55
Isaah Mhlanga Chief Economist The economic consequences of COVID-19 sudden stops Human mobility | Economic | Financial | The aftermath
Isaah Mhlanga
Chief Economist
The economic consequences of
COVID-19 sudden stops
Human mobility | Economic | Financial | The aftermath
Themes for 2020 | most remain intact, but COVID-19 has brought a bear market
❑Stable global but weak domestic macroeconomic fundamentals
❑ Improvement in geopolitical risks in trade and technology but we now add Russia/Saudi Arabia oil price war
❑Late cycle dynamics dominate market sentiment
o Expensive US markets
o Relatively more attractive emerging markets compared to developed markets
o Expensive global bonds
❑Central banks continue with monetary policy stimulus and we are now adding fiscal stimulus
❑COVID-19 sudden stops:
o Human
o Economic
o Financials
2019e 2020f 2021f
2.93.3 3.4
2019e 2020f 2021f
2.4 2.52.7
Average: 2.7 2.9 3.1
The state of the global economic outlook in January 2020
Source: IMF WEO, World Bank and Alexander Forbes Investments
2019e 2020 2021
2.3 2.0 1.7
2019e 2020 2021
1.21.3
1.4
2019e 2020 2021
1.31.4
1.5
2019e 2020 2021
6.1 6.0 5.8
2019e 2020 2021
3.33.5 3.5
2019e 2020 2021
5.65.8 5.9
2019e 2020 2021
0.8
2.83.2
2019e 2020 2021
0.1
1.6
2.3
United States Euro area United Kingdom China
Sub-Saharan AfricaEmerging and
developing AsiaMiddle East and
Central Asia
Latin America and
The Caribbean
Muted inflation expectations in both advanced and emerging markets
Source: IMF and Alexander Forbes Investments
The major countries’ inflation is stable in 2020 and
falling in 2021 Global inflation is expected to continue to trend lower
0.0
1.0
2.0
3.0
4.0
5.0
2019 2020 2021 2022 2023 2024
DM EM World%
0.0
0.5
1.0
1.5
2.0
2.5
2019 2020 2021
US Euro Area UK%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2019 2020 2021
% China
Moderate fiscal and monetary policy stimulus than in 2019
Source: Bank for International Settlements; Consensus Economics; International Monetary Fund; World Bank and Alexander Forbes Investments
Note: AEs= advanced economies. Shaded area indicates forecasts. Data for 2019 are estimates. Aggregates calculated using nominal U.S. dollar GDP weights. Fiscal impulse is the negative change in general government cyclically adjusted primary balance. Policy rates are the December to December change. Sample includes 35 AEs and 77 EMDEs for fiscal impulse and 16 AEs and 21 EMDEs for policy rates. Policy rates for 2020 use the December 2019 Consensus Forecasts report for central bank policy rates. When these are unavailable, the change in short-term yields is used.
