Ninety One Market Review – Quarter ending 31 December 2020

A macroeconomic recap of the month and financial market performance.

Jan 11, 2021

9 minutes

A macroeconomic recap of the month and financial market performance.
"How the market reacts to news is more important than the news."

Global market performance

The fourth quarter got off on the back foot in October as fears of another round of lockdowns swept through markets, amid surging coronavirus (COVID-19) infections throughout Europe and the US. The penultimate month, however, saw a tidal shift in sentiment as the outcome of the US presidential elections, positive news on the vaccine front, better-than-expected corporate earnings, and encouraging economic data, combined to fuel risk appetite and a rotation in growth. This positive momentum carried through into December, however, the new COVID-19 mutation discovered in the UK, the resurgence in infections across regions and the reintroduction of stricter lockdown measures have led to a return of COVID-19 angst in financial markets, and what this all portends for the global economic recovery.

Overall, equity markets outperformed fixed income. Emerging market (EM) stocks (MSCI Emerging Markets Index, +19%) ran ahead of their developed market (MSCI Developed Markets Index, +13%) peers over the quarter against a backdrop of an improved cyclical recovery, dollar weakness and increasing activity at the ports. Regionally, US equities reacted positively to Joe Biden’s election victory and the limitations of a divided congress in raising taxes and ramping up regulation – the benchmark S&P 500 Index ended the quarter up a robust +11.1% and +16.3% for the year. The tech-heavy NASDAQ Index was, however, the standout performer in the US as it advanced +43.6% over the year. Across the Atlantic, the global pandemic defined the winners and losers on the Euro Stoxx 600 (+17.2%), as consumer companies and technology sectors excelled, while oil heavyweights, travel and leisure, brick-and-mortar retail, and banking stocks were laggards. The value rotation back into cyclicals led Asian markets over the fourth quarter. Approval of the first COVID-19 vaccine for public use and positive economic data lifted mainland China’s benchmark CSI 300 Index to a close of +18.3%, while Japan’s Topix gained 13.5% over the same period.

In yield-oriented markets, sovereign bonds delivered robust performance over the year on the back of never-before-seen monetary stimulus largesse and the trend lower in yields across most regions. Over the quarter, German bunds (+0.3%), UK Gilts (+0.6%) and Italian BTPs (+2.7%) all recorded positive gains, while US Treasuries (-0.8%) lost ground. The Bloomberg Barclays Global Aggregate Bond Index ended the quarter up 1.8%. The risk-on mood also played out in global credit markets as high yield outperformed investment-grade. Nonetheless, the world’s largest digital currency, Bitcoin, was the standout performer in 2020 amid growing belief among retail and institutional investors of cryptocurrencies becoming a mainstream asset class which can serve as a potential inflation hedge despite its historic volatility. The asset class rose by more than 50% in December, and more than 300% over the year, breaching the $29,000 level on 31 December 2020.

All returns are quoted in US dollars.

United States

The US economy continued to grapple with an unrelenting surge in COVID-19 cases over the quarter, which continued to dampen the outlook for the economic recovery. The labour market is expected to show a contraction for the year when the latest jobs report is released on 7 January. October also saw a marked deterioration in consumer spending, while jobs growth in November also reflected a significant slowdown. Congressional lawmakers finally reached an agreement on the long and desperately awaited pandemic-relief bill in the final days of the quarter, with an expected US$900 billion teed up for pandemic-stricken firms and households to help them through the first half of this year. On the monetary front, the US Federal Reserve (Fed) Federal Open Market Committee (FOMC) kept the Federal funds target range at 0.00% - 0.25% throughout the quarter. Going forward, the incoming Fed presidents who have made it to the Fed’s interest-rate setting panel have given the FOMC a marginally more dovish tilt and further strengthened the ‘lower-for-longer’ mantra – even in the likely event that vaccinations and fiscal stimulus provides a shot in the arm for the US economy in the second half of 2021. In politics, Joe Biden comfortably secured victory in the presidential elections, securing 306 electoral votes to Donald Trump’s 232. Donald Trump has nonetheless refused to concede that he lost the election, despite Biden set to be installed in the White House on 20 January.

