2021 THIRD QUARTER SUMMARY

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 0.84% over the quarter.

Chart: Performance of the FTSE/JSE All Share Index over the past ten years (2011/10/01 – 2021/09/30)

 

Source: Trading economics

The third quarter started off on a distressing note with riots taking place in KZN and Gauteng. The riots resulted in a cabinet reshuffle which included the appointment of a new finance minister. The events of the third quarter have highlighted the political disarray of the ruling party as well as a growing political tension amongst smaller political parties.

The largest detractor over the quarter was the resource sector which fell by almost 4%. The financial sector had a stellar performance returning 11.75%.

The Rand started the quarter at around R14.27 to the dollar whilst closing out the quarter at around R15.17. This equates to a 5.9% weakening of the local currency against the US dollar.

As the chart below shows, both local balanced funds and local equity funds gave a positive return on average over the quarter despite the increased volatility.

Source: Profile Data 30/09/2021
* Annualised Performance

 

After a stellar year, local equities still look attractive

Many investors continue to express their concerns regarding the South African-centric risk factors. The narrative of discontent was further exacerbated by the mass looting and political insurrection which took place during the third quarter in KZN and Gauteng. The challenge for South Africans is to keep a balanced view with regard to investing.

Since the local market reached its lowest point during the Covid crash in March of 2020, it has had a stellar return of 46% to the end of September 2021. This came despite the fact that growth in the local economy remains anaemic outside of select sectors, whilst the unemployment rate is at an all-time high.

The graph below illustrates how the local market is seen as being cheap on the “price to book” metric.

 

 

Another valuation metric which fund managers use is the “price to earnings ratio” which also flags the local market as being cheap despite the recovery from its March 2020 lows.

The chart below compares the price of the local market against that of the world equity index. The local market again looks very attractive relative to global equities based on how cheap they are.

 

 

Despite the cheap valuations and the fact that South Africa is a large benefactor from the demand for resources, fund managers such as Prudential, Foord, Coronation, Allan Gray and countless others have expressed their concerns around the local economy and poor governance.

A recent article published by Allan Gray titled “Key questions that advisers and clients are asking” addresses the typical concerns around the local economy and market opportunities.

Despite the concerns regarding the local economy and poor governance, asset managers believe that there is a margin of safety in the discounted share prices of select companies. The global demand for resources continues to provide support for resource shares which constitute a relatively large portion of our market.

 

OUTLOOK (LOCAL)

South Africa continues to make progress in its vaccination campaigns. The threat of a fourth wave looms as medical experts suggest that we may enter the next wave of infections in November/December. This could lead to further restrictions being imposed on high-risk areas which could result in further economic distress for local businesses.

The local election which is due to take place on the 1st of November could result in a shift in leadership within several municipalities as the forecasts suggest an ANC victory with less than 50% of the votes. This would signify the largest loss by the ANC since 1994. The results of the election may cause heightened volatility particularly in the local bond market. The volatility in such an election is however, to be expected.

With regard to the local economy, several fund managers and economists have suggested that the effect of a fourth wave coupled with loadshedding may further exacerbate difficult economic conditions. Interest rates are also set to increase marginally in the fourth quarter. This could signify the start of a period where interest rates may gradually rise over the next 18 – 24 mont

 

OFFSHORE MARKETS IN A NUTSHELL

Global equity markets had a volatile quarter, returning 0.58% over the period.

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

*Performance as of 30/09/2021

Developed markets returned 0.58% whilst emerging markets fell by 8.09% over the quarter.

The US Federal Reserve Bank suggests that the US economy has healed enough for the central bank to begin to withdraw its crisis-era support. Simply put this means that the US Federal Reserve Bank will begin to reduce its monetary support within the bond market. Typically, this has led to periods of heightened market volatility.

Chinese markets reacted negatively on the back of a state led crackdown on Chinese tech companies during the month of August. This was further exacerbated when “Evergrande”, one of China’s largest real estate developers failed to make interest payment on its debt. This resulted in a significant sell off in Chinese assets as well as emerging markets.

 

China and the US lead global economic recovery

For most stock markets the returns since the beginning 2020 have been very attractive with double digit returns despite the Covid crash and ensuing lock downs. The US market has led the way with the highest return of the G20 countries. Economic recoveries are, however, less synchronised than the broad market recoveries.

The chart below shows the stock market recoveries by country in orange whilst the blue bars shows the change in the country’s growth (GDP) relative to where it was at the end of 2019.

 

 

With the exception of China and the US, other major economies have yet to recover to pre-pandemic levels.

The chart below illustrates where Fidelity believes the respective countries are in their economic recovery cycle.

 

Source: Fidelity

 

The illustration indicates to investors that despite the forecasts for slower global growth, economic growth remains positive going forward.

Jurrien Timmer, Director of Global Macro at Fidelity notes that historically the transition from the early-cycle to the mid-cycle is characterised by a period of slower (but still positive) returns as a result of slower (but still positive) earnings growth. Simply put the returns from the initial recovery (early cycle) were steep whilst the mid-cycle is likely to be less acute, even though returns remain positive.

Jurrien also notes that with the transition from early-cycle to mid-cycle comes the “occasional wobble, but these are just corrections in a cyclical bull market.”

FORWARD OUTLOOK (OFFSHORE)

The outlook for global markets remains positive. Higher volatility is to be expected as the global economy enters the “mid-cycle”. There is a concern that further regulatory crackdowns in China could impact company earnings, particularly in the tech sector. The consensus is that the regulatory concern is somewhat overstated but nevertheless adds to the general market volatility.