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How will markets surprise investors this year?

17 February 2021 Adriaan Pask, Chief Investment Officer at PSG Wealth

Can global equity markets sustain the kind of prices they are enjoying now? This is the question many investors are asking. A lot of stimulus has been introduced on the macroeconomic side, and this is likely to continue in 2021. This environment is likely to be conducive to both economic and earnings growth.

Looking further ahead, we are concerned about fiscal debt and how that will unwind over time. Governments have been borrowing from the future and at some point, this will have to be addressed.

In South Africa, markets could surprise investors. At PSG Wealth we know things are looking dire from a growth perspective, but it does seem that valuations are very cheap and there is a significant opportunity for re-ratings. While confidence is very low, this can change very quickly.

Our interest rates remain low and will likely remain so for the rest of the year, while the monetary policy environment is conducive to a recovery. The big question, however, is around lockdowns and whether any stimulus that goes into the pocket of the consumer will ultimately reach the economy in an environment that is still riddled with uncertainty and lower confidence levels.

Globally, the environment bodes well for equities given the amount of capital being pumped into economies. Global bonds, however, should be considered more carefully, and some pain will likely be experienced down the line. Very low cash rates globally and high amounts of liquidity will have inflation consequences, and therefore investors should consider their choice of asset class carefully. Equities not only offer good prospective returns, but also make a lot of sense from an inflation-hedge perspective.

Local equity sectors

Locally, commodities and financials offer attractive prospects. Financials were sold down along with other sectors from March to April last year, but unlike others, have not really recovered. Therefore, there is probably some performance potential as many financial counters are currently very cheap. Commodities have done well but are still far behind their longer-term averages. With all the fiscal and monetary support around, we believe growth is on the cards and commodities could continue to do well.

Bonds

South African bonds have been offering good value as an alternative to cash investments. In the US yields are very low, and there is material risk. Therefore, migrating from a cash to a bond portfolio is not an obvious move as you might end up with a negative return. Dividend paying bond-proxy types of stocks are doing very well, but in South Africa we are fortunate that our bonds are yielding good returns. While there are significant risks to be mindful of, the probability of South Africa defaulting on bonds is very low. There are many uncertainties around, but bonds still seem quite mispriced. If a default does not happen as anticipated, this asset class is set to reward investors handsomely.

The rand

A surprise last year was the relative strength of the rand compared to other currencies. As South Africans, we tend to obsess about the rand, but the forces that move the dollar are more powerful than those that move the rand. The rand is far more susceptible to movements in the US dollar. The dollar weakening in the wake of more fiscal stimulus has benefited the rand. If, as seems likely, more stimulus flows into global markets, we might very well see a weaker dollar and a stronger rand. However, with emerging markets there is always a chance of negative surprises materialising and for that reason, diversification remains important.

 

Quick Polls

QUESTION

The Budget Speech 2021...

ANSWER

Certainly taxpayer-friendly, with tax increases being kept to a minimum
Realistic and in accordance with my expectation
Is welcomed news and will go a long way to bolster the economy and South Africa
I have mixed feelings… cutbacks and reprioritisations in government spending pose a significant risk and will come at a cost
Oh no! What about our booze and tobacco! Higher sin taxes
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