In six short weeks Covid-19, initially a regional epidemic confined largely to the Hubei district in China, has become a global pandemic. The brutal, and in this case ruthless, power of exponential growth has been on display for all to see. At the time of writing it is present in 155 countries, with 198 000 confirmed cases and 8 000 deaths. Although the initial reaction from most governments, healthcare authorities and financial markets was a complacent one, this has changed dramatically. Panic is now widespread, as more and more countries move into lockdown, travel around the world grinds to a halt and governments pass laws enabling them to take control of private healthcare facilities, as they face up to the likelihood that public facilities will be overwhelmed in the weeks and months to come. This is all deeply unsettling, with intense disruption at both a personal and societal level. The strain caused by the humanitarian crisis will be deeply aggravated by the economic fallout to come. We understand that the decline in market value of nearly all long-term investment portfolios over the past weeks is difficult to stomach. Why is Covid such a big deal? The number of confirmed cases and fatalities from Covid1 thus far may seem relatively benign (certainly relative to influenza, which infects three to five million people and causes 250 000 to 500 000 deaths per annum, globally), and is therefore difficult to reconcile with the dramatic responses we have seen globally. But these numbers belie the potential damage the virus could do if it continues its exponential spread. Covid is an entirely new virus. Thought to have originated in bats, it is a novel virus to the human population. As such, unlike influenza and many other endemic viruses (i.e. that circulate amongst humans), we have no herd immunity against it, no proven drugs to treat infection by it, nor any vaccine against it. Scientists are still learning about it, but it is already clear that it has (complementary) characteristics that make it devilishly effective at spreading:
The case fatality rate (CFR), or the percentage of infected people that die, for Covid is not yet known. The World Health Organisation (WHO)’s current estimate is 3.4%. It is still too early to know what the real number is, but many epidemiologists argue that the true CFR is closer to 1%. We think it likely that the actual CFR will:
That is why we are seeing the drastic measures taken by governments around the world to slow the spread of the virus (to ‘flatten the curve’). Encouragingly, these drastic containment and social distancing strategies are yielding positive results, with the virus spreading much more slowly in some countries (e.g. China, Taiwan and Singapore). Our base case for the pandemic and how it all ends There have been several pandemics of global significance over the past hundred years. Although each is different and many occurred in a different time with less biomedical technology at our disposal, they can offer us some guide to what lies ahead. In general, past global pandemics have lasted for almost two years and taken almost a year to peak. Many have also been characterised by multiple ‘waves’, with the virus subsiding and resurging in affected areas (with weather seasonality a significant driver of this). Should relief from this current pandemic come sooner, it would have to be for one of the following reasons:
Our base case is therefore that this ends only when a vaccine becomes available at scale, and that this is, at best, a year away. If this proves to be too pessimistic, we think it will be because one/some of the antiviral drugs currently being tested end up meaningfully improving the prognosis of patients infected with it. The next 12 months will see massive and widespread measures by governments to control the spread of the virus. The economic fallout from putting human lives first will be devastating. Many small businesses will not survive, and the more vulnerable parts of society will suffer the most. We are particularly concerned about the obvious risks here in South Africa, where the economy was already in recession and the healthcare system was already failing. Early market reaction In early January it felt like nothing could stop the longest equity bull market in US history! The market peaked as late as 19 February, more than a month after Covid had emerged in China. This initially complacent reaction anchored off the limited disruption and the buying opportunities that SARS, MERS and H1N1 had all proven to be. By the middle of March, however, equity markets around the world were setting records for the speed at which they were collapsing. Pain has been universally felt across equity, credit, property and commodity markets. Some of the price moves are difficult to explain. For example, gold, which is typically viewed as a safe haven, has fallen. The price declines have also been fairly indiscriminate, with the market drawing little distinction between those businesses that should prove defensive and those that are more exposed. We believe that much of this is due to the explosive growth in passive and quantitative funds over the last few years, a phenomenon that we think has damaged the price-discovery process across many markets. An early casualty of the pandemic was the OPEC+ alliance, with members moving from cartel-like behaviour to a mutually destructive price war within just a few days. There will no doubt be further casualties to come. And, while global central banks and treasuries attempt to pump liquidity into markets, until confidence returns, based on medical discoveries, economic growth will be under immense pressure. An early casualty of the pandemic was the OPEC+ alliance, with