LOCAL MARKETS IN A NUTSHELL
The South African stock market was down marginally over the quarter led predominantly by resource stocks. The JSE All Share Total Return Index fell 1.07% over the quarter.
Chart: Performance of the FTSE/JSE All Share Index over the past ten years (2010/04/01 – 2021/06/31)
Source: Trading economics
The second quarter saw a reversal in resources stocks which were down 5.2%. Despite the negative return over the quarter, resources are up 13.07% year-to-date. Naspers closed out the quarter down 25.38% adding to the drag on the index.
The financial sector had a remarkable recovery over the quarter closing up 8.12%.
The Rand started the quarter at around R14.79 to the dollar whilst closing out the quarter at around R14.35. This equates to a 2.35% strengthening of the local currency against the US dollar.
Source: Profile Data 02/07/2021
* Annualised Performance
Local balanced funds reach new highs
A year ago, we published an article in our second quarter summary titled “WHAT IF YOU HAD SOLD IN FEAR?” The article discussed the importance of sitting tight during periods of volatility.
Looking back over the course of the last year the average local balanced fund has not only recovered from the 2020 market crash but also reach new highs.
The chart below shows the performance of the average local balanced fund over the past two year (07/2019 – 06/2021)
Performance of the average local balanced fund
Source: Profile Data
Our consistent message over the period has been two-fold. It has been one of concern regarding South Africa’s economic, fiscal and political environment which has slowly but steadily deteriorated over the past ten years – “the lost decade”. The other consistent message has been one of optimism regarding how cheap the local market has become. This is now supported by the emergence of a new global economic cycle.
Over the past 10 years the US market has yielded the highest return, led unsurprisingly by big technology companies. Emerging markets have steadily underperformed the US market over the period as shown in the chart below. South Africa’s woes have only compounded on this downward trend however, with a positive outlook on emerging markets, could the trend begin to change?
The chart below shows how emerging markets have underperformed relative to the US market over the past decade. The chart also shows how historically, a cycle of outperformance in the US market has led to a subsequent cycle of outperformance in emerging markets.
Not only are local assets continuing to offer value to investors, but they may also find themselves benefitting from a cyclical recovery in emerging markets.
As of the 13th of July 2021, parts of the country, particularly in KZN and Gauteng are under siege by looters and criminal syndicates. South African assets continue to offer value to investors however, the effects of the looting, damage to property, further job losses, losses in production and political disarray could come at a high cost to the country over the coming months.
The indiscriminate looting could lead to higher rates of covid 19 infections whilst meaningfully disrupting the distribution of the vaccine to citizens around the country.
The third quarter of 2021 could result in heightened levels of volatility in the market.
OFFSHORE MARKETS IN A NUTSHELL
Global equity markets posted solid gains, returning 7.89% for the quarter.
The graph below represents the World Equity Index over 5 years in dollar terms.
*Performance as of 31/03/2021
Developed markets returned 7.89% whilst emerging markets returned 5.05% over the quarter. This materialised despite higher than expected inflation figures coming out of the US.
Vaccination programmes in developed countries have in many cases accelerated beyond earlier forecasts. According to Bloomberg the UK have successfully vaccinated 69% of its population followed by the US at 55% and Europe at 54%.
This is in stark contrast to developing countries.
Another great quarter for offshore investments
This time last year, the consensus amongst assets managers was one of cautious optimism. Asset prices were cheap, however a question mark remained regarding the effect of the virus and how long the global lockdown would continue. Since then, investors have seen five consecutive quarters posting positive returns from global equities.
Global equity markets (MSCI World Equity Index) closed out the quarter up 7.89%. The obvious question is, could we see another correction on the horizon? Should investors be worried?
On balance some of the major global equity markets are expensive on many valuation signals. For a traditional global balanced fund, cash and bonds are not offering attractive returns and yet they tend to constitute a meaningful part of global balanced funds. This coupled with an expensive US market is certainly something that raises questions.
The graph below shows the largest annual falls in US equities since 1980. What becomes apparent is that the largest fall in 2021 of around 4% is well below that of the historical average. This suggests that the volatility in US equities has thus far been relatively low.
Asset managers are well aware of the risks in the market particularly after a phenomenal return thus far in 2021. Asset managers continue to hold “safe haven assets” such as gold as protection in the portfolios. Some managers are using hedges to reduce risk whilst others are underweight expensive markets such as the US in favour of select Asian and European stocks. Many managers are also underweighting the US Dollar.
This highlights the fact that asset managers are cognisant of the risks of a minor correction (a correction of up to 10% in equities) particularly in expensive markets.
FORWARD OUTLOOK (OFFSHORE)
The outlook for global markets remains positive. The fear around higher levels of inflation particularly in the US are warranted but come as no surprise to many asset managers.
The second half of 2021 may come with heightened levels of volatility however, investors must remember that volatility does not represent a loss but rather normal fluctuations in the value of their investments.