First published by Daily Maverick 168 weekly newspaper

As the world celebrated the news in November of the development of a number of vaccines for Covid-19, it was encouraging to see how investor sentiment improved as a consequence. But it was the election of Joe Biden as the next US President, that lit a spark under the prices of riskier assets around the globe. Local multi-asset portfolios, which have been overweight in undervalued assets like SA equities and bonds since April, were in the perfect position to take advantage of this improvement in growth prospects. 

The JSE All Share Index was testing the 60 000 mark earlier this month after hitting rock bottom in March this year, falling under the 40 000 level. Whether this rally will continue into 2021, is any South African’s guess.

The same time last year analysts and economists expected muted economic growth as policymakers and the private sector were set to continue to muddle through the complexity of implementing meaningful structural reform. 

Globally, lower equity market returns were anticipated, but not the double-dipper that hit markets at the beginning of the year, which took everyone by surprise. The same goes for the JSE, which is highly correlated to what happens abroad. The world was turned upside down in March when Covid-19 spread from China to the rest of the world and stringent lockdown regulations took effect worldwide.  

The ALSI started the year at just above 57 000 points. On 24 March the index dropped to just above 38 000 points, a dramatic 33% drop. April and May, however, saw a strong recovery with the index rebounding to just above 51 000 points at the end of May. As of 14 December, the ALSI had reached 59 509 points and has delivered a total return of 7.2% so far this year. 

Sovereign South African State bonds received a double whammy this year. An expected downgrade to junk by Moody’s saw the country’s government debt instruments fall out of global investment favour and related universal benchmarked indicators. This resulted in selling pressure leading into March. Global risk-off sentiment following the announcement of hard lockdowns globally resulted in a further spike in bond yields. The  South African 10-year government bond yield stood at just over 9% at the start of 2020 but peaked at 12.38% in the last week of March.  

The yield on this instrument, which acts as a proxy for the bond market, has since steadied to 8.78% as of 14 December.  

The JSE All Bond Index has delivered 7.85% in 2020 so far, and according to FNB Savings and Investments head of research, Chantal Marx,  a decent return for patient investors, despite the challenges faced in this area of the market this year. 

The research team at FNB expects economies to open up over the next 12 months as “second waves” subside and make way for certainty due to the widespread roll-out of Covid-19 vaccines. “Global growth is expected to be strong with China performing well”, they state in an investment note,” which is good for emerging markets, due to higher commodity prices and stronger currencies.”

The US dollar, as a countercyclical currency, is anticipated to remain weaker, and worldwide interest rates to remain lower for longer, they add.  

Unfortunately (or fortunately for 2020 returns), a lot has already been priced in and the markets and outlook are quite frothy. 

Allex Tedder, head and CIO of Global and US Equities at Schroders, says that global equities are by no means cheap, but they are reasonably valued. “Considering the scale of the pandemic they performed surprisingly strongly in 2020, and we think they will continue to do well in 2021,” he is quoted in a 2021 outlook report.  However, we expect the market recovery to broaden out across a broader range of sectors compared to the past 12 months. The market rally in 2020 was led by a fairly narrow range of tech stocks, in particular Amazon, Apple, Microsoft, Facebook and Alphabet — the owner of Google. 

South Africa should benefit from a cyclical viewpoint, but for industry players and local experts longer-term structural issues locally remain a concern, and a huge one at that.   

Fiscal pressures will continue to be exacerbated by weak nominal economic growth, even as the recovery gets underway everywhere else. This underpins their view for further credit rating downgrades. They also expect inflation to remain benign, due to sustained weak demand, and the South African Reserve Bank to either leave rates steady or to cut rates by a further 25 basis points in 2021. 

That being said, most investment analysts anticipate better than money market returns from growth assets over the next 12 months. But the caveat to the reader: As always the tardy implementation of structural economic reforms, and growing political risk, will pose upside risk to anyone’s forecasts. DM/DM186