members moving from cartel-like behaviour to a mutually destructive price war within just a few days. There will no doubt be further casualties to come. And, while global central banks and treasuries attempt to pump liquidity into markets, until confidence returns, based on medical discoveries, economic growth will be under immense pressure. As things stand, the S&P 500 Index has declined 25% (which compares to c.48% in the Global Financial Crisis [GFC]). The JSE All Share Index has declined 28% (which compares to its 46% decline in the GFC). Meanwhile, global developed market bonds, already at multicentury lows, have rallied, while SA 10-year bonds have sold off almost 200 basis points. Portfolio positioning Although we came into the new year with equity and offshore multi-asset class funds that were reasonably well positioned for the, as yet unsighted, black swan, this was not the case for our South African multi-asset class funds, which were overweight equities. While our weighting in global equities was comfortably low, given our view that global equities were fully priced, a higher weighting in domestic equities offset that. Fortunately, protection bought in the multi asset class funds in the early stages of the pandemic ended up compensating for that initial position. I have been at Coronation for 20 years, and in all previous crises we have been early buyers of assets that we felt had sold off to levels meaningfully below our assessment of underlying intrinsic value. Fortunately, this time was different. Although our initial instinct was to anchor off the buying opportunity that other viruses had proven to be in the past, our first call with an international epidemiologist on 6 February made us more cautious. Numerous calls with other disease experts reinforced that view. As a consequence, our key portfolio actions were as follows: •In our multi-asset class funds:o We did not buy equities into the sell-off. In January and February, we actually bought protection through equity puts across all our multi-asset class funds (Balanced Plus, Market Plus, Capital Plus, Balanced Defensive and Global Managed). At that point in time, protection was still reasonably priced. o We then followed this up by selling S&P futures in our local multi-asset funds in early March. • In our equity funds: o Early on, when the price action was more indiscriminate across stocks, we reduced exposure to some of the more exposed industries and to businesses with weak balance sheets. o Examples include reducing Airbus in our global funds and Richemont, MTN and Sasol in our local funds o We also actively recycled low-quality into high-quality businesses. The Coronation Equity Fund’s domestic portfolio currently has 73% exposure to what we define as high-quality businesses. This is significantly higher than any time in the last decade. It is not often that one is able to buy high-quality companies at attractive prices. • In our fixed income funds: o Our low allocation to credit across in the Strategic Income and Bond funds has allowed us the opportunity to increase our allocation to very attractively priced SA nominal government bonds. Concluding thoughts and playing the long game At the time of writing we draw some comfort from the fact that the performance of our funds through the crisis has ranged from marginally behind to marginally ahead of benchmark. It is very tempting in these difficult times to reduce one’s stress levels and prioritise near-term capital preservation. However, we do feel that the market is increasingly pricing in the economic consequences of this virus. Equity markets are also becoming less indiscriminate – sectors that find themselves in the eye of the storm and stocks with weak balance sheets are now being punished. In times like this we need to remind ourselves that, as devastating as the humanitarian and economic fallout from the virus will be, it will not last forever. A few years from now, when we assess our own actions in this crisis, not taking advantage of deeply discounted stocks trading at fractions of their underlying value will, in all likelihood, be deeply regretted. This too shall pass. Out of every crisis, markets rally when we all least expect them to. In all of this rather depressing commentary, I must emphasise that a large number of risk assets out there are stunningly cheap, both in South Africa and in global markets. For this reason, our stance has started to shift slightly. As of this week, we have increased the pace at which we are recycling shares that we think have come under pressure. We have also started to take off the equity market puts that we bought earlier in the crisis. The next step will be to physically buy equities. In every decision, we will attempt to judiciously weigh up return against risk. We will never reach for return at the expense of risk. But our guiding light throughout will be the long term, as difficult as that may be. Written by: Karl Leinberger, CIO, and John Parathyras, Global Developed Markets Analyst Source: Coronation