-80
-40
0
40
80
-0.8
-0.4
0.0
0.4
0.8
2015 2016 2017 2018 2019 2020
Fiscal impulse
Nominal policy rate annual change (inverted, RHS)
Percentage points Basis points
More
stimulative
More
restrictive
Stance of global fiscal and monetary policy Monetary policy in advanced economies
6
4
2
0
2
4
6
0.0
0.4
0.8
1.2
1.6
2.0
2016 2017 2018 2019
Number of countriesPercent
Loosening policy (RHS) Tightening policy (RHS)
Policy rate
The US dollar weakens and financial conditions have been improving
Source: Bloomberg and Alexander Forbes Investments
Consensus US dollar expectations against GBP and EURGlobal financial conditions have loosened
97
98
99
100
101
102
Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19
Advanced economies excl. United States
United States
EMDEs excl. China
Index, 100=January 2017
1.10
1.15
1.20
1.25
1.30
1.35
Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025
EURUSD
1.0
1.2
1.4
1.6
1.8
Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025
GBPUSD
More liquidity in
markets
Commodities prices expected to rise, driven by hedging against risk
Source: Bloomberg and Alexander Forbes Investments
Consensus platinum prices in USDConsensus gold price in USD
Consensus iron ore price in USD
1 540
1 550
1 560
1 570
1 580
1 590
1 600
1 610
1 620
2020 2021 2022
Consensus crude oil prices in USD
1 005
1 010
1 015
1 020
2020 2021 2022
Platinum
0
20
40
60
80
100
2020 2021 202254
56
58
60
62
2020 2021 2022
Oil Price
Four big risks that prevailed in 2019 have reduced - for now
Late cycle dynamics in markets: global market valuation vs. local market valuations
▪ * Current P/E as at 16 March 2020
▪ Source: Bloomberg and Alexander Forbes Investments
Global asset class valuations South Africa sectors valuations
0.0
5.0
10.0
15.0
20.0
25.0
YTD Ave. Current P/E
0.0
5.0
10.0
15.0
20.0
25.0
MSCIworldIndex
MSCIACWIIndex
MSCI EMIndex
S&P500 MSCI EU MSCI UK China
YTD Ave. Current P/E
The World Health Organization declares COVID-19 a pandemic
Source: Bloomberg and Alexander Forbes
Global confirmed cases Total confirmed cases by country
24747
14991
8236 8794
54236248
3802
845 226 149 114 620
5 000
10 000
15 000
20 000
25 000
30 000Confirmed cases
0
20
40
60
80
100
120
140
160
180China confirmed cases Globally confimed cases (ex China)
'000
Infections and deaths of major virus outbreaks in the last 50 years as of 2020
against COVID-19
Source: Bloomberg and Alexander Forbes
Global deaths Infections and deaths of major virus outbreaks
80.04%
40.39%
57.14%52.85%
77.58%
9.56%
0.04%
34.40%39.29%
3.64%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0.0
0.7
1.4
2.1
2.8
3.5
4.2
4.9
5.6
6.3
7.0
Globally deaths cases China deaths cases'000
China is more integrated with global economy
Source: Bloomberg and Alexander Forbes Investments
Chinese integration in the global economy (2002 vs 2019) China share of global commodities demand (2002 vs 2019)
22
17
11
9
78
6.6
4
23
0
4
8
12
16
20
24
GlobalIndustry
Global GDP Global trade Global tourists Global FDI
2019 2002%
5654
4846
43
39
1413 12
5
18
10
16
6
0
10
20
30
40
50
60
Aluminium Copper Nickel Zinc Lead Naturalrubber
Crude oil
2019 2002%
Tourism and manufacturing sectors most exposed to immediate risks
Source: Capital Economics
Spending by overseas tourists (% of GDP)Manufacturing Supply Chain Linkages with China as
a % of GVA
Global growth revised lower as outbreak spreads rapidly outside China
Source: OECD and Alexander Forbes Investments
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
2020 growth forecasts revision%
What does this mean
for
Rising tides no longer lifts SA, but falling tides takes SA down with them
*Emerging markets
Source: Stats SA, SARB and Alexander Forbes Investments
SA growth has decoupled from global growth The ZAR has underperformed emerging market peers
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
Global South Africa
%y/y
80
85
90
95
100
105
110
01/2018 05/2018 09/2018 01/2019 05/2019 09/2019
EMs* currency index USD/ZAR%
Depreciation12%
weaker
The South African economy’s competitiveness has been declining
