Market Commentary




4Q20 Market Commentary

By Shoaib Vayej – Portfolio Manager

Global Overview

Vaccine Race

The last quarter of 2020 witnessed the resolution of several uncertainties for markets including the United States (‘US’) Presidential election, the exit of Britain from the European Union with a trade deal and the rapid development of several vaccines to counter the COVID-19 virus. While waiting for widespread vaccinations, any recovery of economic activity is inextricably linked to the trend in COVID-19 infections and any restrictions imposed to contain it. The current waves of infections and the associated restrictions are depressing economic activity.

Global growth is expected to be strong in 2021, mirroring the severe recession of 2020. Activity is expected to recover to 2019 levels through 2021, which indicates that COVID-19 has cost two years of Gross Domestic Product (‘GDP’) growth notwithstanding record levels of fiscal and monetary stimulus. Despite China being the origin of the virus, it is also likely to be the only major economy to show any economic growth in 2020. Generally, the Western hemisphere was disrupted more than the Eastern hemisphere, accelerating the pre-COVID-19 trend.

November 2020 witnessed the US presidential election. The Democratic nominee, Joe Biden, prevailed over the controversial Republican incumbent, Donald Trump, in-line with the polls leading up to the event. This change in leadership is positive for the country’s foreign relations and multilateralism generally. Early in 2021 the Democrats won two Senate run-offs which granted them control of both houses of congress, enabling the new administration to implement the party’s agenda smoothly. This agenda is characterised by increased fiscal stimulus and a tolerance for higher fiscal deficits. Before his inauguration, the President Elect Biden announced $1.9 trillion (‘tn’) in new stimulus in addition to the $3.0tn passed at the onset of the pandemic and the $900 billion (‘bn’) announced in December 2020. The major components of the new package are household stimulus, unemployment insurance and additional aid to state and local governments. Repeal of the 2017 tax cuts will fund some of the added spending. Former Chair of the Federal Reserve, Janet Yellen, was nominated to head the treasury and she is likely to be supportive of accommodative fiscal policy.

After numerous delays, the United Kingdom (‘UK’) was able to successfully negotiate a trade deal with the European Union (‘EU’) on the eve of its departure from the EU at the end of 2020. In the long run BREXIT is expected to reduce UK GDP by more than 5%, due to regulatory changes affecting goods and services and a reduction in investment. In return the UK now has more regulatory autonomy. The currency remains more than 10% weaker than the Euro relative to its level before the BREXIT referendum and at multi-decade lows. In turn, the EU also approved a €750bn recovery fund to stimulate its own recovery.

The Chinese economy grew in 2020 given its successful containment of the pandemic, strong exports, and targeted stimulus particularly through investment. A fading level of stimulus in 2021 will require a handover to consumption to sustain high levels of GDP growth. 2021 is symbolically the 100th anniversary of the ruling Communist Party and will see the release of the next 5-year plan as well as President Xi’s 2035 vision.

November 2020 also saw the announcement of three viable vaccines to protect against COVID-19. Approvals have been accelerated and vaccinations have already begun in some countries. Thus far Israel leads with the roll-out having vaccinated almost a quarter of its population. Of the major economies the UK and the US have vaccinated just under 5% of their populations. Most major economies have pre-ordered significant volumes of vaccines that cover the portions of their population which is at high risk. Several mutations of the vaccine have been detected more recently with increased severity, particularly in the UK and South Africa (‘SA’), but the current suite of vaccines seem effective against these new strains thus far. Future mutations that render these vaccines ineffective remain a risk. If relatively poorer countries are unable to secure and roll-out vaccines, there is a risk that inequality deepens further.

The SA economy is expected to underperform the global economy through this crisis, accentuating the pre pandemic trend. Unlike the global economy, the South African economy is only expected to regain less than half of the economic growth lost in 2020. This is primarily due to a lack of fiscal space to counter the negative impacts of the pandemic and associated lockdowns. Electricity shortages and a weak sub-investment grade sovereign credit rating remain impediments to growth. While the government laid out a R500bn aid plan to offset the impact of lockdowns, much of the R200bn loan guarantee scheme remains unutilised. Officially the number of infections is 1.3 million with an associated 35,000 deaths. However, statistics from the Medical Research Council show that excess deaths are almost twice those attributed to COVID-19. Towards the end of the year the government increased restrictions in response to a second wave of the Corona virus that has surpassed the first wave in terms of infections and fatalities. These narrower restrictions are likely to mainly impact the travel and hospitality as well as the alcohol sectors. Talks are underway to extend the Temporary Employer / Employee Relief Scheme (‘TERS’) benefit for affected employees. The country has also been widely criticised for its inability to secure sufficient doses of vaccines to achieve herd immunity, estimated at two thirds of the population or 40 million people. While SA remains part of the COVAX initiative, it has only secured vaccines for 10% of the population. In addition to COVAX, vaccines are expected early in 2021 for the 1.5 million front line (health) workers.

The political and vaccine breakthroughs in the last quarter of the year boosted markets, despite a significant drop in earnings. Global markets ended the year up more than 16% with most of those returns delivered in the 4th quarter. Market breadth was extremely narrow and driven mainly by growth stocks. From a sectoral perspective globally, the best sectors were information technology, communication, and consumer discretionary, all beneficiaries of changing behavior during the pandemic as well as the ultra-low interest rates. The weakest sector was energy which suffered from very weak commodity prices due to mobility restrictions. The euphoria of the last quarter saw a change in market leadership with emerging markets and cyclicals outperforming significantly.

SA lagged world markets significantly ending the year slightly down in US Dollar terms but delivered small real returns when factoring in Rand weakness. Market returns were narrowly driven by mining companies and the Naspers/Prosus stable. The weakest sectors were travel & leisure, chemicals (‘Sasol’) and property. Size was also a strong factor with the market being driven by larger multinationals with the small and mid-caps lagging. The last quarter saw some reversal of market leadership with Sasol rallying on self help progress and higher oil prices. Gold miners retraced on a falling gold price and strengthening Rand.

Equity market conditions appear supportive into 2021 due to improving economic growth and extremely supportive monetary and fiscal conditions. However, the market has re-rated significantly and is therefore susceptible to any shocks such as a longer than expected vaccine roll-out and further pandemic led disruptions. The widening of market breadth and change in market leadership should benefit Afena client portfolios, given our consistent value-based investment philosophy