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Avoid close contact. Don’t go to your doctor’s rooms. So what are your options? Globally, people have been slow to take up consulting doctor using digital and social platforms. But, with COVID-19 now in 100s of countries, the number of people spending time with doctors through screens is increasing just as fast. The number of COVID-19 infections have exceeded 100 000 and are increasing daily. So are the number of people using telemedicine technology. With good reason. Using your computer or smartphone to see a medical professional is not new. Virtual consultations and treatment have been available in most healthcare systems and through medical schemes, including Discovery Health Medical Scheme, for some years. But, given the traditional preference for face-to-face consultations between doctor and patient, virtual consultations and remote care were mainly for the future, for tech-savvy generations. This view is changing fast as the world responds to COVID-19. Dr Peter Antall, the chief medical officer for AmWell, was quoted saying “telehealth is being rediscovered” as health systems are racing to adapt and even develop virtual services that can serve as their front line for patients. (Doctors and patients turn to telemedicine in the coronavirus outbreak). Virtual care is the first line of defence Technology-based consultations and remote contact with patients through virtual platforms are fast becoming the norm. As people connect virtually, healthcare professionals manage overcrowding of consultation rooms, ensure appropriate referral for care, and help prevent the highly infectious COVID-19 virus from spreading. More importantly, virtual care keeps the worried calm, and those who need immediate care are prioritised. “In South Africa, we’re raising awareness and taking appropriate precautions to help to minimise the spread of COVID-19. We must continue to do everything possible to minimise the chance of uncontrolled spread. Applying learnings from around the world in managing COVID-19, show access to and using telemedicine and virtual consultations are of critical importance. It has been an effective healthcare tool to ensure appropriate care while making sure infection rates are controlled by avoiding direct contact with others,” says Dr Noluthando Nematswerani, Discovery Health’s Head of the Centre for Clinical Excellence. The power of social distancing, part of which is offering virtual healthcare, has been invaluable in the success of China (fewer than 50 infections a day) and South Korea (from 900 infections a day to fewer than 200) in containing COVID-19. Promoting virtual consultations prevents medical facilities from becoming overcrowded with people, possibly spreading infection to others. Doctors from around the world agree with this approach and are praising telemedicine technology for helping to successfully manage COVID-19. Virtual consultations through DrConnect: reaching more people virtually Since 2017 Discovery Health Medical Scheme has had a virtual consultation platform called DrConnect. This digital platform, supported by artificial intelligence (AI) machine learning, gives members of the Scheme access to virtual consultations with healthcare providers they have visited in the past 12 months. Through the Discovery app, this platform also offers free trusted medical information from a worldwide network of doctors. “It’s natural that people may be concerned and would want to see a medical professional. Your first choice when any signs or symptoms of COVID-19 are present, should be to stay away from others. Contact your doctor, either telephonically or through virtual consultation channel, like DrConnect (that’s available through Discovery Health Medical Scheme). Accessing virtual consultations, especially now as a measure to contain COVID-19, ensures that people receive the correct care and that we protect the health of others,” says Dr Nematswerani. In response to COVID-19 infections in South Africa, Discovery Health Medical Scheme has a benefit to support the diagnosis and treatment of the illness. Going forward, Discovery Health is looking at opening a basic version of DrConnect to a broader segment of healthcare professionals and people. Commenting on this, Dr Nematswerani says, “With more people having access to and using virtual consultations, we can employ this as another method to contain the spread as well as minimise the accompanying health and other environmental effects of COVID-19.” Telehealth platforms are helping experts and medical professionals around the world to map cases and to distribute messages of prevention and appropriate care. Through effective prevention and encouraging virtual care, we can contain COVID-19. Source: Discovery Health Market Update South African equities fell during the month of February in line with other global equity markets, with only four shares in the top 60 of the JSE finishing the month with a positive return. Local bonds reacted positively to the budget speech by Finance Minister Tito Mboweni, however, the asset class lost some ground towards the end of the month as yields moved higher (moving prices lower) due to sales by foreigners on the back of the de-risking trend. Local listed property came under severe pressure during the month, as the sector faced headwinds from weak local economic conditions and global risk aversion to those asset classes perceived as risky. The rand was weaker against major developed market currencies during the month, which masked the negative contribution from global equity allocations slightly. Economic Update Finance Minister Tito Mboweni delivered an ambitious budget speech during the month, with the minister announcing the intention to reduce expenditure by R261 billion over the next three years, including a reduction in the government wage bill of R160 billion. The minister also announced a downward revision of R63 billion in estimates of tax revenue for the 2019/2020 fiscal year relative to the 2019 budget, which is likely to lead to a budget deficit of 6.3% for 2019/2020. Headline inflation moved up slightly during the month to a year-on-year figure of 4.5% to the end of January, driven higher by the base effect of an increase in the price of transport in particular. See below for a summary of the key market movements for the month of February:
