Mar 10, 2021
Risk-on sentiment remained poised in February, with equity markets ending the month on a positive note, notwithstanding some pressure towards month-end as bond yields began to shoot up – another reminder of the vulnerability of markets to sentiment swings. The deluge of fiscal and monetary stimulus that kept markets afloat since the onset of COVID, has now become the source of angst. This sparked a bond sell-off amid growing fears of inflation and a boom that will ultimately force authorities to raise borrowing costs much sooner than initially anticipated. The rotation into value and small-cap stocks garnered support from expectations of this accelerated return to ‘normalcy’ – thus far seen in rising oil prices and surging bond yields.
Developed market stocks (MSCI World Index) ended the month up 2.6%, outperforming their emerging market peers (MSCI Emerging Markets Index), which could only muster 0.8% over the same period. In yield-oriented assets, government bonds have endured their worst start to a year as a wave of volatility akin to the taper tantrum of 2013 sent the benchmark 10-year US Treasury yield to its highest levels in more than a year. The Barclays Bloomberg Global Aggregate Bond Index finished the month down 2.0%.
All returns are quoted in US dollars.
The US economy has begun to heat up again after the resurgence of infections and subsequent restrictive measures slowed down momentum in the final months of 2020. Consumer spending (which accounts for two thirds of US economic activity) quickened 2.4% in January, the fastest pace in seven months and a sign that the economy may well be gearing up for a sustained recovery from the pandemic-induced recession. This boost to consumer spending largely came off rising personal incomes as the US government provided low-income households with pandemic relief money. The manufacturing purchasing managers’ index (PMI) expanded at the fastest pace since early 2018 and ahead of consensus expectations, rising to 60.8 in February from 58.7 the previous month on the back of robust demand for goods, despite supply disruptions.
The labour market showed promising signs of a return to growth, as jobless claims fell more than forecasted, with the rate of hiring also improving against a backdrop of receding COVID metrics and accelerating vaccination drives. On the monetary front, US Federal Reserve (Fed) Chair Jerome Powell, reaffirmed the bank’s inclination to taking a more passive stance in the early phase of this cycle when he testified before Congress in the final week of February. Powell reiterated that the Fed remains nowhere near its inflation and employment targets, and as such is committed to leaving interest rates near zero for longer. Following years of below-target inflation, policymakers (including newly minted Treasury Secretary Janet Yellen) have now shifted their focus to the ‘maximum employment’ goal of the Fed’s dual-mandate and continue to play down investor concerns surrounding inflation.
Incoming GDP data in the region suggests Germany, France and Spain’s economies showed resilience in the final quarter of 2020. The latest PMI data for the area reveals the divergent nature of the area’s economy, with robust activity in manufacturing and weakness in services owing to COVID-induced lockdowns. The eurozone manufacturing PMI rose to a three-year high 57.9 in February, up from an initial estimate of 57.7 and comfortably clear of January’s 54.8 reading – boosted by soaring new export trade. Germany’s manufacturing PMI was relatively better at 60.6, reflecting the economy’s robust demand for exports, in particular from China. These strong readings come despite continued supply chain and delivery disruptions, as well as rising input costs, and have helped offset the weakness in the services sector. Consumer confidence marginally improved in February, reflecting lingering concerns on the outlook for the region’s economy. Meanwhile, the European Central Bank (ECB) slowed down its bond-buying programme in the final week of February, despite policymakers warning of the danger rising global yields presents to the economic recovery. The rise in bond yields (and associated fall in bond prices) remains a concern for central bankers as they serve as a benchmark for the cost of borrowing to households and companies, and as such policymakers at this stage of the cycle are naturally adverse to any undue rise in yields that could derail the recovery. In politics, Mario Draghi’s newly formed government was approved by a large majority, and thus prevented the need for snap elections.
The UK’s impressive COVID-19 vaccination programme breached the 20 million mark during the month, with Prime Minister Boris Johnson announcing the target of getting adults fully inoculated by July this year, while also announcing the gradual lifting of lockdown restrictions. In terms of economic activity, the UK’s PMIs reflected a divergence from the continent, with the services PMI (49.7 in February from 39.5 in January) showing signs of stabilisation, despite still trending below the expansionary 50 mark. Meanwhile, despite a growing manufacturing sector, Britain’s February PMI rose at its weakest pace (rising to 55.1 in February from 54.1 the previous month), weighed down by continued supply chain disruptions and transportation delays at ports caused by COVID-19 restrictions and Brexit-related frictions, respectively. That said, a sub-index tracking business expectation picked up strongly during the month, reflecting optimism on the back of vaccination rollouts.
GDP rose by 1.0% in the fourth quarter of 2020 and the recovery going forward will largely be supported by Britain’s remarkable roll-out of the vaccination programme as things slowly return to ‘normal’. Amid the stand-off between central bankers and traders during the month, the Bank of England echoed the Fed’s sentiment that rising yields reflect optimism about the recovery, while playing down investor concerns about rising inflation and a return of the market instability witnessed at the onset of the pandemic. Despite record low borrowing costs, the rise in yields could see a return of Chancellor of the Exchequer Rishi Sunak’s hawkish impulses when he delivers his annual budget on 3 March 2021.