Euro area

Europe remained a large contributor to global COVID-19 infections in recent months, and the impact of the resultant lockdowns reflected in frequent data emanating from the region, with the bloc poised to end the year in double-dip recession. The German economy has fared relatively better given softer restrictions at the outset of the pandemic and its exposure to the Chinese economy, while France and Italy, which are heavily reliant on tourism suffered severe consequences on account of lockdowns. The gap between services and manufacturing purchasing managers’ indices (PMIs) was a theme throughout the quarter, as the former suffered from pronounced weakness in travel, hospitality and other consumer-facing sectors, with service providers reporting extremely weak demand. On the monetary front, the European Central Bank (ECB) announced several policy adjustments on the back of persisting headwinds from the second wave of infections sweeping across the currency area. The central bank increased its asset purchases by €500 billion to €1,850 billion and also extended the purchase period by a further nine months to end of March 2022. In politics, European Union (EU) members eventually reached a détente on the union’s landmark post-pandemic recovery package after Hungary and Poland (which had initially vetoed the package) eventually withdrew objections to a new mechanism which tied payments to upholding the rule of law.

United Kingdom

The UK economy expanded by an upwardly revised 16% in the three months ending September 2020 from the initial estimate of 15.5% over the third quarter – slightly coming in below consensus expectations of 15.8%. While this rebound recouped some of the lost output in the second-quarter contraction, GDP growth remained below pre-pandemic levels, even before the reintroduction of lockdowns in November. Data throughout the fourth quarter further confirmed that the UK economy sustained a harder blow from COVID-19 than other major economies in the region, with GDP cumulative declines coming in at twice the magnitude relative to countries such as France, Germany and Italy. The data also reflects the uneven nature of the UK’s recovery, with household consumption running ahead of fixed investment. The furlough scheme acted as an important shock absorber for households and labour markets throughout 2020, and the UK government announced the extension of the scheme to the end of March 2021 as a result. Government borrowing is forecast to rise to World War II levels, reaching £384 billion in 2020 (19.4% of GDP). The Bank of England’s (BoE) efforts to keep gilt yields low has, however, offered some shade for the UK government to sustain its relief borrowing. The BoE’s Monetary Policy Committee (MPC) expanded its asset-purchase programme by an additional £150 billion when it convened earlier in November, £50 billion more than anticipated and maintained the policy stance at its December meeting as was widely expected. On the eve of Christmas, the UK’s Boris Johnson and European Commission’s Ursula von der Leyen finally reached a Brexit trade deal following nine months of excruciating negotiations.


China’s economic recovery stayed the course throughout the fourth quarter, setting the world’s second largest economy on course to be the only positive growth story in 2020. Economic indicators pointed to strong growth in fixed investment, consumer spending, and industrial output, which further bolstered labour markets. The manufacturing PMI fell to 53 in December from the decade-high 54.9 in November, coming in below consensus expectations of 54, but still marking the eighth consecutive month of expansion in factory activity. The industrial sector was first out the gates from the COVID-19 shock as authorities moved to quickly restore production and business activity earlier in the second quarter. The country’s economic recovery continued to gather steam on the back of robust global demand for exports heading into the festive season and credit-easing policy by the People’s Bank of China (PBoC). With the economic recovery well on track, policymakers have recalibrated their focus to long-term growth objectives and discussions on potentially unwinding the stimulus measures introduced in 2020. The PBoC announced in a report late in November that it would keep “normal” monetary policy for as long as required, while the Chinese Communist Party’s Politburo has urged government to bolster domestic demand and to maintain growth within reasonable range.

South Africa

South Africa emerged from its longest recession in almost three decades, with GDP expanding by an annualised 66.1% in the three months ended September 2020 following a spectacular 51.7% free-fall over the April-June period. The reported figure by StatsSA was the biggest rate of expansion since South Africa’s transition from Apartheid to a liberal democracy. Under the bonnet, trade, manufacturing and mining did most of the rowing, following the relaxation of lockdown restrictions. The country’s current account posted its biggest surplus over the same period as exports rebounded following the easing in restrictions and muted import activity at the ports. Consumer sentiment, however, remained relatively subdued (especially the highincome category) over the fourth quarter despite the economic rebound and lifting of restrictions.