*All data is sourced from Morningstar Direct as at 29/02/2020. The performance of South African asset classes is quoted in rands and the performance of global asset classes is quoted in US dollars. Source: Morningstar Investors and market participants should be well aware of the Coronavirus and the equity market declines which have occurred during February on the back of concerns around its likely effect on future economic performance and company profits. During market drawdowns such as these, we believe that it is important to remain calm and not be forced into making rash short-term decisions which impede the ability of investors to achieve their financial goals. While market sell offs are never comfortable, we believe that it is important to focus on whether the moves are driven by sentiment or long-term fundamentals. In our view, many of the movements have been based on panic and emotions, as investors are not able to stomach the volatility that comes with investing in equity markets. We will continue to monitor proceedings closely, as we unpack whether rebalancing or restructuring of portfolios is prudent given the market movements. February was a volatile month for global markets, as the spread of the Coronavirus and its likely effect on global economic growth drove investors out of equities and into perceived safe-haven assets including developed market government bonds. The 10-year US treasury yield fell to an all time low of 1.10%, with markets swiftly pricing in at least two interest rate cuts from the US Federal Reserve (Fed) in the next few months. China’s official manufacturing purchasing managers’ index (PMI) sank to 35.7 in February from a figure of 50.0 in January (greater than 50 indicates expansion), as the extent of the damage to the Chinese economy in the short-term from the Coronavirus became apparent. Source: Morningstar Staying healthy and keeping others safe should be your number one priority right now. Vitality’s key principles have never been more relevant: exercise if you’re well, eat healthy food, and take preventive measures, like washing your hands and maintaining social distancing. We’re living in unprecedented times, and Vitality plays a central role in helping you stay healthy, with benefits and rewards tailored to our present reality. Our HealthyFood, HealthyCare, and HealthyGear benefits are more valuable than ever, giving members valuable discounts on all HealthyLiving items. And our Device Booster and Apple Watch benefits come in handy for members who would like to meet their exercise goals from home. We’ve taken the following immediate steps to give Vitality members peace of mind during this time Vitality Active Rewards maximum weekly goal drops to 700 points We have lowered the Vitality Active Rewards weekly goal from 900 to 700 Vitality points. This means if you are missing gym workouts, parkruns or myruns, you can still hit your weekly goal in a number of ways. For example, if you track 10 000 steps a day on your smartphone, you can earn 100 Vitality points – the same as when you go to the gym. Your Vitality gym discount is safe We are adjusting the 36-visits-in-12-months rule so that if you’ve been going to gym regularly until now, your discount won’t be affected if you decide to skip gym over this period. Look out for more details in the upcoming newsletter. Your HealthyLiving discounts will not be impacted We are pausing the 12-month cycle rule for members to do their Vitality Health Check or Vitality Fitness Assessment to maintain their HealthyFood, HealthyCare and HealthyGear discounts. The year is young, and the situation will change. Don’t worry about achieving your Vitality status right now. Keep engaging if you’re well, and remember that there are many other points-earning activities that you’ll be able to access later in the year. Rest assured, we want to recognise and reward you for making us your partner in your health journey and we will continue to monitor the situation as it unfolds through the year. What’s more, we are enhancing your rewards in the coming weeks Keep exercising with a discounted fitness device Keep exercising if you are well. As a special offer, we are giving members a R1 000 upfront discount on all qualifying Fitbit, Garmin, Huawei, Polar, Samsung or Suunto heart rate fitness devices at Sportsmans Warehouse or Totalsports. This is in addition to your Device Booster benefit of up to 75% cash back. With a fitness device, you can track and record your physical activity to continue earning Vitality points and weekly rewards on Vitality Active Rewards. Free delivery on HealthyFood Working closely with our HealthyFood partner Pick n Pay, we are giving Vitality members a free delivery voucher on their next online shopping transaction. This offer is in addition to your HealthyFood cash back. We are boosting your HealthyDining benefit To help you eat well and stay healthy, we are boosting your existing HealthyDining benefit by 10%. Now, instead of the usual up to 25% back on healthy meals when you order through Uber Eats and our partner restaurants, you can get up to 35% back for making healthy choices. Vitality Active Rewards in the comfort of your home Over the coming weeks, you can also enjoy great discounts on select Vitality Active Rewards online shopping and home entertainment rewards. Whether you like to watch movies at home or to snuggle up with a good book, you can now watch BoxOffice movies or buy your next read from Exclusive Books for less Discovery Miles. Plus we'll be adding gaming vouchers to Vitality Active Rewards. To apply for Vitality contact Tammy or Namhla in our Health department email:health@daberistic.com tel (011)658-1333 Source: Discovery |
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