*Countries selected on basis of similar 2007 GDP per capita incomes to South Africa
**Emerging markets
Source: Stats SA, SARB, World Bank and Alexander Forbes Investments
South Africa container export costs* Global Competitiveness Index
0
500
1 000
1 500
2 000
2 500
3 000
2009 2011 2015Cost to export container (US$)
44
60
99
54
80
55
106
53
66
45
96
61 58
45
91
0
20
40
60
80
100
120
South Africa Rwanda Mauritius Kenya
Ran
kin
g
2007 2010 2013 2017
Wrong way
move
Moderating potential economic growth and stagnant income per capita
*Countries chosen on the basis of having relatively the same per capita income in 2007
Source: Stats SA, SARB, World Bank and Alexander Forbes Investments
Long-term GDP growth Comparative per capita incomes*
-4
-2
0
2
4
6
8
10
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Growth % y-o-y
1970s 3.3% 1980s
2.2%
1990s 1.4%
2000s3.6%
2010s 1.8%
1960s
5.5%
%
0
5 000
10 000
15 000
20 000
25 000
30 000
SA Algeria Brazil CostaRica
Botswana Thailand Mauritius
2007 2014 2019 2024GDP per capita ( PPP; 2011 USD)
SA economy already in a technical recession
▪ Source: National Treasury and Alexander Forbes Investments
SA slipped into a technical recession in Q4 2019 The local sector performance in Q4 2019
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
Finance
Mining
Personal services
Government
Electricity
Agriculture
Construction
Manufacturing
Trade
Transport
%-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
%
Fiscal risks primarily driven by spending, less so by revenue shortfall
▪ Source: National Treasury (2020 Budget) and Alexander Forbes Investments
Real main budget revenue and non-interest spending Financial support provided for state-owned companies
22
24
26
28
30
32
2005/06 2008/09 2011/12 2014/15 2017/18 2020/21
Main budget revenue Main budget expenditure% of GDP
0
10
20
30
40
50
60
70
2008/09 2010/11 2012/13 2014/15 2016/17 2018/19 2020/21 2022/23
Eskom SAA Denel SABC SA ExpressR bil
A yet to be negotiated austerity budget without fiscal consolidation
▪ Source: National Treasury (2020 Budget ) and Alexander Forbes Investments
Gross debt-to-GDP ratio Debt service costs
0
2
4
6
8
10
12
14
16
18
20
2010/11 2012/13 2014/15 2016/17 2018/19 2020/21 2022/23
Debt service costs as share of revenue%
45
50
55
60
65
70
75
80
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23
2019 Budget
Revised with financial support for Eskom
Revised without financial support for Eskom
2020 Budget
%
Debt service costs continue to increase
▪ Source: National Treasury (2020 Budget) and Alexander Forbes Investments
Average nominal growth in spending, 2020/21 — 2022/23
2.2
3.7
4.0
5.1
6.2
6.3
6.6
12.3
0 5 10 15
Peace and security
General public services
Learning and culture
Health
Social development
Community development
Economic development
Debt-service costs
%
5
70
73.6
211.5
212.3
217
229.3
229.7
309.5
396.4
0 100 200 300 400 500
Contingency reserve
General public services
Payments for financial assets
Economic development
Community development
Peace and security
Debt-service costs
Health
Social development
Learning and culture
R Billion
Government spending, 2020/21 (R billion)
Effects of COVID-19 on South Africa economic outlook
1. Trade
▪ Directly through trade links with China, Europe and the US
▪ Indirectly through trade links with China, Europe and the US
▪ Trade links with the rest of the world
2. Investments
▪ Declining Foreign Direct Investment flows
▪ Portfolio investment outflows
3. Financial markets
▪ Liquidity
▪ Volatility
4. Long-term economic impact
▪ Diversification of economic trade ties away from China
A third of South Africa’s exports (US$122bn) go to China, US and Germany
Source: https://atlas.cid.harvard.edu/ Atlas of Economic Complexity
South Africa’s trade with China: commodities and manufacturing
Source: https://atlas.cid.harvard.edu/ Atlas of Economic Complexity
US$20 billion in
exports
US$14 billion in
imports
South Africa’s trade with Germany: commodities and cars
