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Market Review – January 2021: A Mixed Start for Markets but Stimulus Welcomed

9 February 2021

Globally, all eyes were on the US Capitol as President-elect Biden took over the reins from Trump and revealed the details of his economic stimulus, infrastructure, climate change and other plans.

The first comprises additional expenditure of US$1.9 trillion, which will be entirely debt-financed. This is in addition to the approximately US$4 trillion announced in 2020. Over a two-year period, this will amount to nearly 15% of the GDP of the US. Shortly after his inauguration, President Biden also notified the United Nations that the US will be rejoining the Paris climate agreement and the president took action to impose a moratorium on oil leasing in the Arctic National Wildlife Refuge.

S&P 500 futures edged higher after the index posted its best first-day reaction to a presidential inauguration since at least 1937. The tech-heavy Nasdaq 100 Index jumped more than 2%.

However, for most of the month US markets were lackluster, following the release of disappointing data on retail sales in December. For the US, future output is looking more promising than for the EU. The latest PMIs from IHS Markit show that in both the US and in Europe manufacturing activity continues to grow at a healthy pace. The main difference between the two regions is in the services sector. European services PMIs are well below 50, indicating declining activity, while in the United States, the sector appears to be growing.

Also during the month, China released its 2020 GDP figures. Its full-year growth came in at 2.3% year-on-year in real terms excluding price fluctuations. Even though positive growth during a world pandemic is admirable, this is China’s lowest growth figure since 1976.

Locally, the spread between 20-year and two-year debt has risen 48 basis points over the past month, indicating that government would need to reward long-term investors in its bonds handsomely for the risk taken when committing capital for the long term. The steepening of our yield curve took place amid renewed electricity blackouts, a second wave of Covid-19 and seemingly a slower path to economic recovery.

South African retail sales fell 4% year-on-year in November following a revised 2.3% contraction in October. The Reserve Bank’s decision to keep the repo rate at its record low level of 3.5% was good news for homeowners, a growing segment in South Africa. According to ooba, home loan applications in the last quarter of 2020 rose 36% relative to the last quarter of 2019. On the other hand, more South Africans are battling to repay their unsecured debt, when using African Bank’s financial results as a litmus test. The bank stated that the pandemic and the nation’s moribund economy had caused credit impairments to soar 58%, resulting in a credit-loss ratio of 11.7% for the bank.

January – A Promising Start to the Year

For the third month in a row, SA equities as measured by the FTSE/JSE All Share Index (ALSI) had a strong run, returning 5.2% in the month of January. In contrast, following two strong months, SA listed property (as measured by the SAPY) gave back 3.2% in January. SA bonds (ALBI) gained 0.76% and cash (STeFI) returned 0.28%. On a sectoral basis, Basic Materials, Industrials and Financials returned 5.0%, 4.2% and -2.6% respectively.

The MSCI World Index returned 1.5% in rand terms for the month and the Bloomberg Barclays Global Aggregate Bond Index 1.6% for the month when converted back to rand. These positive returns were due to the weakening of the rand by 2.5% against the US dollar in January.

Over the Past 12 Months, Local Listed Property and Financials Are Still Bleeding

Over the past 12 months, the ALSI made quite a comeback with a positive 14.5% total return for the year. The disparities between different sectors are substantial, though. Basic Materials are up 31.8%, but Industrials and Financials (the latter a barometer of the local economic climate) are down 12.7% and 17.4% for the year. Listed property (at -34.6%) is the asset class that took the greatest tumble in the past year. The ALBI returned 8.2% for the year, and cash 5.1%. The rand weakened marginally (0.4%) against the US dollar and 10.0% against the euro over the past 12 months to end January. The MSCI World Index gave South African investors 15.9% in rand terms and the Bloomberg Barclays Global Aggregate Bond Index returned 7.25% in rand.

Longer Term, Not All Main Indices Managed to Beat Inflation

Over the past five years to January 2021, the ALSI returned 8.1% per year. On a sectoral level, Basic Materials returned a positive 25.2% per year. In contrast, Industrials and Financials lost 2.7% and 1.1% per year respectively. As the worst performer over this period, listed property (the SAPY) returned -8.5% annualised over the past five years. Bonds, as measured by the ALBI, at 9.6%, returned more than local listed equities. Cash gave 6.91% per year. on average over the past five years. The MSCI World Index (developed market countries) gave a 12.1% per year. total return and the Bloomberg Barclays Global Aggregate Bond Index returned 3.3% in rand terms over the past five years. Inflation averaged 4.6% per year.

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