deficit of 15.4% for 2020/21 and a worsening debt:GDP ratio of 82%. Government revenue raised to date is some R300 billion lower than budgeted for in February 2020. As a result, the Minister also announced that budgeted expenditure allocations made earlier this year for 2020/21 would be reduced and that a zero-based budgeting approach will be employed from 1 July 2020. South Africa accessed foreign credit of US$7 billion. Importantly, the Minister shared that 21 cents out of every R1 in tax revenue raised by Government are spent on servicing debt, highlighting the necessity to reduce the cost of servicing debt (lower interest rates).

COVID-19 and hard lockdown

It is interesting to note that most (if not all) of the modelling of the COVID-19 experience seems to over-estimate the impact and severity of the disease. Evidence suggests that the virus is spreading more quickly than reflected by infection numbers, with many individuals being asymptomatic or showing very mild symptoms.

Governments imposed hard lockdowns based on information available at the time. It certainly seems to have been an appropriate course of action, as the reported experience of countries that did not impose a hard lockdown is worse compared to those that did. As we have navigated the initial phase of curbing mass infections, the emphasis is now shifting to how to open and rejuvenate economies responsibly.

Ideally, economic growth will recover sufficiently to underpin the prices of financial assets in retirement funds before the benefit of fiscal and monetary support measures melts away.


The JSE’s -21% first quarter investment return was followed by a record 23.2% bounceback in the second quarter, leaving many investors at levels similar to the start of the year. The extraordinarily sharp recovery has resulted from fiscal and monetary interventions from around the world.

We continue to expect severe economic contractions in 2020 and it will be some time before economies return to what we previously considered normal. There is the possibility that after the sharp recovery, financial markets may drift sideways for some years as economies recover to drive long-term growth expectations in financial markets.

To deal with the possibility of a long, slow grind, we advise investors to adhere to the basic elements of a good investment strategy:

  • Focus on long-term results rather than short-term volatility;
  • Maintain a personal savings strategy (plan) that reflects your unique circumstances and conditions;
  • Rely on superior investment managers identified by quality manager research, rather than market trends;
  • Ensure that investment portfolios are adequately diversified; and
  • Include previously unavailable asset classes (e.g. sustainable infrastructure development projects) in investment portfolios.

Finally, we have experienced exogenous shocks to markets and economies before, and from experience, we know that focusing on the basics produces the best results.

The question is, do you have your basics in place?