April 30, 2020

So, we were downgraded

The first quarter of 2020 was a period unlike any other. Even though many important events  occurred,  the  COVID-19  coronavirus  pandemic  overshadowed  all.  The pandemic changed our lives and will have a profound impact on the global economy as we move into a global recession. This has already been felt in financial markets from mid-February 2020, with stock markets around the world delivering record crash results and liquidity drying up in bond markets.

We have confidence that the prices of financial assets (held by retirement funds) will eventually recover as the world moves beyond the COVID-19 pandemic. It may take a long time for some stock markets in the developed world, especially in the US, to reach their historic highs of February 2020 again, as developed world stock markets were expensive before the crash. The South African stock market, on the other hand, was considered cheap before the crash – for good reason, thanks to Government mismanaging our economy for too many years. However,  even  though  there  has been a healthy recovery in our stock market after the low point of the crash in March  2020, the South African stock market can now be considered very cheap.

The key to managing one’s exposure is not to focus on the extent of (“paper”) losses, but to position one’s savings to benefit from any such recovery.

Figure 1 shows the monthly asset class investment returns in which retirement funds invested for the period to 31 March 2020. The shaded areas in Figure 1 indicate the months in which balanced funds achieved negative investment returns.


There are many “lowlights” for the quarter, including:

The FTSE/JSE All Share Index retracted by 37.2% (from its intraday highest

level of 59 104.61 on 20 January 2020 to its intraday lowest level of 37 117.92

on 19 March 2020).

The MSCI All Country World Index is down 33.7% in USD, from its high on 12 February 2020 to its low on 23 March 2020; in rand terms the index is down only 21.5%.
The price of oil (Brent spot) came down by 64% (from USD68.66 on 3 January to USD24.74 on 1 April). This is positive for South Africa, but negative for Sasol.

The falling oil price took the Sasol share price along with it, as the share price

crashed by 93.6% (from an intraday highest level of R326.89 per share on 6 January 2020 to an intraday lowest level of R20.77 per share on 23 March 2020).

The rand traded at an intraday lowest level of R13.93 against the US dollar on 2 January 2020 and weakened to an intraday highest level of R19.09 on 3 April 2020 (-27%).
Bond yields reacted sharply: South Africa’s 10-year government bond, the R2030, traded at a lowest intraday yield to maturity of 8.625% on 28 February 2020, only to race up to a high intraday yield to maturity of 13.40% on 25 March 2020, translating into a loss of 19.3%.
The Barclays Global Aggregate Index (global bonds) fell by 8.8% in USD from 9 to 19 March 2020; in rand the index is UP 35% (!!) from the lowest to the highest level during the quarter.
The already depressed listed property sector fell by 58% from top to bottom in quarter 1 of 2020. Listed property is now 73% down from 2 January 2018 to the end of March 2020.
South Africa’s sovereign credit rating was downgraded to sub-investment grade by ratings agency Moody’s on 27 March 2020 and South African bonds will be excluded from the World Government Bond Index at the next re-balancing of the index (expected April 2020). The downgrade resulted from a much weaker economic position than anticipated previously.
Ratings agency Fitch afterwards announced a deeper negative outlook for South Africa’s sovereign credit rating; and
Many countries around the world are looking at disastrous economic growth for Q1 and Q2 of 2020 as citizens obey government orders to lock down, isolate or stay home.


Balanced funds that comply with Regulation 28 in Annexure B of the Pension Funds Act, 1956 (Act 24 of 1956) are expected to be down for the quarter by approximately 15% and by 6% for the 12 months to March 2020. Some absolute return funds are down by 5% for the quarter and 2% for the 12 months to March 2020. Absolute return funds that maintained significant exposure to listed property underperformed their peers.

Smoothed bonus guaranteed funds are underfunded at present, which means that the market values of the assets of these funds are lower than the liabilities (guaranteed values). Generally, members who retire or withdraw from retirement funds will benefit from the guarantee and receive the full guaranteed value (book value) upon exit. Remaining members will see a reduction in bonuses over the coming period. This means “holding back” investment returns in order to improve the funding level before providing the benefit thereof to such members/investors through higher bonuses.

Different guaranteed portfolios provided by different insurance companies have different rules for how to handle times such as these. Some of these insurance companies may be required to deploy capital into the portfolios in order to assist the funding levels to recover.

There is no doubt that we will experience a deep global recession in the second quarter of the year and this could even spill over into quarter 3, depending on how effective the world is at treating COVID-19 and how quickly we can return to normal economic activity. We may also go through a period of sustained low global economic growth as we discount the cost of dealing with the COVID-19 pandemic. We are not sure that economic growth will bounce back as easily or in the same way we expect the prices of financial assets to recover. Central banks around  the world have introduced significant liquidity into the banking system to re-inflate economies (Figure 3). The concern is that the additional liquidity will remain in the banking system and financial markets, and not be on-lent to boost economic growth. There is wide consensus that fiscal measures such as direct support for SMEs and the self-employed are both necessary and prudent.

Figure 3


Should the liquidity remain captured in the banking system, one can expect bond yields to remain demanding (Figure 4) and this should reflect in USD strength and relative rand weakness (Figure 5). However, should monetary authorities succeed in kick-starting economies through steps such as yield curve targeting (such as in Australia) accompanied by prudent steps from fiscal authorities, one can expect US bond yields and the USD to soften, which may result in relative rand strength.

Figure 4

10-yr US Government Bond Yield %



The continued monetary stimuli referred to in Figure 3 had been compared by Lord Nicholas MacPherson (former permanent secretary to the United Kingdom Treasury, 2005-2016) in 2017 to heroin – one needs ever-increasing fixes to create a high. Meanwhile, the negative side effects increase. It is time to move on.

In closing, one should be mindful of the human tragedy caused by the COVID-19 coronavirus pandemic and that many people are likely to lose their lives. In this pandemic, South Africa is fortunate to have strong and decisive leadership in President Ramaphosa, Health Minister Mkhize, Finance Minister Mboweni and Reserve Bank Governor Kganyago.

It could have been so much worse. It will get better. We need to be patient. Stay faithful to your investment strategy; any knee-jerk reactions sparked by fear will be costly.