2021 FOURTH QUARTER SUMMARY

LOCAL MARKETS IN A NUTSHELL

The South African stock market soared to new highs during the quarter. The JSE All Share Total Return Index gained 15.13% led by the resources sector. The phenomenal return of 29.2% for the 2021 calendar year, was the highest return since 2009.

Chart: Performance of the FTSE/JSE All Share Index over the past ten years (2012/01/01 – 2021/12/31)

Source: Trading economics

The fourth quarter gave investors a much-needed boost to the 2021 calendar-year return. After a very disappointing 5-year return from local assets, the local equity returns have provided investors with a much-needed reprieve. For most investors with a balanced mandate, the annualised 3-year return has shifted to double digit returns.

The resource sector was indeed the standout performer in the fourth quarter as it was in 2021. The demand for resources remains strong supported by positive global GDP.

Source: Profile Data 31/12/2021
* Annualised Performance

 

A year in review

2021 was expected to be a year of recovery as businesses looked for normalisation whilst people were hopeful that life could at last start to resemble what they once had. The reality was that 2021 came with mixed outcomes. Locally, the ANC suffered its greatest loss in decades at the local municipal elections. July saw an unprecedented uprising shadowed by political agendas, whilst unemployment rates continued to rise.

For local investors and consumers, the rand plays a meaningful role in the price of goods, and indeed the returns from offshore assets such as company earnings for local listed companies such as British American Tobacco. The chart below shows the wild ride experienced by the rand in 2021. The local currency reached a high of R16.28 and a low of R13.42. That equates to a range of 18% between the high and low points.

Source: ex.com

South African assets had a great year. The local stock market was up 29.2% over the year whilst local bonds returned 8.4%. The local listed property sector returned a staggering 38.6% as it recovered from a low base. Cash gave a nominal return of 3.8% which is likely to be well below the rate of inflation.

The chart below shows the return of the various local asset classes over the 2021 calendar year.

As one looks to the year ahead asset managers are still of the opinion that local assets appear to be cheap with many asset managers feeling upbeat about the potential for further upside, particularly with regard to commodity prices which could give a further boost to resource stocks.

The volatility that was experience in 2021 is likely to continue into 2022. Investors should remain focused on their long-term objectives and sound financial planning principles.

Be wary of debt – Interest rates to increase

Interest rates are the lowest that they have been since the late 1960s. The rapid fall in interest rates during 2020, came as a much-needed aid to those who had fallen on difficult times. Interest rates have however, bottomed out at 7%. South Africa has already seen a rate hike of 0.25% with as many as three more hikes expected before the end of the year.

The chart below shows the South African prime interest rate since the year 2000.

According to Trading Economics global macro models and analysts’ expectations, the prime interest rate is currently forecasted to reach 9.25% in 2023. This forecast may be subject to correction as economic and inflation data becomes available during the course of the year. Nevertheless, interest rates are set to rise.

For an individual who has financed their car, owes debt on their credit card and perhaps has a home loan, the incremental increase in monthly repayments could stack up considerably over the next 12 – 18 months.

Investors should seek to pay down their debt, starting with unsecured debt (debt which isn’t backed by an asset) such as credit cards which usually carries a higher interest rate than that of secured debt (typically long-term debt) such as a home loan.

An effective way to tackle debt is to start with a budget. An often-underestimated tool.

OUTLOOK (LOCAL)

The outlook for local assets remains positive. Asset prices remain cheap whilst our resource sector continues to benefit from a growing global economy. Both local assets as well as the rand, are likely to experience high levels of volatility throughout 2022. Investors must remain focused on their long-term objectives and sound financial planning principles rather than reactive investing.

The South African Reserve Bank is due to hike interest rates by 0.25% during the first quarter. The cost of living is also expected to increase over the quarter as further petrol hikes are expected. Eskom has applied for a 20.5% increase to the price of electricity after having been granted a 15.06% increase in 2021. This is likely to result in higher albeit modest increases to the overall rate of inflation. Given the current outlook to inflation as well as low interest rates, cash deposits are unlikely to provide meaningful increases in capital value after taxes and inflation.

OFFSHORE MARKETS IN A NUTSHELL

Global equity markets had a great quarter, returning 7.86% in USD over the period.

 

The graph below represents the World Equity Index over 5 years in dollar terms.

*Performance as of 31/12/2021

 

Developed markets returned 7.87% whilst emerging markets fell by -1.24% over the quarter.

