• Is that a light I see at the end of the tunnel?

    By May 25, 2020Investments

    While the Covid-19 infection rate in South Africa is picking up speed and the government is still making controversial lockdown decisions, lots of businesses are taking matters into their own hands and ignoring some of the irrational rules which are destroying their livelihoods. Wearing a mask and keeping one’s distance are, however, two newly-formed habits that are taking hold.

    There are some rays of light which we can latch onto during this rather grey second quarter of 2020 and they are:

    • Moderna, a biotech company listed in the US, has announced positive results from its Covid-19 vaccine in a phase 1 limited-sample trial.  “The data couldn’t have been better,” said Moderna CEO, ahead of phase 2 roll-out to 600 patients, with phase 3 due in July.
    • The tech-heavy Nasdaq index in the US is positive for the year. It is driven by companies like Apple, Alphabet, Facebook and Amazon.
    • The South African Reserve Bank has cut interest rates another half a percentage point last week. The prime interest rate is now 7,25%
    • According to Eskom, there may be only three days of load-shedding this winter.
    • The rand has strengthened a little, to under R18/$.
    • As you can see from the graph below the Covid-19 death rate is decreasing in the developed world. Unfortunately it is picking up in developing countries like South Africa.

    As far as investments go, South African companies are still struggling and as we can see from the graph below, only resources companies and some multi-nationals like Naspers and Richemont have performed over the past five years. Although the “new world” companies in China, Korea and the US are currently doing very well, we have to be cautious when it comes to investing in equities because future earnings will either support or destroy their current valuations. It is also becoming more and more difficult to find an alternative to investing in shares because of interest rates falling so fast. The search for yield is becoming frantic due to the fact that interest rates in developed countries are negative; companies are not paying dividends; and high sovereign debt levels are putting future government bond defaults under the spotlight.

    This is a time to have a balanced investment approach. The fact remains that if you can look beyond the next two years, you will see a world where Covid-19 is no longer a threat, where the US election is behind us and where world economies are re-building, just like after a devastating war.