After ending 2020 on a positive note of 2.3% growth and robust momentum in January, China’s economy slowed down in February amid the resurgence in COVID-19 cases and reintroduction of containment measures. Demand also took a harder knock as Beijing clamped down on travel ahead of the February Lunar New Year festival. As is usually the case during the Lunar New Year Festival, we witnessed a cooling off in manufacturing activity over the period as workers take time off. The manufacturing PMI fell to 50.9 in February, marking the lowest reading since May 2020 and also came in below consensus expectations of 51.5, but nonetheless, activity remains in expansionary territory. With PMIs being lagging indicators by nature, and subject to seasonal effects, more frequent data reflects that the shutdowns this year were less severe than during the same period in 2020, at the height of COVID. As such, the weakness in PMI data is likely to be fleeting, as reflected in electricity usage data, alongside positive consumption and services sector readings seen thus far. Furthermore, producer prices rose for the first time in January since February last year, reflecting the pace of activity industrial activity in the country, which has been the engine room for the post-COVID recovery over 2020. Exports have also been a major driver of the recovery, recording double-digit growth in the past three months. Meanwhile, muted inflation has baffled the People’s Bank of China (PBoC) given rising asset prices and interest rate cuts throughout last year. The PBoC signalled during the month that it does not intend to make any drastic changes to its current overall monetary policy stance.
Manufacturing activity in South Africa accelerated in February, which was the first full month of a less restrictive environment following the relaxation of lockdown measures at the end of February. The manufacturing PMI rose to 53 in February, marking the strongest expansion on the factory floor since October the previous year, on the back of improved export sales and an uptick in demand following the easing of restrictions. Headline inflation quickened to 3.2% year on year (y/y) in January, from 3.1% in December, and in line with consensus expectations. Core inflation (which excludes volatile items such as food, energy and fuel) remained steady at 3.3% y/y over the same period. The average inflation rate over 2020 was 3.3% (compared to 4.1% in 2019) and thus far in 2021, prices remain muted at the lower end of the South African Reserve Bank’s (SARB) 3% – 6% target range. Despite having room to lower rates further in January, the SARB’s Monetary Policy Committee left interest rates unchanged when it convened in January. The bank currently views risks to the inflation outlook to be balanced.
On the fiscal front, Finance Minister Tito Mboweni delivered the 2021 National Budget on 24 February. Ahead of this budget, it was clear that the revenue overrun in the current fiscal year would be in excess of R100 billion. This was primarily thanks to the increase in the prices of mining exports, particularly the platinum-group metals (PGM) sector. However, other revenue items also came in better than expected. What was less clear was whether the National Treasury would increase spending on the back of this, given the pressures from state-owned enterprises, unions and the social needs of the country. In the main, the budget was broadly well-received and should offer some breathing space on the ratings front, more so given the debt-to-GDP ratio is now forecast to be 6 percentage points lower than over the medium term, than previously projected.
The Bloomberg Commodities Index ended the month 6.5% higher. Commodity prices continued their surge in February, fuelled by the industrial activity underway in China, while fiscal stimulus, and vaccine rollouts have dialled up talk of a so-called ‘supercycle’ – a protracted period where supply struggles to keep up with demand and sends prices soaring above their long-run trend. Copper continued its rally over the month, finding support from increased demand for use in green transitions, while oil prices also rose back to pre-COVID levels.
Figure 1: February 2021 % change (US$)
Source: Bloomberg as at 28.02.21.
The South African stock market extended its winning streak to four consecutive months of gains, buoyed by a rally in mining stocks and a market-friendly budget announcement, which aimed at boosting consumption and spending, as well as plans to cut corporate tax rates. The FTSE/JSE All Share Index rose +5.9% over the month, with the Capped SWIX up 5.3%. At a super-sector level; resources regained leadership, up a robust 11.6%, financials bounced back from a January slump to close 4.5%, and industrials ended the month up 2.3%. The JSE All Bond Index eked out 0.1% over the period as rising US Treasury yields saw some profit-taking in the domestic bond market, triggering the largest outflows by non-residents since the first week of 2021. Listed property (FTSE/JSE All Property Index) reversed the prior month’s losses, gaining 9.7%. Cash, as measured by the STeFI Composite Index, edged lower to +0.26% for the month. In currencies, the rand firmed against the euro and US dollar, but retreated against the pound sterling.
At the sector level, basic materials were standout performers, led higher by the PGMs (Anglo American Platinum, Sibanye-Stillwater) as news of disruptions at leading palladium producer Norilsk Nickel fuelled bullish sentiment for PGM prices, while diversified miners (Anglo American, BHP Group) and chemicals (Sasol) also found poise on the back of a wider commodity rally. The travel and leisure sector was also among the best-performers over the period, as the government continued to loosen lockdown restrictions. Financials were led higher by the banks and insurers, which were buoyed by a resilient local currency over the period. The real estate sector enjoyed a relief rally in the month, supported by a positive update from Redefine Properties, while the further easing of restrictions and rollout of vaccines has also seen the counters rebound from their lows.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||Feb 2021 % return (ZAR)|
Source: Bloomberg as at 28.02.21.