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Investment Perspectives – Fourth Quarter 2020

19 February 2021 Reza Hendrickse, Portfolio Manager at PPS
Reza Hendrickse, Portfolio Manager at PPS

Reza Hendrickse, Portfolio Manager at PPS

Ahead of the National Budget Speech taking place on Wednesday, 24 February 2021, here is a recap of Q4 2020 events from an investment perspective.

COVID-19 continued to dominate news headlines in the fourth quarter, as a new wave of infections emerged in several countries. South Africa and the United Kingdom experienced sharp rises in infections, surpassing the peak earlier in 2020.

The US elections were another key focal point this quarter, with Biden unseating Trump as US President, and the Democrats maintaining control of the House of Representatives and subsequently taking control of the Senate.

In Europe, a milestone was reached in the complex and drawn-out “Brexit” process, wherein the rules defining how the parties will engage going forward were agreed to at the eleventh hour.

In South Africa, economic growth data signalled a rebound in activity, the Medium-Term Budget Policy Statement presented by National Treasury contained no major surprises, and credit rating agencies, Moody’s & Fitch, downgraded South Africa further into junk status.

Why have domestic asset classes held up despite weak local conditions?

The SA equity market recovered impressively in 2020, supported by segments of the market that are not reliant on domestic conditions. Resources were a major contributor to returns in 2020 (PGM stocks in particular), with these companies having benefitted from firm demand and favourable pricing in their underlying commodity baskets.
SA bonds performed reasonably well, despite worsening fiscal debt metrics. The reality is though that, despite our challenges, our bonds are still an attractive investment and have enjoyed a tailwind from the global compression in yields and stagnant inflation.

Lastly, SA asset classes have also benefitted from firming global appetite for emerging market assets, and this could remain the case for the foreseeable future, particularly should the dollar weaken further.

Have foreign assets classes also performed well?

Foreign markets enjoyed a buoyant quarter, rising briskly into year-end. The US equity market even managed to end the year at an all-time high; a remarkable achievement in the face of a calamitous year of economic contraction and job losses.

Global equities took comfort this quarter from positive news regarding the vaccine rollout and the strong likelihood of continued monetary and fiscal stimulus, while the US presidential election also appeared to generate optimism.

Over the quarter we also saw some rotation into more cyclical areas of the market (considered “value”), such as smaller cap US stocks, which significantly outperformed large caps and technology focused counters.

How has the global economy fared?

Although equity markets have been quick to shrug off the collapse in economic activity this year, having risen above pre-pandemic levels, the global economy is yet to fully recover. The International Monetary Fund is forecasting a 5.4% rebound in 2021, however this will depend on a host of factors.

The ability for central bank and government support to filter into the real economy, and the potential for further stimulus being unleashed in the US, will be crucial and, in this respect, wealthier nations are better placed for a swift rebound. China will once again be an important driver of growth.

The vaccine rollout will also be a key determinant. Currently, there are a number of vaccines coming to market with efficacy rates of over 90%. Inoculating the population is a significant logistical challenge, and will be key to achieving “herd immunity”.

Despite this, there are still some risks in that many will be reluctant to take the vaccine, and further mutations could arise, which the current vaccines may not be able to protect against.

How is the domestic economy performing?

The domestic economy rebounded sharply in the third quarter, performing better than expected, as manufacturing, trade and mining activity picked up. National Treasury expects the economy to have contracted by 7.8% in 2020, followed by a more modest 3.3% expansion in 2021.

The rebound will be supported by constructive global conditions, a favourable commodity demand backdrop, favourable dollar dynamics, and low inflation and interest rates. It is noteworthy though that SA will likely grow at only half the rate of the emerging market universe.

In terms of interest rate policy, the Monetary Policy Committee of the Reserve Bank opted to keep the repo rate unchanged at their January meeting, and for now it seems that rates will remain anchored low for an extended period, offering an underpin to growth.

How are the portfolios positioned?


This quarter we added to the equity allocations across the relevant portfolios, with the tail risks to growth having subsided. Positive vaccine developments as well as the completion of the US presidential election, increased our conviction that the macro backdrop would show sustained improvement, supported by the accommodative policy backdrop. We are now neutral in our SA equity houseview positioning, and further overweight foreign equity, while SA cash has been downgraded to underweight given its unattractive proposition.
We have favoured foreign equity over SA for an extended period, and this remains the case for now, though there is an argument for a window of opportunity for SA equity. SA equity is more constrained than the global universe, and the long-term prospects are not as bright, however, valuations locally are undemanding and cyclical tailwinds are building. It is likely that we might continue to tactically and incrementally grow the domestic equity allocations.

The other high conviction views currently being expressed in the portfolios is our continued full weighting in SA bonds, both inflation-linked and nominal. These are offering attractive yields, both in relation to their own history as well as compared to cash, and offer adequate compensation for their risk. We are particularly constructive on inflation-linked bonds, which provide added protection against an inevitable upward recalibration of inflation.

The portfolios delivered encouraging performance over the fourth quarter as well as during this challenging year, testimony to a disciplined and diversified multi-manager process. Although it was not our base case assumption that a V-shaped recovery would transpire, the portfolios still participated favourably and remained competitive over this short period, building on their credible long-term track records.

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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