Local markets
SA spent January under lockdown level three instituted by the government amid a resurgence of Covid-19 caseloads fuelled by the highly transmissible coronavirus variant, 501Y.V2.
However, investors shrugged off this negative narrative and pushed both local bonds and equities higher. Equities led, with the JSE Capped SWIX Index gaining 3.08% for the month. Most underlying JSE sub-indices finished in the green, led by tech stocks which were up 14.54%. Resources jumped 5.12%. Property stocks were laggards dropping 3.12%. The bond market was led by the Composite Inflation-Linked Index, which gained 2% amid inflation fears. The All-Bond Index and Stefi rose 0.71% and 0.29% respectively.
On the data front, the ABSA Manufacturing Purchasing Manager Index rose marginally to 50.9 points in January compared to 50.3 printed in December 2020. The extension of lockdown restrictions and load shedding dented the print. SA’s Consumer Price Index came in slightly lower at 3.1% in December 2020 from 3.2% in November.
The year is set to be dominated by vaccine rollout which will see some economies on the path to recovery, though at different paces. The recent fumble by the Department of Health in the procurement of vaccines means SA is going to be one of those countries that will lag. The effective Johnson and Johnson vaccine is set to arrive in the country during this month, having shown an efficacy of 85% against severe COVID-19 cases.
With a global recovery well under way, we expect SA inflationary pressures to increase as the CPI basket is directly and indirectly exposed to oil prices. That said, short-term inflationary risks emanating from higher oil prices seem to be contained by the limited currency pass-through as the rand has been strong relative to the dollar.
Given this backdrop we do not see the SARB reversing its accomodative monetary policy stance. In its last meeting, the SARB kept rates unchanged at 3.5%, albeit raising concerns about SA’s fiscal risk impact on the exchange rate mechanism.
With the National Treasury annual budget around the corner in late February, investors will know for certain whether the National Treasury delivered on its promise to curtail government spending. The National Treasury’s fiscal consolidation drive was bolstered by last year’s wage bill outcome in the Labour Court which went against unions. The court outcome, albeit being contested, boosts Tito’s ambition to cut government spend by R300bn over the three years to end 2022. However, fiscal consolidation alone will not be enough for SA. The National Treasury and the national government should address the anaemic growth trajectory of the country to boost future revenue collections. An overhaul of
the financially burdensome state-owned enterprises is also necessary.
We expected nominal bonds to react to the event risk ahead of the budget, with most of the volatility captured in the long end of the curve. Equities on the other hand are likely to continue tracking prorisk sentiment.
Global markets
The outcome on the global market was the opposite of what happened on the JSE as both global equities and bonds were sold-off by investors.
The MSCI World Index, which represents a large portion of global equities, kicked off January on a good footing supported by an accommodative policy regime and the rapid rollout of vaccines but gave up all its earlier gains and ended the month 1% lower.
Investors seem to have been raffled by the proposal of an additional $1.9tn fiscal stimulus over and above the $900bn passed in late 2020. Growing fears that the excessive fiscal stimulus will overheat the economy. The markets were also spooked by a knee-jerk reaction to a couple of short squeezes in the small-cap segment of the US equity market. Interestingly, both the MSCI Value and MSCI Growth fell by 1% each showing that the sell-off was style indiscriminate.
The MSCI Emerging Markets Index was a bit defiant as it gained 3.1% for the month. However, most of the index’s gains came from Chinese equities, which jumped 7.4% in US dollar terms. Otherwise, most emerging markets had negative returns. The convincing performance by Chinese equities came on the back of upbeat economic data that shows that the second-largest economy grew at a faster-than-expected pace in the fourth quarter of 2020, concluding a Covid-19 stricken year in good shape.
China’s gross domestic product (GDP) grew by 6.5% which was higher than growth of 6.1% which was expected by the market. China’s recovery is being supported by domestic and external demand. It is benefiting from the normalisation of trade and robust demand for healthcare and technological supplies.
Contrary to emerging market equities, emerging market debt underperformed developed markets’ debt. The J.P. Morgan EMBIG lost 1.2% against the Barclays Global Aggregate Bond Index, which dipped 1%. Investors continue to hunt for yield as the BofA/Merrill Lynch US High-yield Constrained and the BofA/Merrill Lynch EU Non-Financial Highyield Constrained both finished 0.4% higher.
While equities and some high-yield bonds took a knock in January, we remain constructive on most risk assets, particularly US cyclical stocks. The US economy is poised for a sharp rebound in 2021 supported by an acceleration in consumer and government spending buttressed by a successful rollout of vaccines and an easy monetary policy. The US Federal Reserve Bank left interest rates unchanged in its January meeting reaffirming its commitment to support markets. The liquidity provisions of at least $80bn and $40bn within the treasury and agency mortgage-backed securities will be maintained, respectively.
This backdrop is supportive not only of US equities, but Global risk assets as well. China, Taiwan, and South Korea are well positioned to benefit from the normalisation of global trade. However, we have a cautious view on Chinese equities which we feel are stretched.
The Covid-19 vaccination race is also progressing well, which is good for markets. The UK and the US are leading in developed markets. The Eurozone had a poor start but is catching up. So while caseloads may continue surging we see investors remaining focused on the progress around the rollout of vaccines.