LOCAL MARKETS IN A NUTSHELL
The South African stock market was up over the quarter led predominantly by resource stocks. The JSE All Share Total Return Index gained 9.39% over the quarter.
Chart: Performance of the FTSE/JSE All Share Index over the past ten years (2009/10/01 – 2020/12/31)
Source: Trading economics
The fourth quarter saw renewed hopes stemming from the approval and deployment of the vaccine in developed countries. The US election although eventful has been received positively by the market as a Biden presidency is likely to be supportive of growth for countries around the world.
South Africa’s economic state remains an area of concern as we hope to see meaningful policy shifts being implemented by the government. Despite this area of concern, the optimism on the local market is round companies that are interconnected with the global economy. The demand for resources has come as a result of the recovering global economy which is supported by the roll-out of the vaccines.
The Rand started the quarter at around R16.60 to the dollar whilst closing out the quarter at around R14.70. This equates to an 11.45% strengthening of the local currency against the dollar.
Source: Profile Data 01/01/2021
* Annualised Performance
Investor behavior is key, the research tells us so!
Simply put, markets are driven in the short-term by sentiment which is a feeling or a tone towards public news or information surrounding either individual companies, asset classes such as gold, economies or currencies. It is emotion-based (although no-one would admit to making emotional decisions). Bad news typically relates into lower prices as people sell based on negative or uncertain news.
The chart below shows the performance of the local stock market during the past year. The temptation during the Covid fall was to sell out of one’s funds and go into cash or liquidate the investment entirely. What we see in the last nine months of the year, is a slow and volatile recovery. In order to recover from the fall, investors needed to remain invested. The challenge for investors is managing their innate feelings of fear and greed leading to destructive behaviors.
The chart below is a representation of how investors may have felt during the course of 2020. Unfortunately, local investors have had to endure a low return environment over the past several years which has continued to weigh in on their emotions. Where do you find yourself on the chart below?
Sentiment is key to investor behaviour. Professional investors such as Ben Graham or advised investors such as yourself need to be mindful of how sentiment can impact on your investment decisions.
“The individual investor should act consistently as an investor and not as a speculator.” Ben Graham
The outlook for local equities is positive now that the vaccine has given hope to a stronger and healthier global workforce during the course of 2021. Select sectors may continue to struggle based on their reliance on the local consumer and the local economy. Not all opportunities are equal and selective stock-picking many prove to be crucial in the search for positive returns. Poor policy decisions by the government may continue to weigh on stocks that are reliant on the local economy.
The local economy is likely to struggle through the next 12 months. Investors can only wait and see what will happen as we head towards the February budget speech. For the time being, inflation appears low as do interest rates, both of which provide some reprieve for local consumers.
The rand appears to be a curveball that could potentially surprise investors by the end of the year. The dollar is believed to have a weakening bias going into 2021, which supports a strengthening rand. A renewed demand for resources and foreign investments into both our local stock and bond market could see the rand strengthen during the course of the year. Accurately forecasting the local currency is very difficult if not impossible, however, a stronger rand over the course of the year is perhaps not out of the question.
Investors need to ensure that they know what their financial plan is and how it is positioned in order for the investor to have the confidence to stay the course.
“Know what you own, and know why you own it.” — Peter Lynch
OFFSHORE MARKETS IN A NUTSHELL
Global markets continued their recovery with the MSCI World Equity Index gaining 13.96% in USD over the fourth quarter of 2020. With the US election behind us, the market looks towards further stimulus packages being deployed around the world with a steady decline in infection rates as people begin to receive the various vaccines around the world.
The graph below represents the World Equity Index over 5 years in dollar terms.
*Performance as of 31/12/2020
The global market’s rally of 13.96% in the fourth quarter has called into question the sustainability of the recovery and a possible short-term fall in the global stock market. Further stimulus packages, low interest rates and declining unemployment along with the continued rollout of the vaccine is believed to be supportive of the recovery boom.
A global context for 2021
The graph below shows the price return of the popular US S&P 500 equity index over three periods. The market crash of 2020 is shown by the pink line where it took 128 days to recover. The light blue line represents the Dot.com bubble in the early 2000s and the dark blue line represents the Global Financial Crisis of 2008 – 2009.
After such a strong recovery during 2020, investors are questioning whether the market has run ahead of itself. “Shouldn’t it have taken longer to recover?” One of the stark differences between the last two market crashes and the crash of 2020, is the response by governments to provide financial relief to the market, economy and individuals. This potentially comes with its own set of risk factors which will need to be carefully monitored by governments and central banks around the world.
The chart below shows the performance of the various US sectors compared to the S&P 500. Although the chart ends in August 2020. The divergent performance in the various sectors has continued throughout 2020. This is what economists call a “K shaped recovery” with some sectors recovering better than others, creating a divergence in performance.
The chart below shows the Russel 2000 Growth index in blue against the value index in orange. What we can see is that the performance of the growth stocks in 2020 has been high whilst value stocks have yet to rally to the same extent. The chart below also shows the importance of holding funds with different investment styles. Although it may have been frustrating to hold a “value fund” in 2020 over a “growth fund”, its important to have exposure to both value and growth as one investment style will outperform the other at different points in time.
Russel 2000 Growth vs Value Index
For investors who feel that the market has run too far, asset managers remind us of the fact that the recovery in global stocks has not taken place across the board. Some economies have also recovered more than others. An example of this is China who have had a very strong recovery whilst the UK and other parts of Europe have yet to recover to the same extent.
2021 is likely to be a bumpy ride with minor corrections in global markets, however, asset managers are in the best position to navigate the valuation gap between assets that have already recovered and those which continue to offer value to patient investors. A pull back in the market is an opportunity for asset managers to exploit and should not be a cause for concern.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros
FORWARD OUTLOOK (OFFSHORE)
With 2020 behind us, the outlook for global markets looks to be positive. As the global vaccination initiative is underway, economists believe that developed economies are likely to continue to see better growth numbers and an increase in demand.
“Economic growth is making a comeback. The International Monetary Fund (IMF) estimates that global GDP will climb 5.2% in 2021. But risks to recovery remain, chief among them a resurgence of COVID-19.” – Capital Group’s 2021 Outlook
The economics team at Morgan Stanley has released their global GDP forecast of 6.4% for the 2021 calendar year. This forecast is by their own admission, is more bullish than that of the IMF.
Volatility in global markets is likely to remain high throughout the course of the year despite the GDP forecasts. Given the fact that the virus has yet to come under control in many countries around the world, resurgences in the infection rates, is to be expected. The UK has had to enact stronger lockdown conditions to curb the spread of the virus whilst vaccinations are underway. Minor falls of up to 10% in equity markets should be expected, however, asset managers are cognisant of the risks which could affect long term fundamentals.