Apr 9, 2021
The world did not go gently into the new year; from the storming of the White House, to the Democrats’ Blue Wave, GameStop, Bitcoin breaching US$60,000, Impeachment, Suez Canal and so on and so forth. In financial markets, the dominant theme was that of the sharp rise in US Treasury yields, ignited by the US election Georgia Senate run-off victory for Democrats, which paved the way for a massive wave of fiscal stimulus by the incoming Biden administration. This, alongside the deluge of monetary stimulus since the onset of COVID, and the rollout of vaccines across regions, fuelled expectations as well as market angst of an accelerated return to ‘normalcy’ (and thus an earlier-than-expected normalisation of policy) – giving further impetus to an all-time classic cyclical rotation into value and small-cap stocks, which stand to benefit from a brighter economic outlook.
Equities had a strong showing in the first quarter of 2021 (Q1) amid bouts of volatility and frenzied trading in sections of the market. Overall, developed market stocks (MSCI World Index) rose 8.3%, while their emerging market peers (MSCI Emerging Markets Index, 1.9%) endured a tough spell during the quarter despite a solid start to the new year. Regionally, US equities, benchmarked by the S&P 500 Index (+6.2%), hit all-time highs during the period but just missed out on the 4,000 handle on the final day of the quarter. European markets also delivered solid gains, with the Euro Stoxx 600 (+4.5%), pushed higher by industrials and banks as yields continued to advance. In Asia, the Japanese Topix saw the quarter off on a positive note, up 1.1%, while mainland China’s CSI 300 Index closed in the red, down 3.5% amid tightening monetary policy and Beijing’s de-risking agenda. On the other hand, Q1 did government bonds no favours, with the US 10-year Treasury yield shooting up 0.836% over the quarter (yields rise as prices fall), the largest such rise since late 2016, as investors continued to offload bonds in anticipation of a robust global economic recovery and associated pickup in inflation. The sell-off contagion also played out in other markets as German bunds, UK Gilts and Italian BTPs all retreated. The Barclays Bloomberg Global Aggregate Bond Index ended the quarter down 4.5%.
All returns are quoted in US dollars.
The US economy continued to march forth over Q1; supported by rapid vaccinations, the rollback of restrictions on businesses, pent-up savings by American households, and massive injections of fiscal stimulus by the Biden administration. Consumer spending (which accounts for two thirds of US economic activity) quickened 2.4% in January, but cooled off somewhat in February as reflected in high-frequency debit and credit card data. Many economists, however, are looking past this February dip, and expect the stimulus payments disbursed to households to be another shot in the arm for retail spending and another boost to services sectors. The manufacturing purchasing managers’ index (PMI) was slightly revised higher to 59.1 in March 2021, marking it the second-fastest expansion in factory activity on record, while US service providers also experienced the fastest growth on record in March. The US Labor Department delivered a blockbuster jobs report showing robust hiring in the final month of Q1, with businesses adding 916,000 jobs (the most in seven months) and smashing consensus expectations of 647,000. US Federal Reserve Chair Jerome Powell noted that hiring is likely to pick up in the coming months, although the economy remains a long way from reaching full employment. The Fed’s policy committee kept short-term interest rates and the pace of its asset purchases unchanged, while upwardly revising its growth forecasts for 2021 to 6.5% from 4.2% in December – reflecting the better-than-anticipated pace of vaccinations and impact of the incoming US$1.9 trillion American Rescue Plan. The Fed also now expects inflation to breach its 2% target, but reiterated it views this as transient and due to temporary dynamics, but will react should it exceed its target over a protracted period.
While the US powers ahead, across the Atlantic, a third wave of infections, the glacial pace of vaccinations and the return of lockdown restrictions continued to take its toll on the region’s economy. The area’s dominant services sector continued to struggle under lockdown conditions, held back by the continued spread of the virus across the region. Incoming data suggests the euro economy is, however, tracking ahead of economist expectations in March, owing to the solid surprise in manufacturing output. That said, economists do not expect this robust PMI data to prevent the eurozone economy from posting its second consecutive contraction in Q1 (given the impact of tighter and extended social restrictions), which will see it slip into a technical recession. In light of this background, the European Central Bank (ECB) maintained its stance on combatting any tightening in financial conditions as it front-loaded its bond-buying programme to stave off the contagion of the debt selloff from across the Atlantic. In a divergence from the UK and US, the ECB is the only major central bank that committed to pushing back against rising bond yields. Bond yields and stock prices began to price in the likelihood of lost productivity over the coming months, with the gap between German bunds and US 10 year yields widening 200 basis points in recent weeks– the former reflecting demand for safer debt and an ultra-accommodative central bank, while US Treasuries reflect faster and stronger growth.
The UK’s economic outlook brightened over the quarter as data showed an upwardly revised GDP print of +1.3% for Q4 2020, from initial estimates of +1.3%. January GDP data further reflected an economy more resilient against the third national lockdown than had been initially expected, printing +2.9% for the month, comfortably beating consensus expectations of a 4.9% contraction. This upbeat data has largely been buttressed by the U. K’s impressive vaccination programme, which provided the impetus for a faster-than-anticipated return to a semblance of normalcy. The labour market has also shown resilience, with the unemployment rate edging lower to 5% in the three months to January, down from 5.1% in the preceding period and ahead of expectations of 5.2%. Nonetheless, this remains the highest jobless rate in five years, but would have been a lot higher if not for the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme, which have played a crucial role in ensuring unemployment does not spiral out of control and aggregate demand and spending remain supported throughout. As widely expected, the Bank of England (BoE) Monetary Policy Committee (MPC) unanimously kept the Bank rate (+0.10%) and asset purchases unchanged at its March policy setting meeting. The bank’s stance on the recent ascent in yields was more in line with that of the Fed’s than the ECB, with BoE Governor Andrew Bailey citing this phenomenon as a reflection of optimism on the economic recovery ahead.
