Quarter Three - 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
The third quarter of the year has certain traditional characteristics within western markets, from the thinner trading volumes of August through to the increased propensity for weakness in September, and despite the atypical environment we find ourselves markets did not disappoint this time around.
We have doggedly stuck to COVID as the central theme to this commentary for some time now, and that remains the case for quarter three where issues surrounding vaccination rollout and the economic reopening stayed in sharp focus. The subtle variation for the past three months however has been a shift to the knock on effects of the pandemic-led global economic shutdown and subsequent reopening. We have mentioned it before but there does appear to have been a continued dislocation between COVID-led negative news and market reaction, albeit that the Delta variant has remained a present threat to the orderly unlocking of domestic economies and the efficient global rollout of vaccines. The focus for much of the past three months has been on the logistical pressures created with the economic reopening. The combination of artificially high demand and a supply chain suffering from goods and labour shortages has delivered a result of marked inflationary pressure and fears of central bank action.
It would be fair to say that it has been a ‘quarter of two halves’ with the supportive first half seeing risk assets continue to strengthen but this then giving way to market uncertainty around inflation and central bank response. Chinese regulatory pressure and a potential debt crisis in the form of the Chinese company Evergrande, only added fuel to any capitulation. The net result was global equity markets broadly flat on the quarter, but with a lot going on in between. But whilst the MSCI ACWI (global) index ended the quarter down 0.4% it was Asia and Emerging Markets that bore the brunt of a sell off, closing the period -8.5% and -6.7% respectively. In contrast the UK saw an increase of 2.2% on the quarter with the US also slightly up.
Turning to fixed income markets where returns were relatively flat to slightly stronger on the quarter, with the strength coming primarily from the high yield (+0.9% US High Yield) and inflation linked sectors (+2.3% UK IL). This contrasted with further weakness within emerging market debt (-1.5%) for what has proven to be a challenging 2021 to date. Elsewhere across ‘real asset’ sectors property took a breather on the back of the significant strength seen earlier in the year with the global REIT sector up a modest 0.2% on the quarter. It was again commodities that stole the show with energy prices rising significantly on the quarter. For reference the Bloomberg Commodity Index was up 6.6% on the quarter with GSCI Energy up 9.7%.
Domestic market commentary
It was a volatile quarter for the local equity market, with regulatory changes in China and moderating global growth weighing on the market’s largest companies and the commodity complex. The big drivers of performance over the quarter were losses from index bellwethers Prosus (-14,5%) and Naspers (-16,9%) and a decline in the resources sector (-3,8%), particularly precious metals. Overall, the FTSE/JSE All Share Index was down -0,8% for the period. With less exposure to global risk factors, domestically exposed small and mid-cap counters outperformed large cap counterparts over the quarter.
The rand weakened by approximately 1,7% against the US dollar in the final month of the quarter, while a rise on global bond yields weighed on the local bond market. The South African Reserve Bank (SARB) kept interest rates unchanged but highlighted increased risks to near term inflation. Governor Kganyago again expressed a preference for a lower inflation target, a topic that will no doubt gain prominence. The All Bond Index declined in September, bringing the returns over the quarter to 0.4%.
As the quarter ended, South Africa moved to adjusted alert level 1, further relaxing restrictions on movement and trade. After a ruling by the Constitutional Court, local elections will now go ahead with the Independent Electoral Commission (IEC) confirming the November date. In terms of key economic data, the economy recorded quarterly GDP growth of 1,2% (not annualised), exceeding market expectations yet again. With growth for the first half of the year ahead of expectations, market participants, including credit ratings agencies, upgraded their 2021 GDP forecasts despite the damage from the civil unrest in July. Recent activity data released confirmed the negative impact of the unrest in July on the economy and confidence, but forward-looking measures also suggest a recovery underway as businesses get back to operation.