Feb 11, 2021
January witnessed the continuation of positive momentum in financial markets, despite weak economic data and political and social upheaval in the US and Europe. The first half of the month saw a resurgence in infections across regions, reinforced lockdowns, vaccine angst and US treasury yields rising above 1% for the first time since the COVID-19 outbreak, thus fuelling a rally in the dollar. Risk-on sentiment did, however, receive a shot in the arm in the second half as Joe Biden moved into the White House, while a dovish US Treasury Secretary and US Federal Reserve (Fed) Chair signalled more fiscal and monetary easing on the cards.
Nonetheless, most stock markets lost ground as the month drew to a close. Emerging market (EM) stocks (MSCI Emerging Markets Index, +3.1%) significantly outperformed their developed market (MSCI Developed Markets Index, -1.0%) peers over the month, buoyed by strong returns in China. Wall Street’s fear gauge (CBOE Volatility Index) shot up to its highest level since the March 2020 crash, as a group of retail traders inspired by Reddit posters drove up the share prices of the most heavily shorted stocks (such as GameStop and AMC Entertainment), causing some hedge funds to incur billions of dollars in losses as they were forced to unwind their positions. Regionally, the US benchmark S&P 500 Index ended January down 1.1%, despite reaching new highs during the month. Across the Atlantic, the Euro Stoxx 600 (-0.6%) was weighed down by vaccine squabbles and disruptions to supply, which raised investor concerns of extended lockdowns. Most Asian markets fared relatively better and positive economic data saw mainland China’s CSI 300 Index close +2.7% higher, while Japan’s Topix ended flat at -0.7%. In yield-oriented markets, sovereign bonds came under pressure in January with US Treasury yields (-1.0%) spiking following the Democrats seizing control of the Senate and the prospect of a fiscal deluge fuelling inflation concerns. European sovereigns remained in negative terrain, with UK gilts (-1.7%), German bunds (-0.5%), and Italian BTPs (-0.6%) ending the month lower. The Bloomberg Barclays Global Aggregate Bond Index closed 1.0% down for the period. Being no stranger to speculative mania, the world’s largest cryptocurrency, Bitcoin, saw its price shoot up as high as $38,627, ending the month up 19.5%. Tesla founder Elon Musk added fuel to the fire by simply adding “#Bitcoin” to his Twitter profile.
All returns are quoted in US dollars.
2020 saw the US economy record its first contraction since the Global Financial Crisis (GFC). Year on year (YoY), GDP shrank 3.5%, capping the worst performance since the year following World War II. The economy slowed from the robust 33.5% seen in the third quarter (Q3), only mustering an annualised 4% growth rate in Q4 against the backdrop of an unrelenting COVID-19 virus which has left the American consumer low on confidence and the labour market in distress. The economy shed 140,000 jobs in December, considerably above market expectations of 71,000, snapping the seven-month streak in jobs growth as the resurgence of infections took hold. Meanwhile, purchasing managers’ indices (PMIs) continued to show strength in January. On the monetary front, the Federal Open Market Committee (FOMC) kept the Federal funds target range at 0.00% - 0.25% at its January meeting with Chair Jerome Powell quelling fears of tapering and emphasising the need to keep policy supportive until the economy and the labour market recover from the pandemic. Newly minted US Treasury Secretary Janet Yellen struck a dovish tone following her confirmation, calling for the White House to “act big” now in order to avoid long-term “scarring” to the US economy. Republicans, however, have pushed back against President Biden’s push for a US$1.9 trillion stimulus package, citing concerns of a rising fiscal deficit. At the time of writing, the Biden administration and the GOP are yet to reach a détente on a stimulus package.