The South African Reserve Bank’s (SARB) MPC left key policy rates unchanged when it convened at its final meeting of the year back in November. The voting was consistent with the September MPC decision, with two members voting for a 25bps cut and three members voting to keep rates unchanged. This outcome was unsurprising even though inflation, particularly core inflation was revised 30bps lower for 2021 (core revised from 3.7% to 3.4%). The central bank upwardly revised growth to -8.0% for 2020 (from -8.25% in September) on the back of better-than-expected production data released for the third quarter, and projects a 3.5% expansion for 2021.

Following an uptick in COVID-19 cases, President Cyril Ramaphosa announced on the night of 28 December that the country will move to an “adjusted” Level 3 lockdown following a second wave of infections driven by the new COVID-19 variant, while also citing a lack of compliance to regulations by businesses and households as a key contributor to the rise in infections. The president also announced that vaccines would likely only be rolled out in the second quarter of 2021.

Commodity markets

The Bloomberg Commodities Index ended the quarter up a robust 10.2%. Risk-on sentiment fuelled robust price action from industrial metals, with iron ore a standout performer on the back of strong demand out of China and supply concerns in Brazil. Notwithstanding rising tensions among OPEC+ members during the quarter, Brent Crude and West Texas Intermediate prices rose 26.5% and 20.6%, respectively on positive vaccine news and an improved outlook for fuel demand. Gold endured weakness over the quarter as investors fled into riskier assets, but dollar weakness ensured the yellow metal closed out the year with its biggest yearly return in a decade.

Figure 1: 4Q 2020 % change (US$)

South Africa Market Review Commodity index

Source: Bloomberg as at 31.12.20.

Domestic market performance

South African equities had a strong finish to the quarter and year with the benchmark FTSE/JSE All Share Index up 9.8% and up 7.0%, respectively. At a super-sector level, financials (+19.4%) were the star performers over the quarter, followed by resources (+8.3%) and industrials (+7.4%). The local bond market delivered strong gains over the quarter and outperformed as EM assets benefitted from risk-on sentiment – the JSE All Bond Index ended the quarter a strong +6.7% and outperformed equities over the year (+8.7%). Listed property (FTSE/JSE All Property Index) bounced back strongly in the fourth quarter, rising 23.6%, albeit from a very low base, and still down 35.5% for the year. Cash, as measured by the STeFI Composite Index, returned +0.97% for the quarter. In currencies, the rand rallied 13.6% against the US dollar over the quarter, 9.4% against the euro and 7.8% against sterling.

At the sector level, it was a broadly a strong quarter across the bourse. Luxury goods maker Richemont and Anheuser-Busch InBev led consumer goods, which were beneficiaries of the heavy rotation into global cyclicals. As the reflation trade picked up and the global growth outlook improved, PGM and diversified miners lifted the resources sector higher – offsetting some of the weakness from gold miners (Gold Fields, Harmony Gold Mining Co., AngloGold Ashanti) which were among the worst performers of the quarter. Consumer services had a positive quarter, buoyed by domestically focused sectors such retailers and the resumption of travel & leisure following the lifting of lockdown restrictions. Banks went on a strong fourth quarter run as they continued to benefit from the tailwinds of a robust local currency over the period. Real estate went on a tear in November and December following vaccine developments, but this was not enough to overturn its worst yearly performance on record.

Selection of FTSE/JSE All Share Index stock performance

Name Index weight 4Q 2020 % return (ZAR)
Hyprop Investments 0.1 80.1
Impala Platinum Holdings 2.1 38.8
Capitec Bank Holdings 1.7 38.1
Mr Price Group 0.6 30.8
Mondi Plc 2.3 -3.5
British American Tobacco 2.0 -6.1
Mediclinic International 0.3 -7.4
Gold Fields 1.6 -32.3

Source: Bloomberg as at 31.12.20.

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