Source: https://atlas.cid.harvard.edu/ Atlas of Economic Complexity
US$6.4 billion in
exports
US$10.9 billion in
imports
South Africa’s trade with US: commodities and cars
Source: https://atlas.cid.harvard.edu/ Atlas of Economic Complexity
US$7.3 billion in
exports
US$5.1 billion in
imports
Volatility has increased as fears of the pandemic intensifies
Source: Bloomberg and Alexander Forbes Investments
BBG Probability of US Recession within 12 Months The Volatility Index
0
20
40
60
80
100
120
2001 2003 2005 2007 2008 2010 2012 2014 2016 2018 2019
US recession Probability of US Recession within 12 Months
0
10
20
30
40
50
60
70
80
90
2001 2003 2005 2007 2008 2010 2012 2014 2016 2018 2019
US recession VIX
Global financial markets fall on fears of global recession
Source: Bloomberg and Alexander Forbes Investments
Global asset class performance in 2020
$75
$80
$85
$90
$95
$100
$105
$110
$115
01-Jan 08-Jan 15-Jan 22-Jan 29-Jan 05-Feb 12-Feb 19-Feb 26-Feb 04-Mar 11-Mar
Global DM Bonds MSCI World MSCI ACWI
MSCI Emerging Markets Global Reits Gold
Global financial markets fall on fears of global recession
Source: Bloomberg and Alexander Forbes Investments
Global asset class performance in 2020
3.9%1.9%
-9.6% -10.2%
-13.5%
-20.0% -20.2% -20.4%
-32.3%-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Gold Global Bonds EM Bonds CorporateBonds
Global Reits MSCIEmergingMarkets
MSCI ACWI MSCI World Oil
Index Returns to 13 March 2020 (in USD)
Major central banks respond to the global pandemic
* Change in Bps points
Source: Bloomberg and Alexander Forbes Investments
The US Fed cuts rates near zero in two emergency meetings and other central banks follow suit
DM rates 01 Jan 2020 17 Jan 2020 Change*
New Zealand 1.00 0.25 -75
Australia 0.75 0.50 -25
Norway 1.50 1.00 -50
Sweden 0.00 0.00 0
Denmark 0.05 0.05 0
Singapore 1.91 2.23 32
Canada 1.75 0.75 -100
Japan -0.10 -0.10 0
Switzerland -0.25 -0.25 0
EU -0.50 -0.50 0
UK 0.75 0.25 -50
US 1.75 0.25 -150
Total cuts 6.0
EM rates 01 Jan 2020 17 Jan 2020 Change *
Argentine 55.00 38.00 -1700
Turkey 10.50 9.25 -125
Colombia 4.25 4.25 0
SA 6.50 6.25 -25
Brazil 4.50 4.50 0
Chile 1.75 1.00 -75
Indonesia 5.00 5.00 0
Mexico 7.25 7.00 -25
Czech 2.00 1.75 -25
Peru 2.25 2.25 0
Poland 1.50 1.50 0
India 4.90 4.90 0
Malaysia 3.00 2.50 -50
Romania 2.50 2.50 0
South Korea 1.25 0.75 -50
Hong Kong 1.09 1.01 -8
Hungaria 0.90 0.90 0
Singapore 1.91 2.23 32
Philippine 1.38 1.38 0
Taiwan 1.25 1.00 -25
Thailand 1.25 1.00 -25
Total cuts 7.00 11.00
Further global fiscal stimulus expected to curb the outbreak and slowing economic activities
Source: International Monetary Fund (IMF) and Alexander Forbes Investments
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Korea
Malaysia
Mexico
Russia
SA
Thailand
Turkey
Euro area
US
Japan
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0
CA
de
fic
it (
% o
f G
DP
)
Fiscal deficit (% of GDP)
Developed markets
Emerging markets
Developed markets
Emerging markets
Developed markets
Emerging markets
Developed markets
Emerging markets
Heightened market volatility – helping clients stay the course Gyongyi King – Chief Investment Officer
Themes in 2020
WHAT WE
EXPECT
Themes in 2020 | EXPECTATIONS HAVE NOT CHANGED
Theme
We continue to allocate capital with these risks and opportunities in mind
Continued weakness in domestic economy remains negative
for SA company earnings
Volatility to persist
Expensive US markets
Low returns from traditional asset classes
Credit rating downgrade
Portfolio positioning
Maximum exposure offshore; Rand hedge exposure within
portfolios
Purposeful diversification – across asset classes, strategies and
asset managers
EMs offer better long-term growth prospects and valuations
Exposure to hedge funds and alternatives
Max offshore exposure, Rand hedge exposure, alternative asset
classes
Current Market Update
Coronavirus | COVID-19 GLOBAL MAP
Source: John Hopkins Coronavirus resource center
Confirmed: 116
Deaths: 0
Recovered: 0
Active: 116
Our Investment Management
Approach
Goals-based. Risk-led. Forward looking.