China’s economy gathered pace in March as the industrial, construction and services sectors improved following the Lunar New Year holidays on account of strong domestic and external demand. The country’s industrial production is 35.1% higher from the previous year, reflecting robust expansion in China’s industrial economy. This strong showing is predicated on solid export activity, fiscal aid and China’s excellent record in keeping the coronavirus at bay (at the time of writing the country had recorded zero new cases in over a month, despite Beijing lifting travel restrictions). The official manufacturing PMI rose to 51.9 in March after edging lower to 50.6 in February. The non-manufacturing PMI (which comprises services and construction) also ticked higher to 56.3, marking the highest reading since November 2020. On the labour front, however, the picture was rather mixed, with a sub-index of manufacturing employment rising above the 50-mark for the first time since 2Q 2020, while non-manufacturing employment continued to track lower. Overall, the upbeat economic trajectory playing out in the world’s second largest economy has given Beijing and the People’s Bank of China (PBoC) more leg room to pull back the massive injection of stimulus since the advent of COVID, as it pursues its agenda to rein in debt and the risk of asset bubbles – a campaign which has been constrained by the US trade war and more recently, COVID. The PBoC reiterated at its scheduled quarterly meeting in March that it intends to maintain monetary policy flexible and respond appropriately to changing dynamics.
South Africa’s economy grew by 6.3% quarter-on-quarter (q/q) in the three months to end December 2020, comfortably beating expectations of a 5% expansion, largely on the back of the easing in lockdown restrictions. For the full year, GDP shrank 7% compared to a decline of 0.2% the previous year. This was the biggest contraction in a century, with the economy languishing in its longest downturn since World War II. This was a broad-based recovery which saw growth in all sectors except for finance, real estate, business services and a modest contraction in mining. Manufacturing PMI readings have edged higher in the past three months with the March reading of 57.4 the fastest pace of expansion on the factory floor since October 2020. Headline inflation slowed to 2.9% in February of 2021 from 3.2% in January, below market expectations of 3.1% and below the South African Reserve Bank's (SARB) target range of 3-6%. The reading was the lowest since June 2020 as food & non-alcoholic beverage inflation moderated. Core CPI slowed to 2.6% from 3.3 the prior month.
The SARB’s MPC unanimously voted to keep the repo rate unchanged at 3.5% p.a. at its scheduled March meeting. This was a change in the voting pattern from the previous four meetings where two members out of the five had been voting for a 25bps cut. The MPC assesses risks to growth and inflation to be balanced, which allows it further room to push back the hiking cycle to at least the second half of 2022. On the fiscal front, the February budget balance was a positive surprise both form a spending and revenue perspective, which should also provide temporary relief on the ratings front, pending the implementation of growth-additive reforms.
The Bloomberg Commodities Index ended the quarter 6.9% higher. Commodity prices continued to charge ahead, fuelled by robust industrial activity in China, while fiscal stimuli, and vaccine rollouts also saw increased chatter of the so-called ‘supercycle’ – a protracted period where supply struggles to keep up with demand and sends prices soaring above their long-run trend. Such cycles are, however, few and far between, the last one occurring in the 1990s on the back of China’s rapid industrialisation where demand for natural resources skyrocketed and supply struggled to keep up. Oil continued the recovery from the March 2020 crash, and was a top performing asset class year-to-date, with Brent Crude up 22.7% and West Texas Intermediate rising 21.9%, while elsewhere, copper hovered at all-time highs, finding support from increased demand for use in green transitions.
Figure 1: Q1 2021 % change (US$)
Source: Bloomberg as at 31.03.21.
The South African stock market extended its winning streak to five consecutive months of gains, and the best start to the year since 2006. Underpinning this performance was the continued rally in mining stocks and positive local newsflow which included a market-friendly budget announcement. The FTSE/JSE All Share Index rose +13.1% over the quarter, with the Capped SWIX not far behind, up 12.6%. At a super-sector level; resources carried the bourse, up a robust 18.7%, while industrials gained 13% and financials lagged behind at +3.8% over the same period. The JSE All Bond Index endured a challenging period as rising US Treasury yields saw some profit-taking in the domestic bond market, triggering large outflows by non-residents. Listed property (FTSE/JSE All Property Index) posted a healthy 8.1% gain for the first quarter, as the easing of lockdown restrictions provided some relief momentum. Cash, as measured by the STeFI Composite Index, remained broadly stable, returning 0.9% for the quarter. In currencies, the rand traded weaker against the greenback and British pound but firmed against the euro.
At the sector level, it was flashes of green across most of the bourse. Basic materials delivered solid performance, led higher by the platinum-group metals (PGMs) miners (Anglo American Platinum, Impala Platinum) as greening of the economy and tighter vehicle emissions standards continued to boost PGM demand and earnings, while diversified miners (Anglo American, BHP Group) and chemicals (Sasol) also found support in the wider commodity price boom. Consumer services performed well over the quarter, with the battered travel and leisure sector (Tsogo Sun Hotels, City Lodge Hotels) among the best-performers, as government continued to ease social restrictions, while the general retailers also provided support. Financials managed to deliver modest gains, helped by a local unit which has proved to be more resilient than we have witnessed in recent memory. Elsewhere, the real estate sector enjoyed a relief rally over the quarter, supported by positive updates from the likes of Redefine Properties, while the further easing of restrictions and rollout of vaccines also saw many counters rebound from their lows.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||Q1 2021 % return (ZAR)|
|The Foschini Group||0.5||20.0|
|Harmony Gold Mining Co.||0.4||-12.6|
Source: Bloomberg as at 31.03.21.