Monthly Market Commentary – January 2021

Monthly Market Commentary – January 2021

South African Equities led the way in January while South African property gave back over 3% after two months of strong performance in the asset class. Although the rand weakened over the month, it was not enough for global asset classes to outperform the JSE. The local bourse was primarily driven by sharp gains in industrials with Naspers and Prosus, in particular, performing well, and a few select Basic Material stocks, Sasol and Sappi. Local bonds again offered reasonable performance despite yields rising in the developed world. The SA 10-year yield held steady at around 8.75% providing attractive real yields, particularly appealing to foreign investors in a low global yield environment.

January was a mixed month. It started well on optimism over vaccine rollouts, fiscal easing, and the potential for further monetary easing. But markets then reversed as concerns emerged over delays to vaccine rollouts in mainland Europe as well as new strains of COVID-19 becoming more prevalent. January also saw a strange (and legally questionable) battle occur between hedge funds and retail investors (organised via a Reddit social media channel). This massively inflated the share prices of some fundamentally unsound companies (notably GameStop) as the retail investor army bought up stock in large numbers, pressuring hedge funds to take losses on their ‘short’ trades.

SA Drivers

US Investment ban on top Chinese Tech Companies | Importance High

Plans to blacklist Chinese tech giants Alibaba, Tencent and Baidu were scrapped by the US administration, providing support for the tech giants. The companies were on the shortlist to be added to a catalogue of alleged Chinese military companies, which would have subjected them to a new US investment ban. The news spurred the performance of Naspers and Prosus on the local bourse.

Better than expected earnings results | Importance Medium

Several SA retailers and domestically focused companies have released results that have surprised the market on the upside. This suggests that management teams were overly conservative in their provisions for the expected economic impact of the lockdowns, suggesting that the situation is not as dire as originally anticipated.

SARB keeps rates at 3.5% and IMF revises down SA GDP | Importance Medium

The repo rate was kept at a record low 3.5% on a 3-2 split decision by the committee with the remaining two committee members calling for a 25bpt cut. This suggests that risks of interest rate increases are low for now. Inflation averaged 3.3% in 2020, the lowest in 16 years. IMF revised down SA’s 2021 GDP growth to 2.8% (from 3%) and 1.4% in 2022 (1.5% previously) and advised SA to “tackle long-standing fiscal and structural challenges”.

 

Asset Class Total Returns – ZAR

 

Global Drivers


US $1.9 trillion rescue plan | Importance High

Biden prioritized his economic rescue plan in the month of January which could see a massive $1.9trn injected into the economy. This will follow stimulus of $900bn agreed in December 2020 and $3trn passed at the start of the pandemic. This comes amid concerns of the state of recovery in the US economy. Given effective control of the House and Senate by the Democrats it is expected that the package will be muscled through without support from Republicans.

China growth finishes off on a high | Importance High

China grew by a higher than expected 6.5% (annualized) in the fourth quarter of last year and 2.3% in 2020 as a whole. The annual growth of 2.3% is the lowest since the 1970’s but nonetheless made it the only major economy to grow last year. The recovery has been swift for China as its economy shrank by 6.8% in the first quarter of 2020 due to the Coronavirus outbreak and ensuing lockdowns.

EU’s sluggish vaccine rollout | Importance High

European leaders have been criticized for their slow rollout of vaccines relative to countries such as Israel, the US and the UK. The EU has pledged that all adults would be offered a jab before the end of the summer. The EU’s decision to collectively purchase and distribute vaccines enjoyed broad support in general at first, but has since come under fire due to frustrations with speed of delivery.

US Investment ban on top Chinese Tech Companies | Importance High

Plans to blacklist Chinese tech giants Alibaba, Tencent and Baidu were scrapped by the US administration providing support for the tech giants. The companies were on the short list to be added to a catalogue of alleged Chinese military companies, which would have subjected them to a new US investment ban.

Rise of the Retail Trader | Importance High

Users of the subreddit r/WallStreetBets drove up the price of companies like GameStop (a pedestrian physical store purveyor of video games) and other highly shorted companies in order to ‘crush’ the hedge funds who had been shorting the stocks. The short squeeze resulted in hedge fund Melvin Capital losing 53% in January even after a $2.75bn cash injection. The rally in GameStop has captivated Wall Street and forced many hedge funds to rethink risk management practices.

 

Asset Class Total Returns – USD

All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.

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