Quarter Four - 2021
The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
Global asset classes (in dollars)
* Updated annually from 1900, or longest available period Returns for periods longer than 12 months are annualised.
International market commentary
From a market perspective 2021 was without doubt an eventful, albeit financially rewarding, year. If history books mark 2020 as the year that saw the first pandemic in over 100 years to turn truly ‘global’ – with all the uncertainty (and market volatility) that ensued – then 2021 will likely be marked as the year that society learned to both live with and fight against COVID. Indeed the same can be said of the markets where an increasing dislocation was seen as the year progressed between COVID related ‘bad news’ and market reaction. Investors were perhaps looking through the shorter term noise to the bigger picture and the global economy after COVID. But the year was punctuated by several key themes: reflation, inflation, vaccine, variant and hawks.
The year started very much on a reflationary footing (fiscal and monetary policy designed to expand output and effectively support and drive the economic reopening following the pandemic lockdowns of 2020) fuelled in no small part by the inauguration of President Biden and the simultaneous shift in control of the Senate following state elections in Georgia. With the Democrats in control of both sides of Congress the passage through for the American Rescue Plan Act was made significantly easier. This included $1.9tn of additional stimulus (later scaled back) with a focus on infrastructure spending and environmental responsibility. All part of the ‘build back better’ slogan that carried Biden to the White House. This was supported by wider monetary and fiscal policy seen as accommodative to economic expansion and a shift in rhetoric from central banks, moving from inflation to employment as the key point of focus. Inflation, it was felt, would be under control.
In parallel to this, whilst infection levels remained high, a broader rollout of vaccines globally provided optimism to the pandemic and led to a very strong first quarter to the year for equity markets. This was countered by a more challenging period for fixed income assets, and particularly those with longer dated maturities.
With Q2 came the Delta variant, a more transmissible strain against which several vaccines proved less effective. This caused something of a setback for markets as investors feared a derailment of the reflationary effort and delay to the vaccine led recovery. Q2 also saw inflation move front and centre with mixed views as to just how transitory it would prove to be. Commodity prices were rising, with a particular focus on energy, and with input prices rising generally this was having a broader impact on inflation. This rolled into Q3, now with added concerns around the logistical challenges feeding through to further price rises. In short, pent up demand meeting supply deficits with the wrong goods in the wrong place at the wrong time and a labour supply squeeze creating a backlog to the global movement of materials. Issues around a snowballing debt crisis at China’s property giant Evergrande Group and growing regulatory oversight from the Chinese government proved an unwanted distraction to markets, albeit that fears of debt contagion subsided swiftly and the focus shifted back to inflation.
To this backdrop expectations moved to a more hawkish sentiment from central banks, looking to curb inflation by dialling back on monetary and ultimately fiscal policy, consensus now clearly anticipating several rate hikes in 2022 and evidence of a more aggressive asset purchase tapering. With the advent of Q4 emerged the Omicron variant and evidence of significantly higher transmissibility (than Delta) and without information on severity markets weakened as new restrictions were imposed across multiple countries and the reality loomed large of an extended period of life with COVID and what this might mean for the economic recovery. You only need to look at the impact on travel stocks to see the direction of thinking. But with the closing stages to the year came early evidence of reduced severity from the now dominant variant and, coupled with a surge in vaccine booster programmes across the developed world, renewed optimism that the recovery would remain on-track.
But how has this translated to financial markets given the strong rebound seen in late 2020? In truth it has been a good year for risk assets, and specifically developed market equities, but also other asset classes linked to the economic reopening, whilst traditionally more defensive assets have struggled. To equities first and the global index (MSCI ACWI) saw an increase of 20.9% on the year. This was led by the US which rose by 26.5% over the period with Europe (ex UK) not far behind up 22.6%. This is in stark contrast to emerging markets which posted a very slight loss on the year at -0.2%. As mentioned previously, commodities saw strong returns on the year with the broad commodity index up some 27% with oil leading the way up more than 60%. This is in contrast to the classic safe-haven of gold, falling by 4% over the year. To extend the view on real assets, property also performed well in 2021 with the developed market REIT index up 27.2% on the year.
Turning finally to fixed income markets it was difficult to find any bright spots unless linked to either inflation (index linked) or risk (high yield) or managed to avoid duration (longer maturity). The Barclays Global Aggregate index fell by 1.5% over the year whilst the Merrill Lynch Global High Yield index rose 2.8%. The FTSE All Stocks UK Index Linked Index was up 4.2% over the year whilst in contrast the equivalent UK Gilt Index fell 5.2%.
Domestic market commentary
The final quarter of the year saw campaigning dominate October headlines with local municipal elections set for early November. Worsening load shedding upped the stakes as it highlighted the state of service delivery and the importance of the proposed energy reforms. The Department of Minerals and Energy announced the preferred bidders for the fifth round of the Renewable IPP Procurement Programme, which is expected to add about 2500MW of capacity in due course.
In October, the SA Reserve Bank’s (SARB) Monetary Policy Review highlighted an intensification of inflationary risks. This increased the market related probability of a hike in interest rates as monthly increases in both producer and consumer price indices added to the argument. The SARB subsequently increased interest rates by 25 basis points, in a split vote of 3:2 in November. The Monetary Policy Committee emphasised a preference for a gradual interest rate hiking cycle and explained that near- term inflation risks are to the upside.
As the year ended, a rapid escalation of COVID-19 cases confirmed the onset of the fourth wave, though the country resisted stricter lockdown measures. With data indicating a moderation of case counts in the latter half of December, South Africa further relaxed restrictions on movement and trade, including a removal of the curfew.
The SA economy recorded a quarterly GDP contraction of 1,5% (not annualised) in the third quarter, a disappointing number relative to market expectations. The devastating impact of the riots, as well as load shedding, were the primary drivers. The unemployment rate recorded a new high of 34,9% in the third quarter, confirming the bleak picture many job seekers face. In a positive development, credit ratings agency Fitch moved South Africa’s credit ratings outlook to stable from negative.
In terms of currency moves, after a strong start to the year, the rand experienced a much weaker fourth quarter depreciating by approximately 6,0% and breached the R16 to USD1 mark multiple times in the final month of the year.
Domestic bonds ended the year strongly after a three-month slump, supported by improving global risk appetite, this was reflected in the FTSE/JSE All Bond Index which gained 2,9% for the quarter. Local equity markets mirrored positive momentum from global equity markets, the FTSE/JSE All Share Index gained 15,1% during the quarter with resources delivering performance of 32,4% over the year. South African equity indices outperformed the broader emerging market complex, delivering returns comparable to many developed markets.