The rampant surge in infections across the area saw countries such as Germany, France and the Netherlands implement stricter lockdown measures, which will no doubt cause further damage to the region’s economy, and potentially lead to a double-dip recession. Meanwhile, the rollout of vaccines has been slow, meaning herd immunity will take much longer, while new mutations have become more virulent, posing risks to the efficacy of current vaccines. The tightening and extensions of lockdown measures has also seen protests and non-compliance taking hold in certain countries, as citizens and businesses become increasingly frustrated at their governments’ seeming inability to get the virus under control, speed up vaccine rollouts and provide financial support. Political upheaval is never far away in the European Union (EU), and January saw Italy – the most severely impacted EU economy by COVID-19 – face political upheaval as a key coalition member pulled its support over disagreement on how to tackle the country’s economic recovery. Elsewhere, the Netherlands (another country struggling to manage the health crisis) saw its cabinet resign en masse over a child welfare fraud scandal. All the above paints a much weaker outlook for the bloc’s economy this year, carrying over into 2022. On the monetary front, the European Central Bank (ECB) Governing Council (GC) kept its policies unchanged, as widely expected. There were no changes to key interest rates, nor the Pandemic Emergency Purchase Programme (PEPP) or the Asset Purchase Programme (APP). ECB President Christine Lagarde noted that while the rollout of vaccines was a positive, the resurgence in cases, new variants, and resulting lockdown measures, and low inflation remain a concern going forward, and the ECB remains committed to reinforce support if need be.
The UK’s COVID-19 vaccination programme got off to a much better start relative to its European peers but a resurgence in infections and suggestions that the new so-called ‘Kent variant’ may be more transmissible than the original strain, compelled Prime Minister Boris Johnson to introduce a third national lockdown. The manufacturing PMI reading for January came in at 54.1, below December’s 57.5, reflecting the slowdown in the manufacturing sector on the back of supply chain disruptions and transportation delays at ports caused by COVID-19 restrictions and Brexit uncertainty, respectively. The services PMI recorded a sharp contraction from 49.4 in December to 38.8 in January – the third straight month of contraction, reflecting a pullback in business and consumer spending ahead of 2021. The labour market was a positive surprise, with the unemployment rate only rising to 5% in the three months to November 2020, versus economists’ projections of 5.1%. The new tougher restrictions and regressive PMI readings all suggest that UK GDP will drop off sharply in Q1, with a double-dip recession looking more and more a likely outcome. Attention will turn to the Bank of England’s policy stance, which is likely to skew towards more easing, with growth forecasts likely to be downgraded amid an uncertain economic outlook. This easing could come in the form of further cuts to the Bank rate (currently +0.10%) as talk of negative rates persists or increasing the pace of the bond-buying programme.
China’s economic recovery switched to a higher gear in January, according to an aggregate index tracked by Bloomberg. This, after registering 2.3% growth in 2020 (the only major country to have grown), driven largely by robust performance from industrial production, an export boom, property investments, a buoyant stock market and government spending, offset slightly by declining retail sales. 2020 saw the country make further inroads into its share of the world economy, with the year expected to see China’s economy account for 16.8% of the global economy, up from pre-trade war levels and further growth is expected this year, with consensus in excess of 8%. The quicker rebound from COVID-19 has also seen the consumer market become a primary driver of multinational companies’ earnings, while its standing in global financial markets has been further reinforced by record IPOs and listings in 2020, alongside large flows into equities, bonds and indices over the period. Coming into the new year, the resurgence in COVID-19 cases and reintroduction of containment measures in January has dampened sentiment, as seen in softer readings of manufacturing and services PMIs, while demand took a harder knock as Beijing clamped down on travel ahead of the February Lunar New Year festival. With the recovery well on track, the People’s Bank of China (PBoC) signalled in January that it is mulling rolling back some of the stimulus measures adopted to counter the effects of the pandemic. An adviser to the PBoC was noted in a symposium during the month advising government to remain alert to risks of bubbles in equity and property markets as it considers future policy moves, including greater regulation of the tech giants.