Our multi-managed approach | ADJUSTING THE FOCUS
Purposeful diversification | REDUCING DRAWDOWNS
Asset allocation1
Identifying how much to invest
in each available asset class
in line with specific investment
objectives
Multi-asset
Access broad global
opportunity sets with
alternative and
differentiated sources of
return
Strategy selection2
Determining which styles of
money management, or
factors, within each asset
class work together optimally
in the context of a portfolio’s
objectives
Multi-strategy
Blend active and index-
tracking strategies to for
complementary exposures
to attractive styles,
expected to add value
Asset manager selection3
Researching the asset
manager universe to find
those best placed to
implement the desired
strategies
Multi-manager
Blend asset managers
with dependable
investment styles to get
exposure to different
market cycles
Purposeful Diversification I Strong emphasis on risk
management
Purposeful
diversification
Reduce drawdowns
and increase
predictability of
outcomes
Strategy selection
Spread risk
2
2011 2012 2013 2014 2015 2016 2017 2018
Quality
14.72%
Momentum
45.95%
Momentum
34.23%
Quality
21.83%
Momentum
7.13%
Value
60.68%Quality 40.77%
Momentum
-8.69%
Momentum
11.60%
Quality
43.48%
Low
Volatility
22.80%
Low
Volatility 21.21%
Low
Volatility
6.08%
Capped
SWIX
5.16%
Value
19.97%
Value
-8.79%
Low
Volatility
8. 72%
Low
Volatility
31.71%
Capped
SWIX
20.71%
Momentum
17.73%
Capped
SWIX
2.78%
Quality
3.77%
Capped
SWIX
16.49%
Quality
-9.27%
Capped
SWIX
4.13%
Capped
SWIX
29.09%
Value
16.28%
Capped
SWIX
15.42%
Quality
-6.13%
Low
Volatility
3.49%
Momentum
11.49%
Capped
SWIX
-10.94%
Value
-5.72%
Value
26.43%
Quality
9.51%
Value
3.65%
Value
-23.44%
Momentum
13.29%
Low
Volatility 7.84%
Low
Volatility
-11.22%
Sources of performance
Smoothing out impacts of volatility | WE ARE MULTI-MANAGEMENT
Our multi-managed approach | OUR ADVANTAGE
How hedge funds are
aiding our portfolio?