The fourth quarter proved to be another tough period for emerging market equities. Chinese equities fell-6.06% after having fallen-18.13% in the previous quarter. China was hard hit by a resurgence in the rate of infections which caused doubt around their ability to sustain their economic activity.

The S&P 500 closed the year up 26%. When one digs deeper the reality is that the return was largely driven by a handful of stocks, five to be exact.

Volatility continued to spike during the fourth quarter in both US and global markets.

 

Should I be worried about rising interest rates?

The US Federal Reserve announced in December that it plans to raise interest rates three times during the course of the year. The current rate of 0.25% could end the year 400% higher at 1%. Historically interest rate cycles have coincided with higher market volatility. This begs the question as to whether investors should be concerned?

The chart below shows the real return of the S&P 500 during tightening cycles. The right-hand side of the chart shows various outcomes over the following three-year period.

 

One can also see how volatile the performance can be particularly within the first 12 – 18 months after the start of the tightening cycle. With the exception of three out of the fourteen instances, the real performance of the S&P 500 three years after the start of the tightening cycle, has been positive if not very pleasing.

According to BlackRock the market has already priced in faster rate hikes than the Fed has suggested. This is in response to the high rates of inflation which asset managers believe will begin to moderate towards the second half of the year. It is expected that the Fed will be more accommodative of inflation than during previous cycles.

The chart below shows BlackRock’s forecast of the Fed rate compared to what the market has already priced in.

The risks to higher inflation or the need to raise rates quicker than expected are ever present. However, a change in the interest rate cycle has historically been a poor reason for investors to panic. Asset managers are in the best position to monitor the variables which affect the risk within the market and where necessary, to adjust the portfolio to be more defensive or growth orientated.

The 2022 consensus view

Upon reviewing the various market insights and commentaries for 2022, several consensus views become apparent. We have summarised these views into five key themes.

Inflation

2021 saw heightened levels of inflation particularly in developed economies. This came as a result of an increased demand for goods and services (pent up demand) coupled with a supply bottle-neck in goods such as microchips which are integral to all things technology. The consensus view was that inflation was transitory, simply meaning that it won’t remain high for too long. This consensus view now reflects the opinion that inflation, particularly in the US, will moderate towards the second half of the year as supply chains begin to open up and interest rates begin to rise. A notable risk to this scenario includes geopolitical risk, and policy errors. One of the tools used by central banks to combat higher inflation is higher interest rates.

Interest rates

Interest rates are set to rise in 2022. In the US it is expected that the Federal Reserve will hike rates three time before the end of the year. The current rate of 0.25% could end the year 400% higher at 1%. Historically rising interest rates have coincided with higher market volatility. Investors are therefore wary of how 2022 could play out from an asset price perspective. If the US Fed were to raise interest rates too fast, they may cause a sale in asset prices.

Lower but positive global growth

Global growth in 2021 was relatively high compared to historical trends however, given the fact that the global economy had reopened from an unprecedented shutdown in the previous year, a bounce in global growth was inevitable (barring any major resurgence in the virus). Global growth is expected to remain above trend albeit lower than that of 2021. This normalisation of economic activity should bode well for corporate earnings.

 

Heightened risk of volatility

2022 is likely to be fairly volatile as interest rates rise and global growth begins to normalise. For most asset managers select global equities are the chosen asset class of 2022 as they expect lower yet positive returns from them. Investors should be prepared for more volatile returns as a matter of course.

What to do about China

The state of play in Chinese markets and politics could be characterised by the Chinese proverb which roughly translates to “the nail that sticks out gets hammered”. The MSCI China Index closed the year down-21.64%. Phenomenal companies such as Alibaba, JD.com, Tencent and Baidu fell between-15% and -43% in 2021. A question mark remains over the Chinese property market as well as regulatory pressures on large tech companies.

It is expected that China will further its stimulus response to support the economy. Asset managers are also hoping for less “noise” during the course of the year as China has already emphasised its priority for quality growth o—er quantity.

 

Investors should remain focused on their long-term financial plan whilst the fund managers navigate the complexities of the coming year.

FORWARD OUTLOOK (OFFSHORE)

The outlook for global markets remains positive. Higher volatility is to be expected during the course the year. The global pandemic appears to have run its course in many parts of the world. Despite the expected waves of resurgent infections, the mortality rate, particularly in developed countries, has fallen to relatively low levels when measured as a percentage of active cases. Although the potential for new variants to emerge remains high, the consensus view is that the worst is likely behind us.