Two steps forward, one step back
Asset markets posted a respectable end to a challenging year, as most indices more than recouped the substantial March drawdowns. Yet this was largely thanks to extraordinary monetary and fiscal policy stimulus rather than a return to normal. To be sure, the real recovery is ongoing and remains far from even. The confirmation of a more virulent strain temporarily dampened the relief that came with the initial vaccine rollout in developed countries. Yet equity markets were unperturbed by the surge in infections and renewed lockdowns across the world. It is worth remembering that the equity market is not a direct reflection of the economy and in the real world, the recovery is still a case of two steps forward, one step back.
The final stretch of 2020 contained important political and geopolitical events. In the US, the Electoral College confirmed Biden’s presidential victory, much to the dismay of Trump and his supporters. The Senate passed a bipartisan stimulus package worth $900bn, which was finally signed by outgoing president Trump, despite not getting his way with a $2000 stimulus cheque. The EU and China signed the long overdue but still contentious Comprehensive Agreement on Investment, which is a potential policy blueprint for the Biden administration to rehabilitate the relationship with Beijing. And, at long last, the UK left the EU with a trade deal.
On the local front, the summer holidays were bittersweet. Data releases were by and large encouraging, as Q3 GDP printed a whopping 66.1% jump (on an annualised basis), even if the economy was still 6% smaller than a year ago, the current account posted the largest surplus (at 5.9% of GDP) in 32 years, and the rand raced to 14.50 versus the US dollar. Even the fiscal data suggested that the worst of the lockdown hit is in the base, as the preliminary figures show a R6bn budget surplus for December, only R2bn wider than the average over the prior three years. Yet ANC Secretary General Magashule remains in his position, despite the party’s Integrity Commission recommending that he step aside. The second wave of Covid-19 infections has again laid bare the inadequacies of the public health care system, while also forcing beach closures and a return to Lockdown Level 3 with a renewed booze ban.
Based on the PMI and other high-frequency data, SA’s GDP should have increased a further 9% in 4Q20, leaving full year growth at -7%. However, reduced mobility and business restrictions are downside risks to Q1 GDP, which is usually a weak quarter due to the growing impact of Black Friday on Q4 sales. With a possible Q1 GDP contraction, there will be renewed pressure on the SARB to cut the repo rate again, but the rand is no longer overvalued, the oil price is notably higher, and fiscal risks have not dissipated. As such, the monetary policy outlook remains highly uncertain. Greater policy leeway will be enabled by the accelerated structural reforms. In addition, the successful, transparent, and wide rollout of a vaccine in South Africa will be crucial for a sustained recovery.
SA markets posted a reasonable performance in the final month of the year, as all major asset classes managed to outperform cash (0.3%). Listed property (13.7%) beat equity (4.2%), followed by fixed-rate bonds (2.4%) and inflation-linked bonds (2.2%). The stronger rand (5.3% versus the US dollar) would have diluted gains in offshore equity and commodity allocations. For the calendar year 2020, most asset classes more than recouped the substantial March losses as fixed-rate bonds (8.6%) and equity (7.0%) beat cash (5.4%), while inflation-linked bonds (4.2%) underperformed and listed property (-34.5%) declined outright. Notwithstanding the strong final quarter, the rand did not manage to fully recoup its Covid losses, ending the year 4.8% weaker.
Dollar weakness continued in December as the vaccine rollout and positive data surprises trumped concerns regarding a more virulent strain of the coronavirus. The Electoral College confirmed Biden as the victor, while the much anticipated US$900bn stimulus package put further pressure on the dollar index, which lost 2.1%. Improving risk appetite, the ongoing recovery, and the weaker dollar supported commodity prices in general, while oil received a fillip from slower output normalisation. EM FX gained 2.3%, on average, with the Chilean peso (7.8%) and the rand (5.3%) being relative outperformers. USD/ZAR ended the year at 14.67, around 5% overvalued based on our 15.50 – 16.50 broad fair-value range.
The US 10-year yield was stable around 0.90% during the month, while demand for inflation protection pushed the 10-year TIPS yield below -1%, widening breakevens to almost 2.0% – the highest in just over two years. EM external debt gained 1.8%, while local markets rose by 3.5%, in part thanks to the FX rally and demand for high-yielders. SA’s 10-year yield declined by 24bp, leaving the market broadly fairly valued. Breakeven inflation temporarily widened intra-month amid a rally in ILBs and despite the stronger rand. The bond market was supported by substantial coupon flows, as well as increased demand from non-residents who bought a total of R20bn worth of bonds, according to JSE statistics.
DM equity markets lost some momentum in December due to surging Covid-19 cases and renewed lockdowns, as US fiscal stimulus and a Brexit trade deal transpired only late in the month. The MSCI World Index rose by 4.2% (total return), while the MSCI EM Index gained 7.4%. The MSCI South Africa Index returned 9.8%, while the ALSI and SWIX posted modest performances of 4.2% and 4.0%, with a wide-ranging sectoral distribution. Basic materials (9.4%) – notably platinum (20.8%) and industrial metals (18.2%) – and financials (8.3%) outperformed during the month, benefiting from the combination of higher commodity prices, the stronger rand, and lower yields. Consumer services (3.2%), industrials (2.0%), health care (1.9%), and consumer goods (1.3%) posted modest gains, while technology (-3.5%) and telecoms (-4.0%) declined outright. The negative impact of surging Covid cases and greater restrictions was evident in sub-sectors such as travel and leisure, construction, and industrial transport. According to JSE figures, non-residents turned net buyers (totalling R15bn) of SA equities in December for the first time since June 2019. While domestic risks are elevated, the local bourse is screening cheap relative to history and versus the EM peer group amid another round of positive earnings revisions.