Thursday, August 13, 2020

The mix that is of oil war and market volatility

COVID-19 is now pandemic and central banks and governments around the world have responded with stimulus programmes whilst some continue to explore other ideas of how they can rescue their economies against this Coronavirus which has become a household name.
 

Investment markets have not been as volatile since the global financial crisis. Asset prices are being influenced by two key factors which have led to heightened fears of recession around the world.  

That is the COVID-19 and its potential impact on economic activity as countries shut down in order to contain the risk, as well as the; oil price shocks and its impact on the fossil fuel industry, commodity prices and the US shale-oil industry.


Whilst many across the globe are trying to make sense of the pandemic coronavirus-, it is yet difficult to estimate the impact on global growth but the high frequency indicators in China point to a steep drop in activity and subsequent gradual recovery, with associated disruptions for companies around the world that have supply chains running through China. Many countries are waging war against the coronavirus to restore the lives of their citizens and saving their economies. For Botswana it remains unclear what the government has on offer to stimulate the economy which has waged war against the virus. As landlocked as is, Botswana remains amongst the three countries that have not yet registered any positive case, whilst its major trading partner South Africa continues to register many more which have are now nearing to a thousand. By late Thursday, Botswana had announced the setting up of a relief fund that will allow non-governmental organisations, corporate companies and various institutions to pledge towards the fight of the spread. 

Tourism in many economies across the globe is already taking a heavy hit, Botswana not spared. The month on month decline in global tourism activity could be that has only been seen once since 2008/09 economic meltdown.

Many tourism operators have experienced major cancelations in bookings both in wild adventures, bednights and conferencing and from the airlines’ side, it may get worse before it gets better as many have since halted the sky travels. This week Thursday, China announced the re-opening of some if its tourism centres at the infection rates decline. 

A rising number of cases globally are now the focus of attention, with an unsettling new vocabulary ‘pandemic’ becoming common currency. Financial markets which have now driven partly by emotion, are likely to continue to be susceptible to sessions of volatility until the spread of the virus is contained and its effects upon economic growth prospects properly assessed.

It is at times like these, that anxiety takes another level on investors, emotions often trumps rational decision-making behaviour.  It’s essential to guard against knee-jerk reactions, which prove to undermine long-term investment outcomes. As difficult and tormenting as it may before investors, perhaps being composed amidst the market panic caused by the oil price slump and the Coronavirus is the solution for now.

It remains unclear how weak both the local economic data and the global will be or how long a potential recession could last. Companies can’t give any credible guidance on earnings. And while the market may bounce on stimulus announcements, it is unlikely to bottom. 

The market volatility reflects investor efforts to price in not just COVID-19, but the responses to it from public health officials responsible for infection transmission control and mitigation measures; monetary and fiscal stimulus meant to offset the economic impact from those measures; business strategy and capital allocation decisions around the potential fallout in terms of, say, supply chain disruption and, crucially, anticipated effects on end-market demand. Will changes in consumer behavior be temporary or lasting? That remains to be seen. 

Botswana’s biggest pension Fund BPOPF also worried 

Botswana Public Officers Pensions Fund (BPOPF) the biggest pension fund in Botswana, continues to be in contact with its investment consultants and managers and has confirmed that its investment portfolios are being handled professionally and actively to minimize the impact of such volatile markets and to capitalise on opportunities as they arise. Whilst the Ministry of Health and Wellness has reported no confirmed cases within Botswana as at the 17th March 2020, “we remain concerned on the rate of infection globally,” said the Fund’s Chief Executive Officer Boitumelo Molefe.  

The BPOPF confirms that there was a market value decline over the 12 months to December 2018 in the local equity portfolio. This was due to declines in share prices of some of the stocks on the Botswana Stock Exchange. Also some Equity managers were selling equities and holding more cash; a flight to safety. During difficult times where investment markets fluctuate due to different market factors, the Fund has always taken measures to minimise the risk of loss by diversifying across different asset classes and markets/countries.

Last year, BPOPF which hold assets worth more than P60billion identified five managers to take its portfolio into China and Hong Kong financial markets.

The Funds’ chief executive Molefe revealed to local Mmegi newspaper, that the five managers would handle the pension fund’s push to invest in Asia. She had indicated that China in particular offered a lucrative unique market and had abundant opportunities waiting to be explored despite the limits to external investors. 

In late 2018, the pension fund launched a fresh P1 billion private equity drive which saw it entering into partnership agreement with two fund managers each handed a P500 million purse for the local private equity market.

The Fund has experienced phenomenal growth since its inception in 2001 owing to the overwhelming positive response as public servants exercised their option to join the fund. 

Oil producers on cash reserves and maintaining debts

While the cost of production in Saudi Arabia is extraordinarily low (below $10/barrels out of existing wells), the Saudi government has grown used to the profits from its oil fields funding its fiscus.
 
The Saudi government needs an oil price of around $85/barrel to balance its budget. Russia’s fiscal breakeven is around $50/barrel, with commercial producers in the US requiring a similar amount.
 
Each country is producing below its breakeven rates and will be tapping cash reserves and/or debt markets. International pundits have shown that, both Saudi Arabia and Russia can currently access debt markets relatively cheaply, but the countdown has started on how long spot prices can be maintained.
 
In the meantime, shale producers will come under increasing pressure, with increasing concerns about the quality of their debt.

The international economic experts also think that,  serious as it may, COVID-19, appears to be materially less mortal than initially feared – probably below 3percent in developed world healthcare settings compared to around 0.2percent for seasonal ‘flu’. For reference, SARS (Severe Acute Respiratory Syndrome in 2003) and MERS (Middle Eastern Respiratory Syndrome in 2012) had 10percent and 30percent mortality rates respectively.

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