Hedge Funds | WHY AN ALLOCATION MAKES SENSE
Risk
Focus on downside
protection
Manager skill
Deliver performance
as a consequence of
manager skill
Absolute return
target
Performance returns
in excess of cash
Diversification
Low correlation to
traditional asset
classes
Multi-strategy
Greater flexibility in
execution
Improve the likelihood of reaching investment goals
1 month returns | 28 February 2020
* Hedge funds returns net of fees
0.70% 0.54%
-0.04%-0.61%
-2.40%-3.18%
-5.15%
-9.00%-9.55% -9.55%
-15.69%
SakhisizwePortfolio
Stefi ALBI AF QIF Stable AF QIFModerate
AF QIFPerformance
AF QIF Focus SWIX ALSI Capped Swix FTSE/JSE SAProperty
YTD returns | 28 FEBRUARY 2020
*Hedge funds returns net of fees
4.37%
1.14% 1.12%0.56%
-1.15%
-2.84%
-4.83%
-10.53% -10.63%-11.87%
-18.26%
SakhisizwePortfolio
ALBI Stefi AF QIF Stable AF QIFModerate
AF QIFPerformance
AF QIF Focus ALSI SWIX Capped Swix FTSE/JSE SAProperty
Stick to long-term
strategy despite market
volatility
JSE All Share Index Annualized Returns -1994 to Feb 2020
1 y
ear
5 y
ear
10 y
ear
20 y
ear
-50.0%
0.0%
50.0%
100.0%Mean 18.5%
Std 20.6%
Min –37.6%
Max 48.3%
0.0%
15.0%
30.0%
45.0%
0.0%
10.0%
20.0%
30.0%
0.0%
6.0%
12.0%
18.0%
24.0%
30.0%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Mean 16.9%
Std 3.2%
Min 13.3%
Max 25.2%
Mean 16.2%
Std 3.5%
Min 10%
Max 23%
Mean 14.3%
Std 6.3%
Min 2.2%
Max 33.3%
Long term investment horizon | THE VALUE OF STAYING INVESTED
Source: Alexander Forbes Investments
S&P 500 Index Annualized Returns -1980 to Feb 2020
1 y
ear
5 y
ear
10 y
ear
20 y
ear
Mean 13.4%
Std 17.4%
Min –43.3%
Max 53.6%
-60.0%
-30.0%
0.0%
30.0%
60.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Mean 13.6%
Std 7.6%
Min -6.6%
Max 25.7%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Mean 11.3%
Std 5.3%
Min -3.4%
Max 18.8%
0.0%
5.0%
10.0%
15.0%
20.0%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Mean 10.2%
Std 3.2%
Min 6.0%
Max 17.7%
Long term investment horizon | THE VALUE OF STAYING INVESTED
Source: Alexander Forbes Investments
Taking the bad with the (subsequent) good | WE’VE BEEN HERE BEFORE
-46%
-24%
-23%
-24%
-34%
-42%
-39%
-30%
-40%
18%
94%
32%
16%
124%
57%
53%
43%
48%
121%
155%
185%
85%
196%
108%
116%
207%
101%
138%
89%
475%
208%
566%
172%
141%
370%
194%
Jul69 - Jun70
Aug71 - Oct71
Jun76 - Aug76
Nov80 - Jan81
Nov81 - Jun82
Sep87 - Feb88
May98 - Aug98
Jun02 - Apr03
Jun08 - Feb09
Return 1 year after 3 years after 5 years after
JSE ALSI market crashes and subsequent recovery
Markets are a
scary place at
the moment,
but long-term
investors
shouldn’t panic.
Source: Alexander Forbes Investments and Bloomberg
Heightened volatility and unpalatable returns | DO NOT LET FEAR TAKE FLIGHT
A
WHIRLWIND
OF
EMOTIONS
Do’s
• Be patient – markets are
cyclical
• Focus on your investment
goal – success is not
measured by beating
benchmarks
• Commit to your long-term
strategy – ensure you are
still on track
Don’ts
• Attempt to time the markets
– it is next to impossible
• Focus on short-term
performance – it’s too
stressful
• Base decisions on past
performance – it’s not
indicative of future
performance
Heightened volatility and unpalatable returns | A PARTING
COMMENT
Investing in
markets always
comes with
some risk.
We encourage investors to
focus on performance over
the long term.
Historically, we have seen
the markets recover.
Geopolitical tensions, faltering
global growth, healthcare
emergencies, the list goes on…
In recent time, we have
advised our clients to be more
realistic about their
expectations of future
investment performance.
During these volatile
times, we spread
your investment risk
to manage risk.
Our portfolios have been built to
be robust and well positioned
to deal with risk.
We encourage you to
remain committed to
your long-term
investment strategy.
Multi-management
Multi-asset
Multi-strategy
Multi-manager
▪ Spreading assets
across multiple
investment types,
regions and sectors
▪ Deploying multiple,
complimentary
investment strategies
▪ Appointing multiple, top-
rated asset managers
Thank you