Despite an upward surprise in the manufacturing PMI in January (up to 50.9 from 50.3 in December), this reading still in came in lower than the average recorded over the final three months of 2020. The business activity index meanwhile declined for the fourth straight month as production activity suffered from extended lockdowns and interrupted energy supply from Eskom’s loadshedding. Headline inflation edged lower in December to 3.1% YoY from 3.2% in November. Core inflation remained steady at 3.3% YoY over the same period; the stronger rand in the second half of 2020 has helped keep inflation muted. Despite weakening over the first 11 days of 2021, the local unit has clawed back some of these losses and strengthened against the US dollar in recent weeks. This, alongside subdued core inflation should keep a lid on inflation over the short term. The IMF downgraded its forecast for South Africa’s growth this year to 2.8% from 3%, with the economy likely to have endured its worst contraction in decades last year, as lockdown restrictions kept the economy stuck in its longest economic downturn since war time, while rolling blackouts and the burden of flailing state-owned enterprises saw fiscal metrics deteriorate even further.
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) opted to keep rates steady at 3.50% p.a at its scheduled January meeting, with two members voting for a 25 basis-point cut and three members against. The MPC currently views risks to the local growth outlook to be balanced, but noted that constraints to energy supply, subdued investment and uncertainties surrounding the rollout of vaccines pose “serious downside risks to domestic growth”. SARB Governor Lesetja Kganyago noted in a Bloomberg interview late in the month that the central bank does have room to provide more stimulus in the event the economy takes another hit from a third wave of coronavirus.
The Bloomberg Commodities Index ended the month up 2.6%. Leadership from China’s economy continued to support industrial metals over the period, while oil prices climbed to the summit on the back of supply cutbacks and Saudi-Arabia announcing unilateral output reductions by 1 million barrels per day over February and March. Gold had its worst start to the year as the Fed held policy steady and investors considered the prospects of a global economic recovery.
Figure 1: November 2020 % change (US$)
Source: Bloomberg as at 31.01.21.
The South African stock market made its best start to the year since circa 2012, extending its winning streak to three consecutive months of gains. The FTSE/JSE All Share Index closed the month up a healthy +5.2%, with the Capped SWIX up 3.1%. At a super-sector level, industrials powered ahead (+8.4%), followed by resources (+5.1%), while financials ended in the red, down 2.6% over the same period. The JSE All Bond Index delivered a modest return of 0.71% with non-residents continuing to be net-buyers of local bonds, albeit at a reduced pace. Listed property (FTSE/JSE All Property Index) pared back gains, kicking the year off back in red territory as the All Property Index closed 3.0% lower. Cash, as measured by the STeFI Composite Index, returned 0.31% for the quarter. In currencies, the rand retreated against the US dollar, euro and pound sterling.
At the sector level, it was a broadly positive month on the bourse, albeit a mixed bag of returns across sectors. Richemont led consumer goods on the back of the strong recovery underway in China and a buoyant Chinese luxury goods market, while beverages weighed on the sector on account of the alcohol ban enforced by government. In basic materials; forestry & paper led the charge, with Sappi one of the top performing stocks, boosted by a rapid rise in dissolving wood pulp (DWP) prices, which has seen the counter rebound c.90% since mid-October; Chemicals and energy company Sasol was another sector highlight, helped by rising oil prices, while also reporting better-than-expected first-half earnings as solid performance on cost-cutting and capex offset the negative impact of COVID-19 on the oil market. Strong commodity prices continued to buttress the general miners, with index heavyweights BHP Group and Anglo American doing most of the heavy lifting. Healthcare was a standout performer, lifted higher by Life Healthcare’s positive voluntary trading update and Aspen Pharmacare, with the latter on track to produce the Johnson & Johnson COVID-19 vaccine in Port Elizabeth by end March/early April. Consumer services continued their winning streak, led by retailers on the back of impressive trading updates from the likes of Woolworths, Mr Price Group and The Foschini Group. On a more negative note, the weaker local unit proved to be a headwind for financials over the period.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||Jan 2021 %return (ZAR)|
Source: Bloomberg as at 31.01.21.