Podcast: Junk, expected and nasty

Simon Shares

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Upcoming events;

09 April ~ JSE Power Hour: Trader’s game plan

Lockdown, day six as I record (seven as you listen). COVID-19 numbers globally continue to rise, but I’m watching Italy. They’re now at three weeks of lockdown and are seeing daily new cases decline, but still at 4,000 a day. I am also seeing reports that they’ll extend lockdown to after

Easter, which is bad news for us. Our new cases are minimal, but still likely to spike higher and come the end of three weeks surely we’ll be winning but not wanting to let the virus back in the front door, so lockdown extended? My thinking is extended to first weekend in May. It’s after the two public holidays and means we’d have been in lockdown for 5 weeks.

Longer term we’re waiting for a vaccine, and that’s 2021 at best, so even if lockdown gets lifted, heavy restrictions will be the norm and new lockdown periods very likely if the virus starts to spread with speed. Remember all data is two weeks old due to a 14 day incubation period.
Overall I agree with our governments response and think the president and health minister are doing a great job under unimaginable conditions.

Hardest hit is without doubt small business. Closing for even just 21 days with zero revenue can kill a business, even a strong one.

SaySiyaBonga.co.za

We also have extreme inequality in South Africa that makes lockdown frankly just not impossible for most South Africans. It’s easy in Bryanston, but impossible in Alex and add in poverty we have an entire extra layer of impossible.

First quarter moves;
- Top40 – 19.8%
- Indi25 -6.7%
- Fini15 -40.2%
- Resi10 -25.9%
- SA Property – 48.9%
- ZAR/USD -28.2%
- S&P500 – 20.0%
- FTSE 100 -24.8%
- Nikkei225 – 20.0%
- Gold +4.2%
- Brent oil – 61.4%

Questions is if the worst is behind us and the honest answer is that nobody knows. We’ve seen a massive rally in the last ten days, but that is more about liquidity as governments (especially the US) pump cash into the system. Certainly rallies of around 15% in a bear market are totally normal, we saw about half a dozen during the 2008/9 crisis. I also don’t think the market is going to be able to ignore the horror data that will be coming out over the next many months.

The other issue is that markets try and price in the future, but our forward view is limited to days, maybe weeks. Markets want to price in the next 12-18 months and we have zero visibility that far out. The data for the rest of 2020 will be bad, very bad. But we have no real idea or reference as to just how bad.

We’re going to see a number of bankruptcies, large and small, local and global. Some are easy to spot; airlines, high debt companies, cruise companies. But a lot will surprise us.

I continue to only buy ETFs (ASHGEQ my preferred).

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Hello junk

And now we’re junk. Full junk status, or in the lingo ~ non investment grade.

The outlook was negative and this is significant, means we can go further into junk status at the next review in October. Ideally we don’t want to slip too far down that status because it makes coming back that very much harder.

The immediate response was the local market green, Rand weaker at R17.95/USD and bonds about 1.5% higher yields.

The yields are what matters. We issue new bonds every week to cover costs, so far his weeks auction was over subscribed and that’s what I expect. We’re not actually at risk of default so the +11% yield is very attractive. Also with SARB buying in the secondary market we’ve got lots of liquidity.

But overall, it was pretty much priced in, now government needs to get us out.

Practically we’re now also out of the Citi World Government Bond Index (WGBI) at the end of April. This will see selling in our bonds, also a lot of mandates don’t allow junk bonds, so more selling. The flip side is a lot of mandates only want junk bonds (for yield albeit at higher risk). So in a way we’ve gone from a tiny fish in a giant pond to a large one in a large pond. Nice, but still not want any country wants.

We’ll also see the local banks downgraded to junk, when the sovereign is junk so go the banks. But it will potentially increase their borrowing costs and that will be passed onto consumers.

Question from Njabulo Nsibande

What happens if all REITs or the top ten REITs (as they make up about 50% in the case of CoreShares income property fund) in an ETF all go bankrupt.

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