Fourth quarter of 2020 commentary
2020 was an excellent, albeit a volatile environment for equities. Financial markets performed well for the year (especially during the 4th quarter), despite the physical economy experiencing one of the worst recessions in living memory. Continued fiscal and monetary stimulus combined with the prospect of vaccination programs being rolled out in most countries, is providing the backdrop for this vigorous ‘risk’ appetite. The rebound in economic growth, which is now evident should continue into 2021.
Performance summary charts
The charts below highlight the performance of selected markets for 2020.
Source: MSCI, Datastream, Morgan Stanley Research, Bloomberg and Visio
As we start 2021, we know that the pandemic, its impact on our economies and societies is not going to go away anytime soon. The unprecedented fiscal and monetary policy response of last year seems set to continue for a longer time, possibly well into 2022. Economies will slowly reopen and resume toward some level of normality, depending of course on the success of the vaccine take-up and the stability of the virus itself (consider the mutation risk). Growth levels year-on-year will be higher than usual due to the low ‘base’ effect of last year. Returning to pre-COVID levels of activity will be the key focus-point. Geographically, China and Asia and possibly also the USA are expected to get there this year, with the European Union only likely to find that level of activity in 2022. South Africa’s road to recovery will be longer, possibly only 2024, depending on policy response and potential structural reforms.
Typically, a reflationary environment is characterized by, dollar weakness, rising commodity prices and high long-term bond yields. This points to investment opportunities away from the USA and the dominance of the large technology sector. A broader geographic and sector spread, including emerging markets are currently presenting attractively priced alternatives. Over the past quarter some of these new trends have already emerged with strong non-US market performance, value stocks regaining favour ahead of growth stocks and small caps beating large caps for a change.
Stimulatory monetary policies now have the momentum to drive asset prices somewhat further. Ultimately however, central bank support will slowdown and the prospect of rising inflation may become inevitable, but for now, the outlook for risky assets is attractive. This game is, as we all know, not without risk as stock valuations are creeping up.
The first chart below highlights the strong performance of the top 10 US companies, including Apple, Microsoft, Amazon, Facebook and Google, when compared to the rest of the S&P 500 index. The second chart demonstrates a similar picture when comparing the US to the rest of the world. The valuation discrepancy may be at an inflection point away from large cap US stocks and is worthy of some consideration.
Source; FactSet, MSCI Standard & Poors, JP Morgan Asset Management
The South African economy will benefit from the recent stimulus and current commodity rally, but sluggish domestic growth and the significant level of public debt to GDP is a major concern for the long-term outlook. A weaker US dollar may help keep the ZAR stable in the short-term, but the structural challenges facing the economy does not provide a strong fundamental anchor through time.
Interestingly, the valuation gap between South Africa and it’s emerging market universe is now over 30%, the biggest discount in 22 years, as shown in the chart below. Earnings expectations for the resources sector a key factor to consider.
Source: Thomson Reuters, IBES, RMB Morgan Stanley
Stimulatory response still supports our view of equities as being the preferred asset class. As mentioned, this is not without risk and careful diversification and stock selection are vital during periods of uncertainty. We continue to identify stock selection opportunities, both locally and abroad, A robust business model that can endure the current market conditions with balance sheet strength are core to providing confidence in an investment decision.
Each component in the portfolio construction is working to ensure the risk and return characteristics of your assets are optimal. We are pleased to note that returns in these extremely volatile times have remained robust, with volatility kept to a minimum.
Thank you for your interest. We welcome any feedback or questions.
Oliver, Ulf, Vanessa and Warren